AUTOCESTA RIJEKA-ZAGREB d.d. Širolina 4, Zagreb Annual Financial Statements and Independent Auditor's Report for 2018 CONTENT Page Responsibility for the financial statements 1 Independent Auditor's Report 2–7 Statement of comprehensive income 8 Statement of Financial Position/Balance sheet 9 Statement of changes in equity 10 Statement of cash flows 11 Notes to the financial statements 12 – 69 RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The Management Board of Autocesta Rijeka-Zagreb d.d., Zagreb, Širolina 4 (the „Company“) is responsible for ensuring that the annual financial statements for the year 2017, are prepared in accordance with the Accounting Act (Official Gazette No. 78/15,134/15,120/16,116/18) and International Financial Reporting Standards established by the European Commission and published in the Official Journal of the European Union, to give a true and fair view of the financial position, the results of operations, changes in equity and cash flows of the Company for that period. After making enquiries, the Management Board has a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Board has adopted the going concern basis in preparing the financial statements of the Company. In preparing these financial statements, the Management Board is responsible for: • selection and consistent application of suitable accounting policies in accordance with the applicable financial reporting framework; • giving reasonable and prudent judgments and estimates; • using the going concern basis of accounting, unless it is inappropriate to presume so. The Management Board is responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position, the results of operations, changes in equity and cash flows of the Company and their compliance with the Accounting Act and the International Financial Reporting Standards. The Management Board is also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Autocesta Rijeka-Zagreb d.d., Zagreb Širolina 4 10000 Zagreb The Republic of Croatia 28 May 2019 1 Audit d.o.o. za revizijske usluge Radnička cesta 54 10000 Zagreb HRVATSKA Tel:+385 (0) 1 3667 994 Fax:+385 (0) 1 3667 997 E-mail:audit-revizija@audit.hr INDEPENDENT AUDITOR'S REPORT To the shareholders of Autocesta Rijeka-Zagreb d.d., Zagreb Report on the Audit of the Annual Financial Statements Opinion We have audited the annual financial statements of AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb, Širolina 4 (the ''Company") for the year ended 31 December 2018 which comprise the Statement of financial position (Balance Sheet) as at 31 December 2018 the Income Statement, the Statement of Other Comprehensive Income, the Statement of Changes in Equity, the Cash Flows Statement for the year then ended and the accompanying Notes to the Financial Statements, including a summary of significant accounting policies and other explanations. In our opinion, the accompanying annual financial statements, give a true and fair view of the financial position of the Company as at 31 December 2017 and of its financial performance and cash flows of the Company for the year then ended in accordance with the Accounting Act and the International Financial Reporting Standards ("IFRS") which were established by the European Commission and published in the official list of the European Union. Basis for Opinion We conducted our audit in accordance with the Accounting Act, Auditing Act and International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in our Independent Auditor’s report under section Auditor's responsibilities for the audit of the annual financial statements. We are independent of the Company in accordance with the Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those issues that were, by our professional judgment, of the utmost importance in our audit of the annual financial statements of the current period and include the most significant risks of misstatement due to error or fraud with the greatest impact on our audit strategy, the disposition of our available resources and the time spent by the engaging audit team. These issues were dealt with in the context of our audit of the annual financial statements as a whole and in the formation of our rational regarding them, and we do not give a separate opinion on these issues. 2 An independent member firm of Moore Stephens International Limited - members in principal cities throughout the world We have determined that the issues below are the key audit matters to be reported in our Independent Auditor's Report. Key Audit Issues How we addressed the Key Audit Issues Court disputes and potential obligations Our audit procedures related to this area, among other things, included: At 31 December 2018, the Company had provisions for legal disputes and contingent - Receiving and analysing the attorney's liabilities. During the company's regular business responses to our written inquiries addressed to activities, potential exposure to court disputes them and evaluating underlying issues with may arise. Any liabilities disclosed or disclosed them; contingent liabilities, or non-disclosures in the - Critical review of the assumptions used and financial statements, are inherently uncertain estimates pertaining to the claims. This includes and depend on a number of significant assessing the likelihood of unfavourable assumptions and judgments. The determination outcome of court proceedings and the reliability of the amount for disclosure in the financial of the assessment of the related amount of statements, if applicable, is subject to a obligation; particular assessment regarding these - assessing the adequacy of disclosure in the potentially significant obligations. Because of all financial statements, taking into account this, we regard this area as a key auditor's issue. sensitivity and possible prejudice in the disclosure of detailed information. Related disclosures in the annual financial statements See Notes 3.17 (Accounting The results of our audit procedures were Policies) and Note IV. satisfactory and we agree that the assumptions used in the estimation model are appropriate. Valuation of intangible assets under the In the audit, we focused on the risk of concession contract overestimating the book value of the concession. We reviewed the key assumptions At 31 December 2018, the Company has used in the impairment test, including the reported intangible assets under the Concession discount rate and the long-term growth rate. We Contract. included our valuation experts to review the The carrying amount of the concession on 31 model used by the Company and key December 2018 amounts to HRK 4.032.636 assumptions, and we have analysed the thousand. Reduction in the value of investment sensitivity. in concession is defined as a key audit issue because it involves significant judgement in the Additionally, we have considered whether the estimate. In accordance with IAS 36, the Company's disclosure of judgments in Company has made a test of impairment of the assessing the cash flows and the sensitivity of carrying amount of the concession. the results of those judgments adequately reflect the risks associated with the reduction of Related disclosures in the annual financial the value of the concession. statements: See Notes 3.9 (Accounting Policies) and Note The results of our auditing procedures were 18. satisfactory. We reviewed the key assumptions used in the impairment test, including the discount rate, as reasonable. Other Matters The Company's annual financial statements for the year ended 31 December 2017 were audited by the auditing company BDO Croatia d.o.o., Zagreb, which in its Independent Auditor's Report of 20 June 2018 issued an unmodified opinion on these annual financial statements. 3 An independent member firm of Moore Stephens International Limited - members in principal cities throughout the world Other Information in the Annual Report The Management of the Company is responsible for other information. Other information include information included in the Annual report, but do not include the annual financial statements and our Independent auditor's report on them. Our opinion on the annual financial statements does not include other information, except to the extent explicitly stated in the part of our Independent auditor's report, entitled Report on compliance with other legal or regulatory requirements, and we do not express any kind of conclusion with assurance on them. In connection with our audit of the annual financial statements, it is our responsibility to read the other information and consider whether other information have significant contradictions to annual financial statements or our knowledge gained while performing the audit, or otherwise appear to be materially misstated. If, based on the work we have performed, we conclude that there is material misstatement of other information, we are required to report this fact. In this sense, we do not have anything to report. Responsibilities of the Management and Those Charged with Governance for the annual financial statements The Management is responsible for the preparation of annual financial statements that give a true and fair view in accordance with the IFRS and for such internal control as the Management Board determines is necessary to enable the preparation of annual financial statements that are free from material misstatement, whether due to fraud or error. In preparing the annual financial statements, the Management Board is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s Responsibilities for the audit of the annual financial statements Our objectives are to obtain reasonable assurance about whether the annual financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Independent Auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: 4 An independent member firm of Moore Stephens International Limited - members in principal cities throughout the world • Identify and assess the risks of material misstatement of the annual financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Management Board. • Conclude on the appropriateness of the Management’s Board use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our Independent Auditor’s report to the related disclosures in the annual financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our Independent Auditor’s report. • However, future events or conditions may cause the Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the annual financial statements, including the disclosures, and whether the annual financial statements represent the underlying transactions and events in a manger that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Opinion on the Compliance with Other Legal or Regulatory Requirements Opinion based on the requirements of Regulation (EU) No. 537/2014 1. On 3 July 2018, the Company's General Assembly appointed us on the basis of the proposal of the Supervisory Board of the Company to carry out the audit of the annual financial statements for the year 2018. 2. Audit of the Company's Annual Financial Statements for 2018 is the first year in which we are engaged as auditors of the Company's annual financial statements 5 An independent member firm of Moore Stephens International Limited - members in principal cities throughout the world 3. In addition to the issues, we have mentioned in our Report of the Independent Auditor as Key Audit Issues, we do not have any information on point (c) of Article 10 of Regulation (EU) No. 537/2014. 4. By our statutory audit of the Company's annual financial statements for the year 2018, we are able to detect irregularities, including fraud under Section 225, Response to Non-Compliance with the IESBA Code and the Rules of the IESBA Code that requires us to audit our engagement to see if the Company has complied with the laws and regulations are generally recognized to have a direct impact on the determination of significant amounts and disclosures in its annual financial statements as well as other laws and regulations that do not have a direct impact on the determination of significant amounts and disclosures in its annual financial statements, but compliance with which may be crucial for operational aspects the Company's business, its ability to continue with unlimited business time or to avoid significant penalties. Except in cases we encounter, or find out about, non-compliance of any of the foregoing of the aforementioned laws or regulations that are apparently insignificant, according to our judgment its content and its influence, financial or otherwise, for the Society, its stakeholders and the wider public, we are obliged to notify the Company and ask to investigate this case and take appropriate measures to resolve the irregularities and to prevent the occurrence of these irregularities in the future. If the Company does not correct any irregularities that result in misstatements in the audited annual financial statements that are cumulatively equal to or greater than the amount of significance for the financial statements as a whole, we are required to modify our opinion in the Independent Auditor's Report. In the audit of the Company's annual financial statements for the year 2018, we determined the significance for the financial statements as a whole in the amount of HRK 11.611 thousand, which represents approximately 1.8% of the realized sales revenue for 2018 given the significant fluctuations in profit before tax and earlier periods 5. Our audit opinion is consistent with the additional audit report prepared by the Company in accordance with the provisions of Article 11 of Regulation (EU) No. 537/2014. 6. During the period between the initial date of the Company's audited annual financial statements for the year 2018 and the date of this report, we have not provided the Company with any prohibited non-scheduled services and we did not provide services for the design and implementation of internal control or risk management procedures related to the preparation and / or control of financial information or the design and implementation of technological systems for financial information, and we have maintained independence in the performance of the audit in relation to the Company. 6 An independent member firm of Moore Stephens International Limited - members in principal cities throughout the world Report based on Accounting Act requirements 1. In our opinion, based on the work that we performed during the audit, information’s in the Management Report for the year 2018 are in accordance with the financial information’s stated in the annual financial statements of the Company for the year 2018. 2. In our opinion, based on the work that we performed during the audit, the Company's Management Report for 2018 is prepared in accordance with the Accounting act. 3. Based on the knowledge and understanding of the Company and its environment obtained while performing the audit, we have not found that there are material misstatements in the Company's Management Report. Zagreb, 25 April 2019 7 An independent member firm of Moore Stephens International Limited - members in principal cities throughout the world AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2018 . DESCRIPTION Note 2018 2017 HRK'000 HRK'000 OPERATING INCOME Income from tolls 4. 657.232 631.283 Income from construction based on concession agreement 5. 425.383 4.229 Other operating income 6. 90.390 91.555 Total operating income 1.173.005 727.067 OPERATING EXPENSES Material costs 7. (220.906) (195.810) Staff costs 8. (10.522) (9.606) Depreciation 9. (280.535) (282.033) Other expenses 10. (30.630) (22.486) Value adjustment of current assets 11. (820) (425) Provisions 12. (2.022) (363) Expenses from construction based on concession agreement 13. (383) (4.219) Total operating expenses (545.818) (514.942) PROFIT FROM OPERATING ACTIVITIES 627.187 212.125 FINANCIAL INCOME 14. 74.713 54.879 FINANCIAL EXPENSES 15. (61.690) (92.627) WRITE-OFF FROM SHARE PORTION METHOD 16. 0 (355) PROFIT / (LOSS) FROM FINANCIAL ACTIVITIES 13.023 (38.103) TOTAL INCOME 1.247.718 781.945 TOTAL EXPENSES (607.508) (607.924) Profit before tax 640.210 174.021 Corporate Income Tax 17. 0 0 CURRENT YEAR PROFIT 640.210 174.021 Other comprehensive income 0 0 TOTAL COMPREHENSIVE INCOME 640.210 174.021 The notes below form an integral part of these financial statements 8 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb STATEMENT OF FINANCIAL POSITION /BALANCE SHEET as at 31 December 2018 Restated DESCRIPTION Note 31 Dec 2018. 31 Dec 2017 31 Dec 2017 HRK'000 HRK'000 HRK'000 ASSETS Long term assets Intangible assets 18. 4.033.372 3.906.272 3.906.272 Property, plant and equipment 19. 18.758 19.810 19.810 Total Lon term assets 4.052.130 3.926.082 3.926.082 Short term assets Inventories 20. 744 154 154 Trade receivables 21. 28.329 28.258 28.258 Receivables for given prepayments 13 3 3 Other receivables 22. 1.467 1.169 1.169 Financial assets 23. 179.836 280.565 280.565 Cash and cash equivalents 24. 189.454 127.073 127.073 Total short term assets 399.843 437.222 437.222 Prepaid expenses and accrued income Prepaid expenses 25. 307 22 22 Accrued income 7 130 130 Total expenses and accrued income 314 152 152 TOTAL ASSETS 4.452.286 4.363.456 4.363.456 LIABILITIES Equity Subscribed capital 26. 2.152.000 2.152.000 2.152.000 Loss carried forward (2.434.204) (2.607.698) (4.759.698) Other reserves 27. (2.152.000) (2.152.000) 0 Current year profit 28. 640.210 174.021 174.021 Total capital (1.793.994) (2.433.677) (2.433.677) Provisions Provisions 29. 12.316 12.773 12.773 Total provisions 12.316 12.773 12.773 Long term liabilities Liabilities to banks and other financial institutions 30. 5.041.473 5.280.890 5.280.890 Obligations for grants 573.052 618.185 618.185 Total long term liabilities 5.614.525 5.899.075 5.899.075 Sshort term liabilities Trade payables 31. 48.791 47.568 47.568 Liabilities for taxes and contributions 32. 6.929 6.253 6.253 Liabilities to employees 33. 522 462 462 Current loans 34. 531.928 799.960 799.960 Total short term liabilities 588.170 854.243 854.243 Deferred payment of expenses and income for future periods 35. 31.269 31.042 31.042 TOTAL LIABILITIES 4.452.286 4.363.456 4.363.456 The notes below form an integral part of these financial statements 9 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018 DESCRIPTION Subscribed Loss carried capital Other reserves forward Profit for the year TOTAL HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 Balance as at 1 January 2017 2.152.000 0 (5.349.409) 589.711 (2.607.698) Schedule of previous year results 0 0 589.711 (589.711) 0 Profit for the year 0 0 0 174.021 174.021 Balance as at 31 December 2017 2.152.000 0 (4.759.698) 174.021 (2.433.677) Restated balance 31 December 2017 2.152.000 (2.152.000) (2.607.698) 174.021 (2.433.677) First Adoption of Accounting Standard - IFRS 9 0 0 (527) 0 (527) Restated balance as at 1 January 2017 2.152.000 (2.152.000) (2.608.225) 174.021 (2.434.204) Schedule of previous year results 0 0 174.021 (174.021) 0 Profit for the year 0 0 0 640.210 640.210 Balance as at 31 December 2018 2.152.000 (2.152.000) (2.434.204) 640.210 (1.793.994) The notes below form an integral part of these financial statements 10 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb CASH FLOW STATEMENT – INDIRECT METHOD for the year ended 31 December 2018 POSITION 2018. 2017. HRK'000 HRK'000 Cash flows from operating activities Profit before tax 640.210 174.021 Depreciation 298.537 300.035 Impairment 293 425 Reversal of concession reductions (425.000) 0 Interest income (215) (314) Interest expenses 61.690 92.604 Non-depreciated value of sold and disposed assets 1.146 1.468 Decrease in non-current provisions (458) (2.674) Changes in inventories (591) 464 Changes in trade receivables (892) 2.554 Changes in other receivables (301) 1.732 Changes in accrued expenses and deferred income (162) 4.389 Changes in trade payables 1.224 (1.622) Changes in liabilities for taxes and contributions 676 (714) Changes in liabilities to employees 60 31 Accrued expenses and deferred income 227 (1.988) Interest paid (61.690) (92.604) Interest collected 215 314 Net cash flows from operating activities 514.969 478.121 Cash flows from investment activities Acquisition of tangible and intangible assets (836) (5.057) Other changes in tangible and intangible assets 106 0 Expenditure for acquisition of non-current financial assets 100.724 (278.756) Proceeds from sale of long-term financial assets 0 30.925 Net cash flow from investment activities 99.994 (252.888) Cash flows from financial activities Non-current liabilities repayment (284.550) (658.105) Repayment of current loans (268.032) 71.313 Net cash flow from financial activities (552.582) (586.792) TOTAL NET CASH FLOW 62.381 (361.559) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 127.073 488.632 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 189.454 127.073 The notes below form an integral part of these financial statements. 11 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2018 l GENERAL 1.1. Legal framework, activity and employees The joint stock company Autocesta Rijeka-Zagreb, Širolina 43 (the “Company“) was founded on 26 January 1998 based on the Decision on foundation and it was registered at the Commercial Court in Zagreb, based on Decision No. Tt-98/906-2 dated 26 February 1998. The decision on foundation of the company Autocesta Rijeka-Zagreb d.d. was adopted by General Assembly held on 11 December 1997 in accordance with Articles 42 and 36, Par. 1 of the Public Roads Act. At the same Assembly, a Decision was adopted concerning granting concessions to the concessionaire that would be responsible for the financing, construction, management and maintenance of the Rijeka-Zagreb motorway, which is registered as the core business of the Company. The Croatian Government authorized the Ministry of the Maritime Affairs, Transport and Development to conclude a concession agreement with the Company on behalf of the Republic of Croatia. As such and as part of the payment of shares at the time of founding the Company, the Republic of Croatia transferred the right of management to the Company of the then constructed infrastructure on the Rijeka – Delnice, Delnice – Kupjak and Karlovac – Zagreb motorway. On 24 June 1998, the Company signed a Concession Agreement for a period of 28 years. The Company’s stock capital, which represents the value of the concession on the constructed segments of the Rijeka-Zagreb motorway determined on the day the concession was granted, amounted to HRK 2.152.000 and is divided into 21.520 shares with a nominal value of HRK 100.000 per share. At the General Assembly held on 2 August 2007, the Croatian Government adopted a Decision on Amendments to the Decision on the establishment and the awarding of the concession for the construction and management of the motorway, which extended the concession contract and the Company was approved an extension of the concession for the then constructed infrastructure from the Orehovica Junction to the Rup border crossing and from the Orehovica Junction to the Križišće junction and also for the Krk bridge. Therefore, on 23 August 2007, based on the Agreement IV on Amendments of the Concession Agreement, the concession was extended from 28 years to a period of 32 years and 11 months commencing from the date of the beginning of the concession. In addition, in 2007 the Company paid the amount of HRK 1,480,000 the expanded and extended concession. Based on the Memorandum of Association of 7 November 2012, AUTOCESTA RIJEKA - ZAGREB d.d. founded ARZ - ON d.o.o., which was registered at the Commercial Court of Zagreb on 14 November 2012 under Registration Number: 080814054. In carrying out the restructuring process, the Company has, in accordance with the authorization of the concession contract, entrusted to ARZ-ON d.o.o. provision of regular highway maintenance and toll collection, based on the Contract for the provision of regular highway maintenance services and toll collection from 30 December 2013. On 27 January 2014, the ARZ-ON d.o.o. General Assembly adopted a Decision to merge ARZ-ON d.o.o. as a related company to the transferee HAC-ONC d.o.o., by which Autocesta Rijeka-Zagreb d.d. gained 27% of the share of the founding capital of HAC-ONC d.o.o. The merger was subsequently registered with the Commercial Court on 31 January 2014. Based on the decision of the Supervisory Board of the Company dated 22 September 2017, on September 29, 2017, the Company entered into a contract on the transfer of the business share in Croatian Motorway Company maintenance and collection of tolls d.o.o. with the company of Hrvatske autoceste d.o.o., Širolina 4 and a transfer of the business share to the Croatian Motorway d.o.o. for a fee of HRK 44.776.081,21. 12 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 After transferring the business share to Hrvatske autoceste d.o.o. the contract for the provision of services for the regular maintenance of the motorway and toll collection has been carried out. Following the procedure of public procurement of the regular maintenance of the highway and the collection based on the approval of the Supervisory Board of the Company, on December 14, 2018, the Agreement on provision of services for the regular maintenance of the highway, toll collection and supervision and traffic management was concluded with Hrvatske autoceste d.o.o. for a period of 4 years. The number and structure of employees according to professional qualification on 31 December 2018 and 31 December 2017 was as follows: Structure of qualifications 31 December 2018 31 December 2017 PhD 1 1 Master’s degree 3 3 Mag. 20 19 Higher Education 2 0 Highly qualified worker 5 7 Qualified worker 9 8 Total 40 38 1.1. Company’s Bodies The Company’s bodies are the General Assembly, Supervisory Board and Management Board. The General Assembly: The Government of the Republic of Croatia represented by the Minister of Maritime Affairs, Transport and Infrastructure - Mr. Oleg Butković The Supervisory Board: Name Position Appointed Relieved of duty Josip Ostrogović president 28 August 2017. Marko Šoštarić vice president 28 August 2017. Boško Jolić member - employee representative 23 January 2015. 21 January 2019. The Management Board: Name Position Appointed Relieved of duty Miro Škrgatić Chairman of the Management Board 01 May 2018. - Tomislav Tkalčić Member of the Management Board 01 July 2018. - Josip Šala Director of the Company 23 July 2015. 30 April 2018. On 24 April 2018, at the Extraordinary General Assembly of the Company, the Assembly of the Company elected two members of the Supervisory Board of the Company: Josip Ostrogović and Dr. Marko Šoštarić, on the basis of a procedure for electing or appointing members of the Supervisory Board of the Company in accordance with the decision on the conditions and procedure for the election and / or appointment of candidates for members of supervisory boards in companies of strategic and special interest to the Republic of Croatia (Official Gazette, 33/16 and 109/16) for a period of four years. 13 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 At its constitutive session held on 27 April 2018, the Supervisory Board of the Company made a decision on the election of the President and Deputy Chairman of the Supervisory Board, so that the Supervisory Board of the Company, on 27 April 2018, has the following structure: • Josip Ostrogović, President • doc.dr.sc. Marko Šoštarić, Vice President • Boško Jolić, član – Employee Representative The Supervisory Board of the Company at its constitutive session held on 27 April 2018, on a proposal from the Government Conclusions of 14 April 2018 (Class: 080-02 / 18-01 / 46, Reg. No: 50301-15 / 07-18- 02) issued a Decision on the Appointment of Mr. Mire Škrgatić to the President of the Management Board (beginning of the mandate on 1 May 2018) and the term of office of four years. At the same session of the Supervisory Board, a decision was made on appointing a member of the Management Board of Mr. Tomislav Tkalčić (beginning of the mandate 1 July 2018 and term of office of four years). II BASIS FOR THE PREPARATION OF THE FINANCIAL STATEMENTS 2.1. Compatibility statement and the basis for preparation The annual financial statements of the Company for 2018 are prepared in accordance with the Accounting Act (Official Gazette 78/15, 134,15, 120/16, 116/18) and the International Financial Reporting Standards (''IFRS'') and in accordance with the Ordinance on the structure and content of the annual financial statements (Official Gazette 95/16). The annual financial statements are compiled by applying basic accounting assumptions of occurrence of an event by which the effects of transactions are noted when they happened and are shown in the financial statements in the correct period as well as by applying the basic accounting assumptions of unlimited conducting of business. The annual financial statements are presented in Croatian HRKs (HRK). Croatian HRK is the currency of the company and therefore financial statements are presented in that currency. All amounts disclosed in these financial statements are presented in thousands of HRKs (‘000 HRK) unless stated otherwise. On 31 December 2018, the official exchange rate of the Croatian HRK against 1 US dollar and 1 euro was HRK 6,47 for 1 USD and HRK 7,42 for 1 EUR (exchange rate on 31 December 2017: 6,27 for 1 USD and 7,51 for 1 EUR). 2.2. Basis for preparation The annual financial statements are prepared in accordance with International Financial Reporting Standards, International accounting standards and their Interpretations (together: IFRS) established by the European Commission(“adopted IFRS”) The annual financial statements are prepared by the historical cost method, modified by the revaluation of financial assets available for sale, and financial assets and liabilities, including derivative financial instruments at fair value through profit or loss. In preparing the financial statements, the Management Board is required to make decisions, estimates, judgements and assumptions, which influence the amounts recognised in the financial statements. The most significant judgements by Management Board, which affected the amounts in the financial statements, were estimate of the recoverability of investment in intangible 14 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 concession assets and the estimate of asset impairment. During the calculation of impairment of investment in intangible concession asset. the Company used the following judgements: increase in cash inflow by 1% in 2016-2019, 0% onwards; Increase in cash outflow by 1% 2016-2019 0% onward; and a discount rate of 5.67%. All amounts are stated in Croatian Kuna and rounded off to the nearest thousand, unless stated otherwise. The foreign exchange rate applied on 31 December 2018 was 1 EUR = HRK 7.42 (31 December 2017: 1 EUR = HRK 7.51). Future events and their influence cannot be predicted with certainty. Accordingly, accounting estimates require the use of assumptions, which can change depending on experience gained, if new events occur, and in the case of new information and changes in the Company's environment. Therefore, the actual results might differ from the estimates used in the preparation of the financial statements. The Company's activities are regulated by: • The Public Roads Act (Official Gazette 84/11, 18/13, 22/13, 54/13, 148/13, 92/14) placing the Public Roads Act out of force; • Regulation on the protection and maintenance of public roads (Official Gazette 90/14); • The Law on Concessions (Official Gazette 69/17) placing the Law on Concessions out of force Official Gazette 125/08, 143/12; In July 2011 a new Public Roads Act entered into force defining the legal status of public roads and categorized roads, the method of use, categorization of public roads, construction and maintenance plans for public roads, management of public roads, measures of protection of public and uncategorized roads and their traffic, concessions, financing and supervision of public roads. Public roads are a public good for general use and neither ownership nor other actual rights over public roads can be acquired on any grounds. Public roads are constituted from road land, road construction and buildings on the road land ports, traffic signs and devices to control traffic that necessarily expropriated from real estate. In July 2017, the new Concession Law regulating the procedures for granting concessions, concession contracts, termination of concession, legal protection in concession procedures, concession policies, and other issues related to concessions was introduced. A concession is the right that is acquired under contract. In accordance with the Concession Agreement, the right of management over immovables and movables is transferred to the Company, but the Company is obliged to return the motorway once the concession expires to the grantor (the Republic of Croatia) without compensation and in the projected state. In accordance with the Concession Agreement, the Company has the right to charge a fee for use of the road - Toll from the users, while for the granted concession and the Company is obliged to pay compensation to the Republic of Croatia that corresponds to the amount of the Company’s overall profit reduced by the amount that is allocated to the reserves pursuant to a General Assembly decision. Since public roads are a public good given for the management and the grantor controls or regulates the services, the concessionaire must provide the use of infrastructure, to whom they should they should be provided and at what price, the grantor manages - through ownership, real rights, or otherwise - any significant remaining portion of the infrastructure at 15 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 the end of the concession period. The Concession Agreement has been entered in the accounts in accordance with the interpretation of IFRIC 12. The Company has prepared its financial statements as follows: • the value of the concession agreement of HRK 2.152.000 thousand is recorded as intangible assets-concession and equity of the Company; • the value of the original intangible asset is amortized directly on the capital charge over the life of the concession contract (32 years and 11 months). The Company has commenced operations to consider the need to reduce the share capital and the assets continue to be recognized in the business books as long as the process of reducing the share capital is continued; • Investments in the construction of new sections are recorded as construction income based on the concession agreement and as increases in intangible assets at the time of release, and are depreciated over the remaining duration of the concession; • Pursuant to the decision on the expansion of the concession, the value of a one-time fee in the amount of HRK 1.480.000.000 increases construction expenses based on the concession agreement and construction income based on the concession agreement and the Company’s intangible assets in the amount of HRK 1.483.700.000 and depreciation is carried out through a prolonged period of the concession agreement (32 years and 11 months); • All regular and extraordinary costs of investment maintenance, as well as borrowing costs are capitalized as intangible assets; • All regular and extraordinary costs of current maintenance are charged to expenses in the income statement; • Movables that by the concession contract belong to the concessionaire and are overtaken by takeover protocol on 1 January 1999, as well as property overtaken by protocol dated 30 August 2007 by Decision on expansion of concession, were recorded in the accounts as other tangible assets and liabilities; • On 8 April 2003 and 6 November 2003 the Company concluded Contracts on sub concession with the company Petrol trgovina d.o.o. and Tifon d.o.o. for the transfer of rights for financing, construction and management of the secondary facilities on supporting service facilities at Desinec and Ravna Gora, and the ownership rights over facilities. • On 26 July 2005, the Company concluded a Contract on sub-concession with the company INA d.d. for the transfer of rights for financing, construction and management of the secondary facilities on supporting service facility Vukova Gorica, and the ownership rights over the facilities. • On 31 January 2006, the Company concluded a Contract on sub-concession with the company OMV Hrvatska for the transfer of rights for financing, construction and management of secondary facilities on supporting service facility at Stupnik (west), and the ownership rights over the facilities. • On 4 October 2006, the Company concluded Contract on sub-concession with the company Tifon d.o.o. for the transfer of rights for financing, construction and management of the secondary facilities on supporting service facility at Lepenica, and the ownership rights over facilities. • On 10 February 2007, the Company concluded a Contract on sub-concession with the company INA d.d. for the transfer of rights for financing, construction and management of secondary facilities on supporting service facility at Lepenica, and the ownership rights over the facilities; • On 23 February 2007 the Company concluded a Contract on sub-concession with the company INA d.d. for the transfer of rights for financing, construction and management of secondary facilities on supporting service facility at Vrbovsko - north, and the ownership rights over the facilities. 16 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 • On 23 November 2007, the Company concluded a Contract on sub-concession with the company OMV Hrvatska d.d. for the transfer of rights for financing, construction and management of secondary facilities on supporting service facilities at Rupa (east, west) and Tuhobić, and the ownership rights over the facilities. • By decision on extending concessions, sub-concessions contracts for the transfer of rights for financing, construction and management of secondary facilities at Vrata Jadrana and Kraljevica, and on the use of land for the infrastructure of mobile networks, water supply pipeline for the Krk bridge and the main gas pipeline Pula - Karlovac were transferred from Hrvatske ceste d.o.o. and Hrvatske autoceste d.o.o. • On 16 June 2011 the Company concluded Contract on sub-concession with the County Fužine for the transfer of rights for financing, construction and management of the secondary facilities on supporting service facilities at Lepenica - south, and the ownership rights over the facilities. • On 14 June 2012 the company concluded an agreement on the use of road land for construction of accompanying service facility at Cernik with the company RI-PETROL d.o.o. • On 30 Oc-tober 2012 the company concluded an agreement on the use of road land for construction of accompanying service facility at Zamet with the company RI- PETROL d.o.o. 2.3. Key estimates and uncertainty of estimates During the preparation of the financial statements certain estimates were used that affect the Company’s statement of assets and liabilities, revenues and expenses and disclosure of the Company’s potential liabilities. Future events and their effects cannot be predicted with certainty, as such, actual results could differ from those estimated. The estimates used in preparing the financial statements are subject to change as new events occur, additional experience is acquired, additional information and insights is obtained and changes occur to the environment in which the Company operates. The key estimates used in applying accounting policies in preparing the financial statements relate to the depreciation of intangible and tangible assets, decrease in value of assets, impairment of inventories, impairment of receivables and provisions, and disclosure of potential liabilities. III SUMMARY OF ACCOUNTING POLICIES 3.1. Changes in accounting policies Adoption of New and Revised International Financial Reporting Standards Standards and Interpretations effective for the current period The following standards, amendments to existing standards and interpretations, which are issued by the International Accounting Standards Board and adopted for implementation in the EU and are in effect for the current period, are the following: • FRS 9 Financial Instruments: Classification and Measurement 9 The standard is effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. Final version of IFRS 9 Financial instruments reflects all phases of the project on financial instruments and modifies IAS 39 Financial instruments: Recognition and measurement as well as all other previous versions of IFRS 9. This 17 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 standard introduces new requirements concerning classification and measurement, value reduction and accounting protection. In accordance with the above standard, the accounting method of recognition and measurement of financial instruments is defined, and the current method of determining the amount of required provisions for impairment of financial instruments, including receivables, is changed. Given the capability of the standard, the first-time effect of IFRS 9 is reported in the business books as at 1 January 2018 as a correction of initial balances that has an impact on the retained results of the previous periods, without any adjustments to the terms of previous periods. Provisions for impairment according to IFRS 9 have been determined by applying a simplified approach to receivables without significant financial components. Impairment loss is measured as the expected credit loss over the entire life of the instrument using the matrix for bookings at rates applied to the group of financial assets. Financial assets are grouped on receivables from legal and physical entities. The impairment rates are determined based on the historical credit loss experience, adjusted to the expected information. Given the past experience, claims that have not been paid for in over a year usually represent ultimate loss. The same experience applies to legal and physical entities. The percentage of provisions for each group of unpaid receivables by maturity (up to 30 days, from 31 to 90, from 91 to 180, from 181 to 360, over 361 days) was determined as the ratio of total annual loss - write off of 360 receivables over the unpaid amount by specified maturity categories. Since the release of reservations was made in 2017, the amount of annual write-down of HRK 424.462,20 was used to calculate the reduction rate. For 2018, the net annual write- off amount of HRK 397.333,42 was used, with receivables older than 361 days in the amount of 100%. As all receivables are short-term, it is estimated that the expected macroeconomic trends and the employment rate will not have a significant impact on the historically established loss rates. • Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts: (Amendments to IFRS 4) The overlay approach to be applied when IFRS 9 is first applied. Deferral approach effective for annual periods beginning on or after 1 January 2018 and only available for three years after that date. Amends IFRS 4 Insurance Contracts provide two options for entities that issue insurance contracts within the scope of IFRS 4: • an option that permits entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets; this is the so-called overlay approach; • an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4; this is the so-called deferral approach. The application of both approaches is optional and an entity is permitted to stop applying them before the new insurance contracts standard is applied. The adoption of these amendments and amendments to the standard did not significantly affect the financial statements of the Company. 18 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 • IFRS 15 Revenue from Contracts with Customers The standard is effective for annual periods beginning on or after 1 January 2018. Within the standard a five-step model framework is introduced to be applied to income achieved based on contracts with customers (with limited exceptions), regardless of the type of income transaction or industry. Standard requirements will also apply to recognition and measurement of gains and losses from sale of some non-financial assets that are not part of Company’s regular activities (sale of property, plant and equipment or intangible assets). Extensive disclosures will be requested, including also disaggregation of total revenue; information on performance; changes in the amounts of the contracted assets and liabilities between the period and the key evaluation and audit. Adoption of this changes did not have significant impact on financial statements of the Company. • IFRS 15 Revenue from Contracts with Customers (clarification) The Clarification is in effect for the annual periods beginning on or after January 1, 2018, with earlier implementation permitted. The purpose of the Clarification is to clarify the purpose of the Board when defining the requirements of IFRS 15 Revenues From Contracts with Customers, in particular accounting treatment of identified performance obligations by supplementing the definition of a "separately recognizable" principle, application guidance on principal versus agent considerations including an assessment of whether the Company is principal or agent in the transaction as well as application of access control and licensing by providing additional instructions for accounting for intellectual property and royalties. Clarification also provides additional practical expedients for companies applying IFRS 15 using a fully retrospective approach or for those who opt for the use of a modified retroactive approach. • IFRIC INTERPRETATION 22: Foreign Currency Transactions and Advance Consideration The Interpretation is effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Interpretation clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. The Interpretation covers foreign currency transactions when an entity recognizes a non-monetary asset or a non-monetary liability arising from the payment or receipt of advance consideration before the entity recognizes the related asset, expense or income. The Interpretation states that the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. • Amendments to IAS 40: Transfer of investment properties The Amendments are effective for annual periods beginning on or after 1 January 2018. The Amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The Amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management’s intentions for the use of a pr operty does not provide evidence of a change in use. • Amendments to the IFRS 2: Classification and measurement of share based payment transactions The Amendments are in effect for the annual periods beginning on or after January 1, 2018, with earlier implementation permitted. Amendments have defined the accounting treatment of the impact of performance and non-performance measures on cash-settled share-based payments, share-based payments with the option of net settlement of a withholding tax liability and changes in share-based payment conditions that change the transaction's classification from the one settled in cash to the one settled by equity instruments. 19 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 • The IASB has issued the Annual Improvements to IFRSs 2014 – 2016 Cycle, which is a collection of amendments to IFRSs. The amendments are effective for annual periods beginning on or after 1 January 2018 for IFRS 1 First-time Adoption of International Financial Reporting Standards and for IAS 28 Investments in Associates and Joint Ventures. The overview of IASB has issued the Annual Improvements to IFRSs 2014 – 2016 Cycle is presented below: - IFRS 1 First-time Adoption of International Financial Reporting Standards: This improvement deletes the short-term exemptions regarding disclosures about financial instruments, employee benefits and investment entities, applicable for first time adopters. - IAS 28 Investments in Associates and Joint Ventures: The amendments clarify that the election to measure at fair value through profit or loss an investment in an associate or a joint venture that is held by an entity that is venture capital organization, or other qualifying entity, is available for each investment in an associate or joint venture on an investment- by-investment basis, upon initial recognition. At the date of authorization of these financial statements the following standards, revisions and interpretations were in issue but not yet effective: • IFRS 17: Insurance contracts The standard is effective for annual periods beginning on or after 1 January 2021. Earlier application is permitted if both IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments have also been applied. IFRS 17 Insurance Contracts establishes the principles for the recognition, measurement, presentation and disclosure of Insurance contracts within the scope of the Standard. The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. This information gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity's financial position, financial performance and cash flows. This Interpretation has not yet been endorsed by the European Union. • IFRIC 23: Uncertainty over Income Tax Treatments The Interpretation is effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. The interpretation addresses the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. It specifically considers: whether tax treatments should be considered collectively; assumptions for taxation authorities' examinations; the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and the effect of changes in facts and circumstances. This Interpretation has not yet been endorsed by the European Union. • Prepayment Features with Negative Compensation (Amendments to IFRS 9) The Amendments are effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. Amends the existing requirements in IFRS 9 regarding termination rights in order to allow measurement at amortised cost (or, depending on the business model, at fair value through other comprehensive income) even in the case of negative compensation payments. 20 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 • Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28) The Amendments are effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. Clarifies that an entity applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. These Amendments have not yet been endorsed by the European Union. • The IASB has issued the Annual Improvements to IFRS Standards 2015–2017 Cycle, which is a collection of amendments to IFRSs. The amendments are effective for annual periods beginning on or after 1 January 2019. These annual improvements have not yet been endorsed by the European Union. The overview of the Annual Improvements to IFRSs 2015 – 2017 Cycle issued by the IASB is presented below: • IFRS 3 and IFRS 11: The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it remeasures previously held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business. • IAS 12: The amendments clarify that all income tax consequences of dividends (i.e. distribution of profits) should be recognised in profit or loss, regardless of how the tax arises. • IAS 23: The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation rate on general borrowings. • IAS 19: Plan Amendment, Curtailment or Settlement (Amendments to IAS 19) The Amendments are effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. The amendments are in cases when plan amendment, curtailment or settlement occurs, it is then mandatory that the current service cost and the net interest for the period after the remeasurement are determined using the assumptions used for the remeasurement. In addition, amendments have been included to clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling. • Amendments to References to the Conceptual Framework in IFRS Standards Together with the revised Conceptual Framework published in March 2018, the IASB also issued Amendments to References to the Conceptual Framework in IFRS Standards. The document contains amendments to IFRS 2, IFRS 3, IFRS 6, IFRS 14, IAS 1, IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20, IFRIC 22, and SIC-32. • IFRS 3: Definition of a Business (Amendments to IFRS 3) The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020 and to asset acquisitions that occur on or after the beginning of that period. Earlier application is permitted, these amendments are not yet been endorsed by the European Union. 21 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 These amendments clarify; o that to be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs; o narrow the definitions of a business and of outputs by focusing on goods and services provided to customers and by removing the reference to an ability to reduce costs; o add guidance and illustrative examples to help entities assess whether a substantive process has been acquired; o remove the assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs; and o add an optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business. • AS 1, IAS 8: Definition of Material (Amendments to IAS 1 and IAS 8) The amendments are effective for annual reporting periods beginning on or after 1 January 2020. Earlier application is permitted. The amendments clarifies the definition of ‘material’ and align the definition used in the Conceptual Framework and the standards. The Management Board of the Company provides that the application of these standards, amendments and interpretations, with the exception of IFRS 16 as stated above, will have no material impact on the Company's financial statements for the period of their first application. 3.2. Recognition of income Income consists of fair value of income or receivables received for products or services sold during the Company’s regular operating activities. Income is stated to the amount less Value Added Tax, estimated return, rebate and discounts. The company recognises income when it can be reliably measured and when the Company will gain some economic benefit and when all specific criteria of the Company’s activities are met. a) Income from services based on concession agreement Construction and reconstruction services The Company is obliged to calculate income and expenses relating to construction and reconstruction services in accordance with IAS 11 Accounting for Construction Contracts. Income from construction and reconstruction services are recognised pursuant to concession agreements and are recognised using the method of completed works. Maintenance services – income from road tolls Income from maintenance services pursuant to the concession agreement are recognised in the period when the services are rendered. Pursuant to Article 7 of the Concession Agreement, the Company has the right to collect payments for the use of roads – tolls from users in the manner and amount defined under Concession Agreement. Income from road tolls represent the Company's own income, collected from customers on public roads increased by Value Added Tax (VAT) and serve to cover maintenance costs in the broader sense, to cover operating, financial and extraordinary costs and depreciation of public roads in the amount of the Company's total income. When the Company offers services pursuant to a concession agreement, income is allocated in relation to the fair value of the service rendered when that amount can be reliably identified. 22 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 b) Interest income Income generated from receivables from business relations is stated in financial income. Interest income is considered to be generated on the day of the contracted gaining the right to interest and is stated as calculated income until the balance sheet date. Default interest is stated in financial income at the time of payment. 3.3. Operating expenses Expenses are recognised based on direct relations between costs that have arisen Pursuant to the above, operating expenses represent all expenditure with regard to invoiced income for services provided or goods delivered. . 3.4. Maintenance costs Expenditure for maintenance of tangible assets relates to the reconstruction and maintenance of future economic benefit that can be expected from the originally estimated useful life of an individual asset. These expenses are recognised as an expense in the period they are incurred 3.5. Borrowing costs – interest costs Borrowing costs that can be directly attributed to the acquisition, construction or production of a qualified asset, i.e. intangible asset pursuant to a concession agreement and that necessarily takes a substantial period of time to get ready for its intended use or sale are included in the cost of acquisition until such time that the asset is significantly ready for its intended use or sale. Other borrowing costs are recognised as an expense 3.6. Transactions in foreign currencies Transactions in foreign currencies are initially translated into HRK at the exchange rate at the date of the transaction. Financial assets and liabilities stated in foreign currencies are translated on the date of the balance sheet at the Croatian National Bank medium exchange rate ruling on that date. Gains and losses resulting from translation are included in the statement of comprehensive income as net profit or loss for the period 3.7. Taxation Corporate income tax is the cumulative amount of current tax liabilities and deferred tax. a) Current tax liability Current tax liability is based on taxable profit for the year. Taxable profit differs from profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s current tax liability is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Tax losses can be used over the following five years commencing with the year in which they arise. b) Deferred tax Deferred tax is calculated with the use of the liability method and represents tax effects on all significant temporary differences between the tax bases, assets and liabilities and the amount expressed in the financial statements and amounts used to calculate corporate income tax. Deferred tax is calculated using tax rates that are expected will be in force for the period when the liabilities are likely to be settled or funds will be made available pursuant to tax legislation that is in force or in the process of being enacted by the balance sheet date. Calculation of deferred tax liabilities and deferred tax assets reflects possible tax effects that the Company expects could emerge on the balance sheet date, returns or settling the carrying amount of assets and liabilities. Deferred tax assets and liabilities are not 23 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 discounted or allocated as non-current assets and liabilities in the balance sheet. Deferred tax is recognised when it is likely that sufficient tax income will be available in relation to useable deferred tax. The Company's tax returns are subject to inspection by the relevant administration. As various interpretations are possible of several tax laws, the amounts stated in the financial statements may be subject to change depending on decisions by the relevant tax administration. 3.8. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated amortization and / or accumulated impairment losses, and it is recognized if it is probable that future economic benefits attributable to property flow to the Company and if the cost of asset acquisition can be reliable to determine. The cost of an item comprises its purchase price, including import duties and non- refundable purchase taxes, and any directly attributable costs of bringing the asset to its working condition and for its intended use. Subsequent expenditure relating to an item of tangible fixed assets that has already been recognized is added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the enterprise. When significant parts of property, plant and equipment are required to be replaced in intervals, the Company recognises such parts as individual assets with specific useful lives and respective depreciation. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the plant and equipment as a replacement, if the recognition criteria are satisfied. All other repairs and maintenance costs are recognised in the income statement as incurred. Carrying amount of expected expenses from assets write-off after it was put in use is included in the expense of the same asset, if the conditions of recognizing the expense have been met. Land on which the new section was built is not recorded in the ledgers, as the repurchased land is expropriated, which is subsequently settled to the Company by the Republic of Croatia, Ministry of Finance. Movables that by the concession agreement belong to the concessionaire, that were overtaken by takeover pursuant to protocol of 1 January 1999, as well as property overtaken pursuant to protocol dated 30 August 2007, in accordance with the Decision on the expansion of the concession are recorded in the accounts as other tangible assets and liabilities. Purchase of new equipment (tangible assets) is recorded as property and accrued depreciation is recorded as an expense. Depreciation is calculated by deducting the purchase value of the assets, except land and investments in progress, on a straight-line method over the estimated useful life of the assets as follows: DESCRIPTION 2018 2017 Useful life Useful life Buildings 40 years 40 years Equipment 4-10 years 4-10 years project duration (5 Equipment EU Life Bear project project duration (5 years) years) Other tangible assets 10 years 10 years 24 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 Depreciation is calculated separately for each item of assets until it is fully depreciated. An item of property, plant and equipment and any significant part initially recognised is no longer recognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gains or losses from disposal of a certain asset are determined as the difference between the sales revenue and the carrying amount of that asset and are recognised as an expense or income in the income statement. Other residual values of assets, useful lives and methods of depreciation are reviewed at the end of each financial year and of appropriate, and adjusted if necessary. 3.9. Intangible assets Intangible assets refer to investments into licenses, concessions, registered trademarks, leasehold assets, expenses for project documentation, feasibility studies, etc. Intangible assets acquired during the year are reported at cost less accumulated impairment losses. Cost includes the purchase price and directly associated cost of bringing the intangible asset to a working condition for its intended use. Intangible assets under the concession contract Pursuant to the Concession Contract, the Company acquired exclusive rights on development, projection, financing, construction, managing and maintaining of motorways and all related objects, existing motorways and existing related objects (Rijeka-Zagreb Motorway) for the period of 32 years and 11 months. The ownership of the motorway remains with the Concession Provider and it retains significant control over the motorway. The operator shall recognise an intangible asset to the extent that it receives rights (license) to charge users of the public service. The right to charge users of the public service is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service. The consideration received or receivables for both components shall be recognized initially at the fair value of the consideration received or receivable. Based on an analyses performed and IFRIC Interpretation 12, the Company recognised its concession as an intangible asset since final users are paying for the service. According to Concession Agreement, the Company does not have rights to the additional payments during the construction period (payments will be recovered from tolls collected during the maintenance period). For the purpose of correct revenue allocation in accordance with IAS 11 during the both periods, it was decided that a 0.25% margin covers the financing margin of borrowed funds. Any trade discounts and rebates are deducted from the cost. After initial recognition, the concession is carried at its cost less any accumulated depreciation and any accumulated impairment losses Intangible assets entered in the stock capital at the foundation The management of public roads taken over pursuant to the concession agreement at the time the Company was founded are not recorded as assets in the Company’s ledgers but are recorded as intangible assets. Assets under construction are also stated as intangible assets and are valued at cost increased by fees for professional services, qualified assets, and borrowing costs in accordance with the Company’s accounting policies. Depreciation of intangible assets is calculated once the asset is ready for its intended use. Investment in construction of new sections is recorded in the Company’s ledger as an increase in assets at the moment when the assets are ready for their intended use and are depreciated over the remaining duration of the concession. 25 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 Useful lives of intangible assets are as follows: OPIS 2018 2017 Depreciation recognized in the income Useful life Useful life statement Remaining Remaining concession period concession period Intangible assets (concession (concession duration 32 years duration 32 years and 11 months) and 11 months) Other intangible assets 5 years 5 years The carrying value of intangible assets is no longer recognised at the time of disposal or when no future economic benefits are expected from the use or disposal of these assets. Gains or losses arising from derecognition of an intangible asset are included in profit or loss for the period in which the derecognition occurred and are classified as revenue for difference between the net receivable from the disposal and the carrying value of assets. 3.10. Inventories Inventories are stated at the lower of cost and net realisable value. Inventory of raw material and material, spare parts, small inventory, packaging and car-tyres are stated at the actual value that comprise the supplier’s invoicing value increased by all related acquisition costs (customs fees, taxes, transportation costs and all other costs that may be attributed to procurement) by applying the weighted average cost method. Commercial discounts and similar items are deducted when determining the purchase cost. Minor inventory includes tools, operative and office inventory and similar work equipment with useful lives up to one year and items, which are not considered as non-current assets. Expenditure, i.e. putting minor inventory in use, car tyres and spare parts are included in costs and expensed immediately. The cost of inventories is measured by applying the weighted average price method. After the sale, the Company recognises the carrying value of inventories as an expense in the period in which relative income is recognised. In addition, the amount of any write-off of inventories to the net marketable value, and all shortages in inventories are recognised as an expense in the period of write-off or occurrence of the shortage. The amount of any reversal of inventory write-off because of an increase in net marketable value is recognised as a decrease in the impairment of the inventories in the period in which the reversal occurred. 3.11. Current receivables Current receivables represent receivables up to one year and include trade receivables, receivables from employees, State and other receivables. The mentioned assets are stated at their nominal value. Impairment of receivables is recognised in the period where there is reasonable doubt of collection Receivables from customers and other receivables are initially recognized at the transaction price and subsequently recognized at amortized cost using the effective interest rate method, less any adjustment. The Company measures the loss for its receivables from customers in the amount of expected credit losses expected during the life of the financial instrument. The amount of expected loan losses at the reporting date is recognized in the income statement as a loss on the impairment or the reversal of the impairment loss. Receivables from customers and other receivables are written off (in whole or in part) when there is no reasonable expectation of reimbursement. 26 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 Expected credit losses represent the weighted probability of estimated credit losses (ie the present value of all unpaid cash transactions) over the expected life expectancy of customers. Expected credit losses from customer receivables are calculated using the provision matrix. Trade receivables are classified according to the common risk characteristics that are representative of the ability of the buyer to pay all due amounts in accordance with the contractual terms. The reserve matrix is determined on the basis of historically established non-payment rates over the expected life expectancy of customers and adjusts to future-related estimates. 3.12. Current financial assets Current financial assets contain contractual rights to exchange financial instruments or cash with other legal entities or persons under conditions that are potentially convenient. Forms of contractual rights, such as given deposits, which give the right over financial assets, are stated in the statement on the financial position as part of current assets. The stated assets are classified as loans and receivables and measured by applying effective interest method. At initial recognition, financial assets are classified and measured at amortized cost, fair value through other comprehensive income or fair value through profit or loss. Financial assets are measured at amortized cost if they are not measured at fair value through profit or loss and if they meet the following two conditions: - assets are held within a business model whose object is to hold assets for the purpose of collecting contractual cash flows, and - the contractual terms of a financial asset at certain dates assume cash flows that represent principal and interest payments on outstanding principal. In the case of initial recognition of an investment, in the case of an asset that is not held for trading, the Company may irrevocably decide to present subsequent changes in fair value in other comprehensive income. This decision is implemented on the basis of each investment individually. Financial assets held for trading or managed and whose performance is estimated at fair value is measured at fair value through profit or loss as it is not held for the purpose of collecting contractual cash flows or for collecting contractual cash flows and for selling financial assets property. At initial recognition of a venture, the Company may irrevocably determine the financial assets that otherwise meet the measurement requirements at amortized cost or at fair value through other comprehensive income at fair value through profit or loss if this eliminates or significantly reduces accounting mismatch which would otherwise have arisen. All other financial assets are classified as assets measured at fair value through profit or loss. 27 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 3.13. Investments in joint arrangements The Company together with HAC d.o.o. had joint control over the company HAC-ONC d.o.o. This investment in a joint venture is accounted for by applying the equity method. Society as a Transporter and Society HAC d.o.o. as the acquirer, on 29 September 2017, entered a contract on the transfer of the holding in the company HAC ONC d.o.o. Core capital HAC ONC d.o.o. consisted of two shares: ARZ business share 27% d.d. and the HAC of 73%. Pursuant to the aforementioned Agreement, and based on the Elaborate Evaluation of fair market value of HAC-ONC d.o.o. and the Fair Market Value of the Company's Minority Shareholder's Ownership as a Holder, made by independent assessors, the HAC has purchased from the Company a business share for a fee of 44.776.081 HRK. Consequently, the transfer of ARZ's business share d.d. at HAC d.o.o. which is HAC d.o.o. He has become a holder of all shares in HAC ONC, or a 100% owner. Prepaid costs relate to accrued and unpaid bank charges paid for the period of lending to commercial banks that finance the construction of public roads and on state guarantee fees for loans issued by the same commercial banks to the Company by the Republic of Croatia. Prepaid costs are derecognised in accordance with IAS 39, as they relate to the entire financing period. 3.14. Impairment The net book value of the Company’s assets is reviewed on each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount of the asset is estimated. An Impairment loss is recognised in the income statement in all cases when the net book value is greater than their recoverable amount. The recoverable amount of the Company’s receivables is calculated as the current value of expected future cash receipts and expenses, discounted at the effective interest rate that matches the type of property 3.15. Cash and cash equivalents Cash and cash equivalents comprise cash and bank deposits and are recorded in the statement of financial position. The carrying amounts of cash and cash equivalents generally approximate their fair values. For the purpose of reporting on cash flows, cash and cash equivalents include cash and bank accounts with maturity up to three months. 3.16. Prepayment and accrued income Prepayments relate to accrued undue bank charges paid to commercial banks that financed the construction of public roads for the period of loaning, and to fees for the state guarantees for loans from the same banks that are issued to the Company by the Republic of Croatia. Prepayments are deferred in accordance with IAS 39, as they relate to the whole period of financing. 3.17. Non-current provisions Provisions are recognized when the Company has a present obligation (legal or constructive) because of a past event, when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and if a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date, and adjusted with an estimate based on current best knowledge. The amount of provisions are determined by discounting expected future cash flows using a pre- tax discount rate that reflects current market assessments of time value of money and, where appropriate, the risks specific to the liability. In the event when the Company expects 28 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 compensation for the amount, which is reserved, such compensation is recognised as a separate item of property, but only when such compensation becomes truly certain. 3.18. Non-current liabilities and current liabilities The Company’s liabilities are classified as short-term liabilities, when they are expected to be settled within the current business cycle and when the due date falls within twelve months from the balance sheet date. All other liabilities are classified as non-current liabilities. All loans and borrowings are initially recognised at cost, being the fair value of the received items. After initial recognition, interest-bearing loans and borrowings are subsequently measured at depreciated cost using the effective interest method less impairment. 3.19. Leases The Company as a lessee: Rent in which the lessee substantially retains all the risks and rewards of property ownership are classified as business leases. Operating lease payments are recognized as an expense in the income statement using the straight-line method over the lease term.. The Company as a lessor: leases where the Company does not substantially transfer all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same bases as rental income. Contingent rents are recognised as revenue in the period in which they are earned. 3.20. Trade payables Trade payables are stated at their nominal amount. 3.21. Government subsidies Government subsidies associated with assets, including support based on the takeover of debts by the State, are recorded in the statement of financial position as non- current liabilities. Subsidies received as irreversible support from the State are recognised in the income statement over the period of use of funds that are depreciated using the decreased depreciation cost. Subsidies received through overtake of debts by the owner are recognized as an increase in income over the useful lives of the assets financed by these loans. 3.22. Employee benefits Defined contribution schemes For defined contribution, schemes the Company pays contributions to publicly or privately managed insurance pension funds on a compulsory, contractual or voluntary basis. Once the defined contribution is paid, the Company has no further obligations. Regularly defined contributions include the net periodic costs for the related year and are included in employee costs Other employee benefits The expected cost of other benefits after termination of employment and jubilee awards are calculated during employment, estimating the amount of future benefit that employees earned as a refund for services rendered in the current and previous periods. Benefits are discounted to determine their present value. The discount rate is similar to the interest rate on government bonds for which the due date and terms are agreed in 29 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 accordance with the due date and estimated terms of the benefit obligation. Costs associated with jubilee awards and retirement benefits are charged to employee expenditure. Valuation of these obligations is carried out annually. Severance payments Severance payment liability arises when employment is terminated before the normal retirement date or when an employee accepts voluntary retirement in lieu of severance payments. 3.23. Subsequent events after the reporting period Subsequent events, which provide additional information on the position of the Company on the balance sheet date (events that result in adjustments), are stated in the financial statements. Events, which do not result in impairment but are of material value, are stated in the Notes to the financial statements. 3.24. Environment protection policies The Company’s environment protection policy is that its employees are constantly made aware of environment protection and that they ensure a constant contribution to its protection and improvement as well as to their working environment. 3.25. Comparative data Comparative data is reclassified to be comparable with the current year. There was no significant reclassification made during the year. 3.26. Non-current assets held for sale The Company classifies a non-current asset as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. The Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. A non-current asset classified as held for sale is measured at the lower of its carrying amount and fair value less costs of sale and is no longer depreciated. Impairment losses on initial classification as held for sale are included in the income statement, as well as gains and losses on subsequent measurement. 30 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 NOTES TO STATEMENT OF COMPREHENSIVE INCOME 4. Income from tolls 2018 2017 DESCRIPTION HRK'000 HRK'000 Tolls paid In cash 261.139 259.824 Tolls paid in foreign currency 34.288 35.160 Tolls paid by credit cards 101.851 92.054 Tolls paid by statements 270 213 Tolls paid by Smart cards 2.742 2.693 Tolls paid by ENC 250.858 236.975 Income from HAC 461 258 Other income from tolls 5.623 4.106 Total 657.232 631.283 Tolls are charged in accordance with Art. 8 of the Concession Agreement dated June 1998. The Management Board regulates the amount of tolls in accordance with the fees prescribed by the Minister responsible for motorways and toll facilities, and depending on the type, length, and the importance thereof. The competent Minister gives the approval of a management decision on the amount of tolls. Net income (expenses) from concessionaire is realised in accordance with the Agreement on toll collection on toll plazas and debt clearance dated 4 June 2004, as well as their relevant appendices, concluded with Hrvatske autoceste d.o.o. Zagreb for allocation of income realised from tolls. 5. Construction income based on concession agreement Construction income based on the concession agreement stated in the income statement for 2018 in the amount of HRK 425.384 thousand (2016: HRK 4.229 thousand) is the result of accounting entries recorded in accordance with IFRIC 12 Interpretation - Service concession arrangement In accordance with International Standard 36 Impairment of Assets, the Company is required annually to test the impairment test of tangible and intangible assets in order to determine whether the carrying amount of the stated asset is stated in the Company's books higher than its value in use. The value in use is determined by discounting the future cash flows generated by the said asset. Using this method, it was determined that the discounted value of total future cash flows as at 31 December 2018, for the purpose of further increase in toll revenues during 2018, was by HK 676.514.541 higher than the net book value of concessionary assets in books or 545.104.148 HRK after updating the model with closing numbers from the final balance sheet (which includes the impairment of the concession property acquired in the establishment of the company, the concessionary property on the basis of the extension and the concessionary property created by the construction of parts of the Rijeka - Zagreb motorway, to 2007), and also suggests that the amount of residual impairment can be partially eliminated. 31 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 Therefore, due to the results achieved in 2018 and because of the planned result for 2019 and the projections based on that, the noted impairment have been retained or corrected in the following amounts: • the impairment of the value of the concessionary assets based on the expense for the extension and construction costs of Rijeka's bypasses in the amount of HRK 1.458.700.000 at 31 December 2018 is retained in the same carrying amount, • the impairment of the value of the concessionary property arising from the construction of the Rijeka - Zagreb Motorway in the amount of HRK 1.425.000.000 at 31 December 2018 is adjusted for the amount of HRK 1.425.000.000 and will then amount to HRK 1.000.000.000 at 31 December 2018 By applying the impairment test for concessional property based on the expense for the expansion and construction costs of the Rijeka Bypass in 2016, conditions for partial reversal of the impairment were obtained. In this regard, it was reversed HRK 180.500.000 of the concession compensation fee paid for the extension of the Bypass. Expectations in 2018 and projections for 2019 and future periods show that the reduction could be partially reversed up to the amount of HRK 61.740.253. The management of the Company has not performed the reversal of impairment because it is not possible to confirm the projections of future periods with complete certainty. By the implementation of the impairment test of the concession property arising from the construction of the Rijeka-Zagreb highway was reversed in 2016, when the projections of increased revenues and their impact on future cash flows could be confirmed with the certainty. In this respect, for the purpose of reversal of the impairment of the value of the concession property of the Construction of Autoceste Rijeka - Zagreb was reversed HRK 819.500.000. Due to the achievement of the results in 2018, better than expected, and based on projections for 2019 and future periods, the present value of future expected cash flows is by HRK 614.774.287 higher than book value, i.e. HRK 483.363.895 after updating the data with the final balance sheet. Therefore, the Management Board, guided by the principle of prudence and due to the significant impact of the slight shift in projections on the total value of the discounted cash flows, brought the decision to partially revers the impairment of the concession property, created by the construction of the Rijeka - Zagreb motorway in the amount of HRK 425.000.000, after that the impairment of this concession property amounts to HRK 1.000.000.000. The reversal of the previously recognized impairment (in accordance with paragraphs 109 to 116 of IAS 36) is carried out if there are obvious indicators that the impairment is no longer available or that the changed market conditions will have a positive impact on the entity. Likewise, the change in market conditions affects the abolition of impairment only if positive effects are expected. Point 111.c stipulates that the reduction in interest rates will affect the abolition of the impairment only if these reductions are expected to affect the discount rate used in the calculation of the value of the asset in use, which in this case is a rate of 5.65% as determined when setting the model. This rate corresponds to a custom WACC rate that excludes the expected return of shareholders as it is the country as the owner. WACC in 2018 amounts to about 3%, but needs to be adjusted, to increase the risk due to the negative amount of capital, which reaches the level of about 5%. This is also supported by the assumption that, despite the fact that the Company has been able to refinance loans at lower interest rates and that market rates are still relatively low, in 32 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 the event of further borrowing, it would not be possible to fix interest rates at such a low level which debt is extended by EIB loan to the period after the concession period expires. Furthermore, IAS 36, paragraph 117, provides that the abolition of impairment losses may be carried out only to the amount of net book value that would have been determined that the impairment was not recognized. As a result of the impairment test for 2018, amount of HRK 425.000 thousand was cancelled, bringing the value of the concession asset to HRK 3.410.003 thousand, that represents estimated recoverable value of the concession, given the variability of the parameters in the projections, while the same for the part of the concession property created by construction, ono 31 December 2018. amounts to a maximum of HRK 3.629.559 thousand. 6. Other operating income 2018 2017 DESCRIPTION HRK'000 HRK'000 Fee for sub-concession 26.498 29.490 Income from state subsidies (public debt) 31.211 31.211 Income from remuneration based on the concession agreement 22.433 19.702 Income from reversal of provisions 2.203 2.879 Income from collection of damages 2.113 2.263 Other non-specified operating income 5.931 6.010 Total 90.389 91.555 The sub-concession fee stated in the amount of HRK 26.498 thousand for 2018 (2017: HRK 29.490 thousand) resulted from cession of rights of concession to sub-concessionaires for the construction of secondary facilities (shops, office buildings, buildings, gas stations, restaurants, parking lots, billboards, recreation parks and other facilities along public roads in accordance with Art. 25 of the Concession Agreement). Sub-concession rights last as long as the rights of concession. Pursuant to the Concession Agreement liabilities defined by the Republic of Croatia as the grantor of the concession, budget funds for 2018 were allocated to settle obligations defined by the Concession Agreement to settle maintenance costs for the Rijeka ring road, costs of acquiring expropriated land and buildings; preparation of design and technical specifications and administrative procedures to co-finance bridge tolls on the Krk bridge for legal and physical persons as defined by the Decision on Temporary Financing to the company Autocesta Rijeka-Zagreb d.d. for 2018 and the Decision on Amending the Decision on allocation of budgetary funds to the Autocesta Rijeka-Zagreb d.d. for 2018 as of 17 December 2018. Based on the amendment of the Minister's decision, HRK 49.489 thousand was withdrawn from the state budget. 33 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 7. Material costs 2018 2017 DESCRIPTION HRK'000 HRK'000 Used raw material and material 468 335 Costs of goods sold 959 1.214 Other external costs 219.479 194.261 Total 220.906 195.810 Other external expenses are the following: 2018 2017 DESCRIPTION HRK'000 HRK'000 Transportation services 35 9 Postage 245 207 Current maintenance 137 1.243 Other extraordinary maintenance 55.161 27.533 Rental services 1.058 1.080 Utility services 120 89 Toll collection and maintenance services ARZ-ON 162.204 163.607 Other services 519 493 Total 219.479 194.261 On 15 September 2014, Autocesta Rijeka-Zagreb d.d., entered into a contract for the provision of regular motorway maintenance and toll collection (Contract) with Hrvatske autoceste - održavanje i naplata cestarine d.o.o. (HAC ONC) in which the Company was a member of the HAC ONC Society, with the date of expiry of the contract on 14 September 2018. As part of the Business and Financial Restructuring of the Road Sector, the Government of the Republic of Croatia has confirmed its intention to merge Hrvatske autoceste d.o.o. (HAC) and HAC-ONC with the transmission of operational tasks (regular maintenance of highway and toll collection) of ARZ to HAC by delegating responsibility (on 16 March 2017). The Government of the Republic of Croatia adopted the Decision on Accepting the Text of Business and Financial Restructuring of Road sector), which happened on 1 December 2017, and the provider of contracted services to ARZ became the HAC. On June 4, 2018, the Company made an agreement with the HAC, as the legal successor of HAC ONC, i.e. Annex I of the Agreement on provision of regular maintenance services and toll collection, which was supplemented by certain nomenclature and others for content / nature itself, are not so important parts of the contract. On 14 September 2018, Annex II of the Agreement for the provision of regular maintenance and toll collection service was concluded until 14 December 2018, with the monthly fee corrected by HRK 389 thousand. After the negotiated procurement procedure was completed on 14 December 2018, a contract for the provision of regular highway maintenance services, toll collection and supervision and traffic management with the Hrvatske autoceste d.o.o. for an annual fee of HRK 155.498 thousand for 2019. 34 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 8. Employee costs 2018 2017 DESCRIPTION HRK'000 HRK'000 Net wages 5.787 5.397 Contributions from and to salaries, and salaries 4.735 4.209 Ukupno 10.522 9.606 9. Amortizacija Amortization for 2018 amounts to HRK 280.535 thousand (2017: HRK 282.033 thousand). 10. Other expenses 2018 2017 DESCRIPTION HRK'000 HRK'000 Material rights and travel costs 534 204 Costs of employee commuting 184 162 Intellectual services 2.223 1.840 Insurance premiums 1.399 1.355 Environment protection costs 0 0 Remuneration for key staff 305 216 Taxes and contributions independent of results 623 408 Bank fees 21.267 13.041 Non-written off value of alienated property, plant and equipment 1.146 1.468 Donations and sponsoring 77 22 Write off of aged unadjusted receivables 474 1.420 Entertainment 89 27 Other non-specified expenses 2.309 2.323 Total 30.630 22.486 In 2018, as part of the financial restructuring of the road sector, the Company refinanced two existing loans in the amount of EUR 202.025.000, the deviation of bank fees and commissions compared to 2017 resulted from one-time recognition of prepayment for early repayment of loans under the financial restructuring public debt. Within the scope of intellectual services, audit services amounted to HRK 87 thousand for 2018. 11. Value adjustment of current assets 2018 2017 DESCRIPTION HRK'000 HRK'000 Impairment of trade receivables 893 425 Adaptation to IFRS 9 (73) 0 Total 820 425 35 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 Provisions for value adjustment according to IFRS 9 have been determined by applying a simplified approach to receivables without significant financial components. Impairment loss is measured as the expected credit loss over the entire life of the instrument using the matrix for bookings at rates applied to the group of financial assets. Financial assets are grouped into receivables from legal and physical entities. The impairment rates are determined based on the historical credit loss experience, adjusted to the expected information. Given the past experience claims that have not been paid for more than a year usually represent final loss. The same experience applies to legal and physical entities. The percentage of provisions for each group of unpaid claims by maturity (up to 30 days, from 31 to 90, from 91 to 180, from 181 to 360, over 361 days) is determined as the ratio of total annual loss – write-off of receivable above 360 days in relation the unpaid amount by before mentioned maturity category. Since the release of impairment was made in 2017, the amount of annual write-off of HRK 424 was used to calculate the reduction rate. For the year 2018, the net amount of annual write-offs amounted to HRK 397 thousand, taking into consideration that receivables older than 361 days are written-off in the amount of 100%. Sice all receivables are short-term, it is estimated that the expected macroeconomic trends and the employment rate will not have a significant impact on the historically established loss rates. 12. Provisions 2018 2017 DESCRIPTION HRK'000 HRK'000 Provisions for severance payments 26 0 Provisions for jubilee awards 14 23 Provisions for unused annual vacations 56 0 Provisions for court disputes 1.926 340 Total 2.022 363 Provisions during the year 2018 are shown below: Provisions DESCRIPTION Provisions for Provisions for unused Provisions severance for jubilee annual for court payments awards vacations disputes Total HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 01 Jan 2018 2.318 985 420 9.470 13.193 Reversal of provisions 0 0 0 (42) (42) Amount used (209) (247) 0 0 (456) New provisions 26 14 56 0 96 31 Dec 2018 2.135 752 476 9.428 12.791 36 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 13. Construction expenses based on concession agreement Construction expenses based on the concession agreement stated in the income statement for 2018 in the amount of HRK 383 thousand (2017: HRK 4.219 thousand) are the result of accounting entries recorded in accordance with IFRIC 12 Interpretation - Service concession arrangements. 14. Financial income 2018 2017 DESCRIPTION HRK'000 HRK'000 Interest income 215 314 Exchange rate gains 74.498 40.359 Income from the sale of shares 0 14.206 Total 74.713 54.879 Determination of the fair market value of the capital of the Hrvatske autoceste-održavanje i naplata cestarine d.o.o. (HAC-ONC), was implemented by applying a dynamic approach to a discount method by discounting free cash flows. This method establishes fair market value of HAC-ONC's equity capital. Based on the estimated fair market value, the value of the minority business share of the Autocesta Rijeka-Zagreb d.d. in the amount of HRK 44.776 thousand. The differences between the sale price and the value of shares in the Company's business books are recognized as income from the sale of the business unit. 15. Financial expenses 2018 2017 DESCRIPTION HRK'000 HRK'000 Interest expenses 61.690 92.627 Total 61.690 92.627 Interest expenses accrued in 2018 and 2017 relate to non-current loan interest. 16. Expenses form equity method By investing into joint arrangements, the Company made expenses in the year 2017 in the amount of HRK 355 thousand. 17. Corporate income tax The Company is subject to corporate income tax on its taxable profits in Croatia. Income tax is recorded based on estimated taxable income in accordance with the fiscal laws prevailing in Croatia. Reconciliation between accounting profit / (loss) and tax expense is given below: 37 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 DESCRIPTION 2018 2017 HRK'000 HRK'000 Profit for the year before taxation 640.210 174.021 Total increased loss /decreased profit 640.210 2.012 Loss after increase and decrease 0 176.033 Loss carried forward 0 (241.213) Tax loss available for transfer 0 (65.180) Tax liability 0 0 An overview of the tax losses carried forward by years is shown as follows: YEAR HRK'000 2013 1.088.416 2014 948.542 2015 935.749 2016 589.181 2017 241.213 The transferred tax losses are utilized in the current tax period 2018. Deferred tax assets are recognized when there is a probability that sufficient taxable profit will be available in respect of which deferred tax assets may be utilized. The Company recognized impairment of concessionary assets in the income statement after applying IAS 36, item 63 in the amount less than the taxable amount (the amount after the impairment reversal after deduction). Consequently, there was an increase in the tax liability for the difference between the depreciation expense and the depreciation charge at the lower of the amortized cost (ie the reversed depreciation charge for impairment). Pursuant to Article 47, paragraph 3, item 33 of the Income Tax Ordinance in conjunction with Article 6, paragraph 1, item 4 of the Profit Tax Act, the tax base is reduced by HRK 216.370.077,87. 38 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 Cancellation of Reduced Depreciation Amortization Used but Maximum Historical Reduced value the depreciation Depreciation Total acquisition value Depreciation and included in the previously tax Depreciation for acquisition value of concession- charge for cost for depreciation Year of concessional cost on amortization of P&L and CIT non-deductible the Year (25% of concessional equity capital impairment not impairment for the year intangible assets historical value non-current application at depreciation used on Intangible intangible assets IAS 36 in the P&L and value included in CIT under IAS 36. assets nr. 2 expense for impairment Assets) CIT HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 0 1 2 3 4 5 6 (4+5) 7 8 (4+7) 9 10 11 1998. 2.153.812 - 63.464 - 63.464 63.464 63.464 430.762 1999. 2.153.812 - 76.223 - 76.223 76.223 76.223 430.762 2000. 2.153.812 - 76.223 - 76.223 76.223 76.223 430.762 2001. 3.078.850 - 97.447 - 97.447 (5.848) 91.599 91.599 615.770 2002. 3.078.850 - 112.607 - 112.607 (26.830) 85.777 85.777 615.770 2003. 4.727.711 - 136.112 - 136.112 (23.053) 113.059 113.059 945.542 2004. 5.472.238 - 193.815 - 193.815 (24.113) 169.702 169.702 1.094.448 2005. 5.473.509 - 208.938 - 208.938 (25.275) 183.663 183.663 1.094.702 2006. 5.567.003 - 210.535 - 210.535 (26.555) 183.980 183.980 1.113.401 2007. 6.384.929 - 110.640 - 110.640 (23.676) 86.964 86.964 1.276.986 2008. 8.746.652 - 303.442 - 303.442 (15.086) 288.356 288.356 1.749.330 2009. 10.011.694 - 382.651 - 382.651 (15.086) 367.565 367.565 2.002.339 2010. 10.078.540 - 436.982 (53.502) 383.480 (15.086) 368.394 368.394 2.015.708 2011. 11.668.908 2.152.000 1.483.700 1.715.134 (1.384.923) 330.211 (18.002) 312.209 312.209 2.333.782 2012. 11.803.300 1.483.700 398.512 (63.136) 335.376 (18.002) 317.373 317.373 2.360.660 2013. 11.817.405 3.883.700 401.089 (182.144) 218.945 (18.002) 200.943 200.943 2.363.481 2014. 11.822.637 3.883.700 401.721 (182.144) 219.577 (18.002) 201.575 201.575 2.364.527 2015. 11.823.478 3.883.700 401.927 (182.144) 219.783 (18.002) 201.781 201.781 2.364.696 2016. 11.823.541 2.883.700 401.960 (142.584) 259.376 (18.002) 241.374 241.374 2.364.708 2017. 11.823.541 2.883.700 401.963 (114.349) 287.614 (18.002) 269.612 269.612 2.364.708 2018. 11.823.541 2.458.700 401.961 (114.349) 287.613 (18.002) 269.610 216.370 485.980 2.364.708 TOTAL 6.933.348 (2.419.276) 4.514.072 (344.624) 4.169.448 39 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 NOTES TO THE BALANCE SHEET/STATEMENT OF FINANCIAL POSITION 18. Intangible assets Investment in Intangible assets Prepayments property Leasehold Licences DESCRIPTION entered into stock Concession for intangible IT programs Trade mark TOTAL under investments and patents capital assets construction COST HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 Balance as at 1 January 2017 2.152.000 9.886.946 36 245 736 4.750 20.419 629 12.065.760 Direct purchase 0 306 0 4.320 0 236 0 0 4.862 Correction from 025 to 124 receivables 0 0 0 (122) 0 0 0 0 (122) Disposals, alienation and deficits 0 (2.464) 0 0 0 (1.250) (2.243) 0 (5.957) Balance as at 31 December 2017 2.152.000 9.884.788 36 4.443 736 3.737 18.175 629 12.064.544 Direct purchase 0 187 202 0 0 8 0 397 Transfer to use 0 4.425 (36) (4.425) 0 0 0 0 (36) Correction from 025 to 02200000 0 0 0 (8) 0 0 0 0 (8) Correction from 025 to – assets with small value.35100000 0 0 0 (70) 0 0 0 0 (70) Disposals, alienation and deficits 0 (2.062) 0 0 0 0 0 0 (2.062) Balance as at 31 December 2018 2.152.000 9.887.338 144 736 3.737 18.183 629 12.062.766 IMPAIRMENT Balance as at 1 January 2017 2.152.000 5.688.670 0 0 337 3.711 19.727 629 7.865.074 Depreciation for the year 0 296.360 0 0 38 663 612 0 297.673 Disposals, alienation and deficits 0 (982) 0 0 0 (1.250) (2.243) 0 (4.475) Balance as at 31 December 2017 2.152.000 5.984.048 0 0 374 3.125 18.096 629 8.158.272 Depreciation for the year 0 296.569 0 0 38 367 65 0 297.038 Concession impairment 0 (425.000) 0 0 0 0 0 0 (425.000) Disposals, alienation and deficits 0 (916) 0 0 0 0 0 0 (916) Balance as at 31 December 2018 2.152.000 5.854.701 0 0 412 3.491 18.161 629 8.029.394 CARRYING AMOUNT Balance as at 1 January 2017 0 4.198.276 36 245 399 1.039 691 0 4.200.686 Balance as at 31 December 2017 0 3.900.740 36 4.443 361 612 80 0 3.906.272 Balance as at 31 December 2018 0 4.032.636 0 144 323 246 22 0 4.033.372 40 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 18. Intangible assets (continued) The estimation of the value of concession contributed to registered capital was made by the company Civil Engineering Institute of Croatia using two different methods. The first method (static method) determined the depreciated replacement value of the constructed sections of the motorway. The second method (dynamic method) determined the net present value of the estimated future revenues from the concession. The used discount rate (WACC) was 7%. Both methods determined the value of concession in the amount of HRK 2.152.000 thousand. . IAS 36 imposes the duty of asset impairment recognition in the reported value of assets, as well as guidelines for the recognition and measurement of such impairment. The basis to evaluate the potential impairment of assets is to assess the recoverable value of property that is based on reasonable and verifiable assumptions and the Management's best knowledge about future business conditions. The recoverable amount is the higher value resulting from: • net sales price if the property is marketable, and • value of assets in use obtained as the net present value of future cash flows that will arise from further use of the assets. In the event that the recoverable value is lower than the net book value, it is necessary to recognize impairment of assets in the profit and loss account for the year in the amount of the discrepancy. During 2011, the Company performed an impairment test of non-current intangible concession assets, where the mentioned assets were divided into three units, which independently generate cash: - intangible concession assets incurred at the Company’s foundation, by recording the value of the concession right into the subscribed capital of the Company, - intangible concession assets incurred by paying concession fees for taking over the Rijeka ring road, - intangible concession assets incurred by reconstruction and extension of the Rijeka-Zagreb motorway. An analysis of discounted future cash flow of each of the three mentioned units, it was determined that: - that the intangible concessionary property created by the Company's establishment by entering the value of the concessionary right into the Company's share capital does not separately generate sufficient cash to cover the non-amortized amount of the asset, since the said contract has passed the old profile of the Zagreb Motorway Karlovac which during the upgrade and extension of the Rijeka- amended. Consequently, the concessionary assets in the amount of HRK 2,152,000 thousand are fully depreciated. Since the stated asset constituted the basis for the subscription of the Company's registered capital at the time of establishment, this amount is still expressed as subscribed capital until the status issue of capitalization and / or recapitalization is resolved. During 2010, the Company started to negotiate and address this issue with the relevant ministries, and the solution to this issue is expected to be made in future periods. - Intangible concession assets incurred by paying concession fees for taking over the Rijeka ring road does not independently generate sufficient cash for the recovery of the paid part of the fee, as the Rijeka ring road is an open-type motorway without toll collection, and by its transfer, the Company gained the right of toll collection on the bridge of Krk and Rupa exit. As the Company invested additional resources in the construction of the Rijeka ring road, the mentioned income does not cover the costs of additional construction and is not sufficient to recover the prepaid concession fee. Therefore, the amount of prepaid concession fees of HRK 1,483,700,000 was completely written- off. 41 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 18. Intangible assets (continued) - that the intangible concession arising from the upgrading and expansion of the Rijeka-Zagreb Motorway does not generate sufficient money to cover the non-amortized amount of the property, the main reason being the short life span within which the loan is to be repaid, and an effectively inadequate concession lifetime of 25 years use until the end of the concession in 2031), in which it is necessary to cover construction costs which for the newly constructed road are usually 40 to 50 years. Since the construction of the Rijeka-Zagreb motorway lasted ten years (from 1998 to 2008), the full amount of this road will only be realized in a period of 15 years, which is insufficient given the usual economic life of the road at least 40 to 50 years, and it is unrealistic to expect that the revenues generated during the concession period will cover all non-depreciated construction costs. Due to the above, in accordance with International Standard 36 - Property Reduction, the Company conducted a test for the reduction of concessionary assets arising from the construction of the highway and recognized HRK 1,425,000 in impairment of the value of the concession property created by the construction. The Company implements the impairment test on an annual basis to determine if the carrying amount of the assets is higher than its value in use. By applying this method, it was determined that the discounted value of the total future cash flows as at 31 December 2017, to further increase from tolls income and decrease of operating costs in 2017, was by HRK 276,817 thousand higher that the net carrying value of concession assets (which already includes the impairment of concession assets acquired at the foundation of the Company, concession assets based on enlargement and concession assets resulting from the construction of part of ARZ motorway in the period from 1998 to 2007), which meant that the mentioned assets in the business books did not need to be further reduced. The concession contract provides for maintenance of the infrastructure at the level of usability and renewal to the condition in which the road will be taken at the end of the concession agreement. Since the Company has taken over the section Zagreb-Karlovac, which has been fully upgraded and expanded by means of the Company's shares, Management expects that regular annual maintenance of the highway during the term of the concession period will result in the value of the infrastructure at the end of the contract being equivalent to the values it has taken over. The costs of such maintenance are not recognized as the amount of provisions in accordance with IAS 37 as the Company, due to the nature of the maintenance itself, of the available funds at the time of that period in which it will be carried out is unable to determine with reasonable accuracy the amount needed to just maintenance. Therefore, the Society's stated cost of regular maintenance is recognized as it is incurred. Depreciation of intangible assets, real estates, plant and equipment amounts to 282.033 thousand. 42 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 19. Property, plant and equipment Tools Investment Plant and Other DESCRIPTION Land Buildings and PUO in TOTAL equipment assets furniture progress HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 COST Balance as at 1 January 2017 10.421 1.154 8.958 372 13.513 5.261 2.099 41.778 Direct purchase 0 0 133 0 7 0 0 140 Transfer in use 0 0 0 0 263 0 0 263 PUO closure from project 29020003 0 0 0 0 0 (72) 0 (72) Disposals, alienation and deficits 0 0 (155) (1) 0 0 0 (155) Balance as at 31 December 2017 10.421 1.154 8.937 372 13.783 5.189 2.099 41.954 Direct purchase 0 0 198 0 6 0 236 439 Transfer in use 0 0 0 0 236 0 (236) 0 PUO closure from project 29020003 0 0 0 8 0 0 0 8 Disposals, alienation and deficits 0 0 (325) 0 (17) 0 0 (342) Balance as at 31 December 2018 10.421 1.154 8.809 379 14.009 5.189 2.099 42.059 IMPAIRMENT Balance as at 1 January 2017 1.154 8.777 372 9.633 0 0 19.936 Depreciation for the year 0 0 83 0 2.281 0 0 2.364 Disposals, alienation and deficits 0 0 (155) (1) 0 0 0 (155) Balance as at 31 December 2017 1.154 8.705 372 11.914 0 0 22.145 Depreciation for the year 0 0 125 1 1.373 0 0 1.499 Disposals, alienation and deficits 0 0 (325) 0 (17) 0 0 (342) Balance as at 31 December 2018 1.154 8.505 373 13.270 0 0 23.302 CARRYING AMOUNT Balance as at 1 January 2017 10.421 182 3.880 5.261 2.099 21.842 Balance as at 31 December 2017 10.421 231 1.870 5.189 2.099 19.810 Balance as at 31 December 2018 10.421 304 7 739 5.189 2.099 18.758 The Company does not have any mortgages over its assets. 20. Inventories 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Stocks of raw material and material 689 137 Minor inventory in use 240 138 Impairment of minor inventory in use (240) (138) Goods 56 17 Total 745 154 43 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 21. Trade receivables 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Domestic trade receivables 51.406 50.465 Foreign trade receivables 8 27 Impairment of doubtful and disputable trade receivables (23.085) (22.234) Total 28.329 28.258 Movements in impairment were the following: 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Balance as at 1 January 22.234 23.147 New impairments during the year 893 425 Value adjustment - IFRS 9 454 0 Reversal of impairments (496) (1.338) Balance as at 31 December 23.085 22.234 22. Other receivables 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Receivables for advances to employees 43 41 I. Total receivables from employees 43 41 Other receivables from the State and State Institutions 79 71 VAT prepayment 5 8 Impairment of receivables from Tax Administration (65) (65) Receivables from State by the Concession Agreement 979 964 Receivables from EU BEAR 349 0 II. Total receivables from the State and State institutions 1.346 978 Interest on case in accounts on site 13 3 IV. Total other receivables from legal entities 0 97 IV. Receivables for court litigations 77 53 Total (I.+II.+III.+IV.) 1.480 1.169 Receivables from the State under the Concession Agreement stated in the balance sheet as at 31 December 2018 in the amount of HRK 978 thousand (31 December 2017: HRK 964 thousand) refer to expropriated lands, and transfer of installations, contributions and projection expenses charged to the Company, and in accordance with the Concession Agreement dated 24 June 1998 the Republic of Croatia is obliged to conduct expropriation of land with the assistance of the Company. 44 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 23. Financial assets 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Prepayments 179.822 280.556 Interest on the funds available on demand 14 8 Total 179.836 280.565 Term deposits are shown below: Interest rate 31 Dec 2018 Bank % Purpose Maturity HRK'000 from 50% to 60% on after the treasury bills from the expiration of Ministry of Finance with the terms or maturity up to 91 days (6 by Privredna banka Zagreb d.d. contracts) Expropriation arrangement 1.800 Two deposits by 0,03% Hrvatska poštanska banka annual interest rate, Foreign currency deposits 28 Feb 2019 178.022 Total 179.822 Deposits for expropriation were termed with the purpose of payment of allowances for expropriated land in accordance with the provisions of Article 20 of the Expropriation Act (Official Gazette No. 9/1994, 35/1994 and 114/2001). Contracts have been concluded for a period of one year from the date of payment, with the possibility of automatic renewal of the term for the same term and with the possibility of early disbursement. Non-allocated term deposits amounting to EUR 24 million are termed as two separate deposits, both at an interest rate of 0.03% and both for the term until 28 February 2019. 24. Cash and cash equivalents 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Gyro account 41.425 33.067 Cash in hand 625 626 Foreign currency account 123.280 71.900 Foreign currency cash in hand 94 276 Overnight deposit 24.031 21.204 Total 189.455 127.073 25. Total expenses and accrued income 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Prepaid expenses 307 22 Accrued income 7 130 Total 314 152 45 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 26. Subscribed capital The Company’s subscribed capital, which represents the value of the concession of the constructed sections of the Rijeka - Zagreb motorway on the day of the concession being granted was determined in the amount of HRK 2.152.000 thousand and is divided into 21.520 shares with a nominal value of HRK 100 thousand per share. The sole shareholder of the Company is the Republic of Croatia The value of concession was evaluated by an independent company of the Institute of Civil Engineering of Croatia d.d. 27. Loss carried forward and other reserves Other reserves of the Company are negligible in the amount of HRK 2.152.000 thousand and the carried forward losses as at 31 December 2018 were stated in the amount of HRK 2.434.204 thousand (31 December 2017 in the amount of HRK 2.607.698 thousand). 28. Current year profit Current year profit on 31 December 2018 was stated in the amount of HRK 640.210 thousand (31 December 2017: HRK 173.494 thousand). 29. Provisions 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Severance payments 2.135 2.318 Legal cases 9.429 9.470 Jubilee awards 752 985 Total 12.316 12.773 Based on the previous Approval of the Supervisory Board dated 23 January 2014, the Company’s Assembly agreed to conclude an Agreement on the regulation of mutual rights and obligations relating to the transfer of work contracts. In the said agreement, the Company assumed the obligation to pay severances and jubilee awards in the amount defined by actuarial mathematics for the ARZ-ON employees at the time of the payment maturity. The employees that concluded work contracts with ARZ-On d.o.o. on 1 October 2013 and had been employees of AUTOCESTA RIJEKA-ZAGREB d.d. retain the rights arising from the previous employment, which resulted in a separate statement of severance jubilee award payments for ARZ- ON employees. Discounted interest rate used in the calculation is 2,86%. 46 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 30. Long term liabilities 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Non-current liabilities for received bank loans /i/ 5.041.473 5.280.890 Accrued and outstanding compensations (25.708) (29.788) I. Non-current liabilities for received bank loans 5.015.765 5.251.102 Government grants - Ministry of Finance 219.026 237.028 Public debt - KLC and KU 379.734 410.945 II. Government subsidies 598.760 647.973 Total 5.614.525 5.899.075 /i/ Long term liabilities from foreign banks are shown as follows: 31 Dec 2018. 31 Dec 2017. DESCRIPTION Note HRK'000 HRK'000 Non-current Bank Loans Collateral secured * 5.545.322 6.073.055 Total loan liabilities 5.545.322 6.073.055 Current portion of non-current loans 34. (503.849) (792.164) Total long term loan liabilities 5.041.473 5.280.891 *Collateral for long term loan liabilities relates to guarantees from the Republic of Croatia. All loans in use of have interest rates that are based on the EURIBOR-adjusted margins ranging from 0.13% to 1.95%. Exceptions are made by funds issued by the Ministry of Finance, collected by the issuance of euro bonds, for which the Company annually repaid a fixed interest rate of EUR 2.338.757 except for the first year of repayment when the interest amounted to EUR 2.729.967. An analysis of long term loan maturity dates on bank loans are shown as follows: 31 Dec 2018. 31 Dec 2017. DESCRIPTION EUR'000 HRK'000 Due date within one year 67.926 503.849 Due date in one to five years 318.657 2.363.662 Due date in over five years 361.009 2.677.811 TOTAL 747.592 5.545.322 Kreditanstalt fur Wiederaufbau (KfW) – EUR 133,5 mil & EUR 110 mil With the KfW Bank on 24 September 2007, a Loan Agreement of EUR 13,.5 million was signed which refinanced existing loans, namely: KfW loans of EUR 73.5 million and ZABA loans amounting to EUR 60 million interest rate of 6-month EURIBOR plus 0.52% on margin. The term of the loan is 19 years, and the insurance instrument is a state guarantee of the Republic of Croatia. The repayment of principal began on 1 April 2008 and ends in April 2026. Repayment is made in 38 semi- annual instalments, so that principal is repaid in agreed percentages. In September 2007, the Company concluded another loan contract with KfW Bank in the total amount of EUR 110 million. 47 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 The purpose of the loan was to finance equipment IIA and IIB in the amount of EUR 79.950 thousand and construction of the Donja Zdenčina and Novigrad node as well as ENC Lučko in the amount of 30.050 thousand euros. The loan was concluded for a term of 24 years with a maturity of one year and the guarantee of the Republic of Croatia. The interest rate is based on the value of 6-month EURIBOR increased by 0.62%. Repayment of principal is done in 46 semi-annual installments, started on 1 October 2008 and will end in February 2031. Credit KFW EUR 110 mil & EUR 133,5 mil EUR'000 HRK'000 Blanace 01 JAN 2018 160.022 1.202.352 Principal repayment (11.381) (84.540) Exchange rate fluctuations 0 (15.254) Balance 31 DEC 2018. 148.641 1.102.558 Short-term portion of long-term loan (13.877) (102.937) Payable after one year 134.764 999.621 Loan by the European Investment bank – EUR 60 mil and EUR 210 mil The Company concluded a non-current loan agreement on 24 June 2002 with the European investment bank amounting to EUR 60 million, with a guarantee provided by the Republic of Croatia. The loan was fully withdrawn. The loan purpose was to finance the construction of the section Vrbovsko-Bosiljevo and Bosiljevo-Vukova Gorica Stage I of construction and to finance the construction of a full profile road on the - Bosiljevo 2 route, and the Zečeva Draga and Severinska Draga viaducts as part of Stage IIA. The loan is to be repaid in 60 quarterly instalments. Repayment of the first tranche began on 15 March 2008. The interest rate is equal to EURIBOR increased by 0.40%, i.e. for tranches spent in IIA stage EURIBOR increased by 0.25%. Interest repayment is conducted quarterly and the repayment of principal conducted semi-annually. The Republic of Croatia guarantees for the loan repayment. On 9 March 2006, a new agreement for an additional non-current loan was concluded with the European investment bank in the amount of EUR 210 million, for financing the construction of IIB full profile of the Kikovica-Stara Sušica section. The loan was withdrawn in five tranches with different payment dynamics. The approved interest rate is EURIBOR increased by 0.13%, and repayment is to be conducted semi-annually. The payment of the first tranche happened on 15 September 2011. The period of the loan is 25 years with a grace period of 5 years. Credit EIB EUR 60 mil & EUR 210 mil EUR'000 HRK'000 Blanace 01 JAN 2018 178.877 1.344.017 Principal repayment (14.577) (108.229) Exchange rate fluctuations (17.081) Balance 31 DEC 2018. 164.300 1.218.707 Short-term portion of long-term loan (14.577) (108.126) Payable after one year 149.723 1.110.581 Loan by the European Bank for Reconstruction and Development - EUR 60 mil and EUR 50 mil On 22 October 2001, the Company concluded a non-current agreement with the European Bank for Reconstruction and Development amounting to EUR 60 million. The purpose of the loan is to finance 50% of the amount of construction on the section Vrbovsko-Bosiljevo and Bosiljevo-Vukova Gorica of 48 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 stage I of construction and stage II A for the construction of the Zečeva Draga and Severinska Draga viaducts as well as a full profile of the main Vrbovsko-Bosiljevo 2 route. The other 50% is financed by the EIB. Loan repayment began on 12 May 2005 and is being conducted in 30 semi-annual instalments. The agreed interest rate is 6-month EURIBOR increased by 1%. The Republic of Croatia issued a guarantee for the loan repayment. The new Credit Agreement amounting to EUR 50 million was concluded with the EBRD on 26 July 2006. The purpose of the loan is to finance II B stages of the construction of the full profile of the highway. The loan was approved for a period of 25 years with a 4 year grace period and interest rate of 6- month EURIBOR increased by 1%. The repayment of principal commenced on 17 December 2010 and ends on 17 June 2031, will be realized through 42 semi-annual installments, all with a guarantee issued by the Republic of Croatia. Credit EBRD EUR 60 mil & EUR 50 mil EUR'000 HRK'000 Blanace 01 JAN 2018 40.143 301.620 Principal repayment (6.381) (47.217) Exchange rate fluctuations (3.971) Balance 31 DEC 2018. 33.762 250.432 Short-term portion of long-term loan (6.381) (47.331) Payable after one year 27.381 203.101 Loan KA Finanz AG & Kommunalkredit Austria AG & PBZ d.d. – EUR 200 mil During 2007, there was an addition to the concession agreement, in area and time alike, so ARZ d.d. was obliged to pay a concession fee to the Republic of Croatia for the mentioned addition. The Company provided the means required to settle the liability with a loan amounting to EUR 200 million approved by Dexia bank. This loan was also insured by a guarantee of the Republic of Croatia. It was approved for a period of 15 years and will be repaid in 22 equal semi-annual instalments. The first instalment to repay the principal started on 15 November 2011. The interest rate amounts to 6-month EURIBOR plus a margin of 0.32%. Memorandum on concession and acceptance of rights and obligations transferred a part of the loan amounting to EUR 70 million from Dexia to Kommunalkredit Austria AG and the rest amounting to EUR 70 million remained in Intesa Sanpaolo (ex BIIS). With the sale of bank Kommunalkredit Austria in September 2015, its share portions in both loans were taken over by buyer KA Finanz AG in the role of the new creditor. New changes occurred during 2018. With the sale of the loan, except for the bank KA Finanz AG, which retained a smaller portion of EUR 9.090.909,08, as Kommunalkredit Austria AG, as new creditors, was issued on 29 October 2018 with a stake of EUR 46.218.181,84 and PBZ d.d. which purchased the Dexia CL loan in the amount of EUR 17.418.181,78 on 31 August 2018. Kredit KA Finanz AG & Kommunalkredit Austria AG & PBZ d.d. EUR 200mil EUR'000 HRK'000 Blanace 01 JAN 2018 81.818 614.753 Principal repayment (18.182) (134.577) Exchange rate fluctuations (8.148) Balance 31 DEC 2018. 63.636 472.028 Short-term portion of long-term loan (18.182) (134.865) Payable after one year 45.454 337.163 49 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 Loan Intesa Sanpaolo & Raiffeisen bank Hrvatska d.d. – EUR 140 mil On 11 March 2008, the Dexie and BIIS approved a syndicated loan agreement for the construction of the Rijeka Bypass in the amount of EUR 140 million. Loan repayment period is 15 years at the beginning of 4 years. Repayment of principal began on 31 January 2012 and will end on 31 July 2022. The agreed interest rate is 6-month EURIBOR increased by 0.59%. Interest and principal are repaid every six months. The loan is secured by the guarantee of the Republic of Croatia. Part of the loan amounting to EUR 70 million, the Declaration on the Transfer and Receipt of Rights and Liabilities, was transferred on 27 June 2013 from Dexia Bank to Kommunalkredit Austria AG and the remaining EUR 70 million remained owned by Intesa Sanpaolo (formerly BIIS ). The bank Kommunalkredit Austria's sale in September 2015, its shares in this loan are taken over by the buyer of KA Finanz AG as a new creditor. On 29 October 2018. KA Finanz sold the entire share of the loan to the Goldman Sachs bank, which was issued by Raiffeisen Bank Hrvatska d.d. on the basis of the Declaration on the Transfer and Receipt of Rights and Obligations signed on 3 December 2018. which in turn assumed a loan share of EUR 25.454.545,44. Credit Intesa Sanpaolo & Raiffeisen bank Hrvatska d.d. EUR 140 mil EUR'000 HRK'000 Blanace 01 JAN 2018 63.636 478.141 Principal repayment (12.727) (94.224) Exchange rate fluctuations (6.295) Balance 31 DEC 2018. 50.909 377.622 Short-term portion of long-term loan (12.727) (94.405) Payable after one year 38.182 283.217 Loan from ZABA d.d. - EUR 177 mil In order to finance operating costs in 2014, on 17 November ARZ d.d. concluded a loan agreement with Zagrebačka banka d.d. amounting to EUR 177 mil. The entire amount of the loan was withdrawn and most of the funds were used to settle the loan to JP Morgan. The Republic of Croatia issued a guarantee for the loan. The loan was approved for a period of 7 year with a 2-year grace period. The interest rate is based on the six monthly EURIBOR increased by a margin of 3.96%. According to the concluded loan repayment agreement, it was due to until 2021. However, on 10 April 2018, a refinancing of the loan was carried out in such a way that one loan of EUR 202.025.000,00 refinanced the remaining debt of this loan in the amount of EUR 128.727.272,00 and the total amount of the EUR 70 million. Previosly, The Agreement on the Settlement with the Zagreb Bank d.d. was colcluded then a new loan agreement was signed. Loan ZABA d.d. EUR 177 milijuna EUR'000 HRK'000 Blanace 01 JAN 2018 128.727 967.212 Principal repayment (128.727) (955.467) Exchange rate fluctuations 0 (11.745) Balance 31 DEC 2018. 0 0 Short-term portion of long-term loan 0 0 Payable after one year 0 0 50 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 Loan from PBZ & ZABA & ESB & SGB - EUR 70 mil On 9 June 2016, the Company concluded a loan agreement in the amount of EUR 70 mil with the club of banks including Privredna banka Zagreb d.d., Zagrebačka banka d.d., Erste Steiermarkische bank d.d. and Societe generale Splitska banka d.d. with agreed interest rate of 3 month Euribor plus a margin of 4.15%. The guarantee for orderly return of the loan was a state guarantee. The loan was approved for a period of 7 year with a 2-year grace period. The start of loan repayments should be in June 2018 and end in June 2023. The entire amount of the loan was withdrawn by the end of the year 2016 The Republic of Croatia issued a guarantee for the loan. The loan was approved for a period of 7 year with a 2-year grace period. Repayment of the principal loan amount will be conducted in 21 equal quarterly with the contracted interest rate with an interest rate of 3-month EURIBOR increased by a margin of 4.15% However, within the project of restructuring of the road sector debt within which ARZ d.d. the early termination of the loan was executed in such a way that after the signing of the Settlement Agreement with each creditor, a new loan was refinanced, which at the same time included the remaining debt on the loan of Zagrebačka banka d.d., so that on 10 April 2018 this loan was fully closed . Loan PBZ EUR 70 mil EUR'000 HRK'000 Blanace 01 JAN 2018 70.000 525.956 Principal repayment (70.000) (519.569) Exchange rate fluctuations (6.387) Balance 31 DEC 2018. 0 0 Short-term portion of long-term loan 0 0 Payable after one year 0 0 Loan from Ministry of Finance - EUR 85 Mil On 30 November 2017, the Fund Transfer Agreement was concluded with the Ministry of Finance of the Republic of Croatia. Funds were collected by issuing euro bonds and in the amount of EUR 85,045,727.50 assigned to the Company as a Recipient of funds, in the manner that the Company paid a net amount of EUR 83,245,309.45 while the amount of EUR 1,800,418.05 was the name of the cost of financing the issuance of euro bonds. The interest is paid once a year and amounts to EUR 2,338,757.51 except for the first year of EUR 2,719,967.85. Interest payment begins in January 2019, and the deadline for repayment is January 15, 2030. The funds are intended for early repayment of a loan of EUR 55 million, repayment of short-term loans from the Ministry of Finance of EUR 18.8 million and servicing of credit liabilities amounting to EUR 8.5 million due to payment in the first quarter of 2018. Loan Min.fin EUR 85 mil EUR“000 HRK'000 Blanace 01 JAN 2018 85.046 639.004 Principal repayment 0 0 Exchange rate fluctuations (8.171) Balance 31 DEC 2018. 85.046 630.833 Short-term portion of long-term loan Payable after one year 85.046 630.833 Loan Privredna banka Zagreb d.d., Zagrebačka banka d.d., Erste Steiermarkische bank d.d. , OTP banka & Hrvatska poštanska banka d.d. – EUR 202.025 thousand The Loan Agreement amounting to EUR 202.025.000,00 was signed on 5 May 2018 with the following creditors: Privredna banka Zagreb d.d., Zagrebačka banka d.d., Erste Steiermarkische bank d.d., Hrvatska poštanska banka d.d. and Societe generale Splitska banka d.d. which was attached to OTP bank on 1 December 2018 and became one of the creditors. This loan, which became operational on 10 April 2018, refinanced two existing loans approved by domestic banks that also 51 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 participated in their refinancing. The loan is approved, with a currency clause, for a period of 12 years without a grace period. The interest rate is in the amount of 6-month Euribor plus a margin of 1.95%. The principal is repaid by repaying 5% of the principal in the first three years in different amounts in 6 instalments and the remaining 95% of the principal will be repaid in 18 equal instalments. The role of the agent was transferred to Privredna banka Zagreb d.d. to which the Company is obliged to repay the agency fee annually in the amount of EUR 30.000,00. The Company paid a participation fee of 0.7% in one instalment on the total loan amount. Loan repayment began on 28 September 2018 and the end of repayment is on 31 March 2030. Loan PBZ, ZABA, ESB, HPB i OTP EUR 202.025 thousand EUR'000 HRK'000 Balance 10 APR 2018 202.025 1.499.512 Principal repayment (727) (5.398) Exchange rate fluctuations 0 (972) Balance 31 DEC 2018. 201.298 1.493.142 Short-term portion of long-term loan (2.182) (16.184) Payable after one year 199.116 1.476.958 II. Government grants Government grants for non-refundable contributions refer to non-refundable grants from the Ministry of Finance of the Republic of Croatia in the period from 2000 to 2002 less part of depreciation calculated for assets purchased with Government grants in the period from 2003 to 2009. In accordance with a decision by the Government of the Republic of Croatia on 20 June 2002 government grants for the assumed loans refer to the liabilities that the Ministry of Finance of the Republic of Croatia assumed for long and current loans, which became a public debt on 1 January 2003. The Company recognised grants as non-refundable support in the income statement during the useful life of assets, which are depreciated through reduced depreciation cost, while support from assuming debts from owners is recognised as an income increase during the useful life of the assets financed by the assumed loans. 31. Trade payables 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Domestic trade payables 48.791 47.568 Total 48.791 47.568 32. Liabilities for taxes and contributions 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Contributions on salaries 130 115 Contributions from salaries 156 135 Taxes and surtaxes from salaries 115 96 VAT liabilities 6.405 5.907 Other liabilities to the State and State institutions 123 0 Total 6.929 6.253 52 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 33. Liabilities to employees 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Net salaries and wages 507 447 Other liabilities to employees 15 15 Total 522 462 34. Short term loan liabilities 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Current portion – principal (Note 30) 503.849 792.164 Calculated interests on loans 28.079 7.796 Total 531.928 799.960 Short term loan liabilities stated on 31 December 2018 in the amount of HRK 503.849 thousand (31 December 2017: HRK 792.164 thousand) represent current portion of long –term loans as stated in Note 34 to the financial statements The maturity of liabilities per month is shown below: LIABILITIES Up to 1 months Up to 3 months Up to 12 months Total HRK '000 HRK '000 HRK '000 HRK '000 Principal 51.653 40.357 411.839 503.849 35. Accrued expenses and deferred income 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Accrued invoices and situations 1.045 742 Other accrued expenses 475 420 1. Accrued expenses 1.520 1.162 Deferred income 15.897 17.655 Deferred collection income 13.852 12.225 II. Deferred income 29.749 29.880 Total 31.269 31.042 Deferred income mainly relates to the accrued fees, pursuant to the Agreement on subconcession, coupled with INA dd, Petrol Trade Ltd. and Tifon d.o.o., HRK 14,966 thousand which are derecognised for the duration of the subsidy. The remaining amount of deferred income in the amount of HRK 931 thousand relates to income from various leases. Accrued expenses relating to accrued vacation days, which is the cost related to the next accounting period. 53 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 36. Related party transactions The party is considered to be related to an entity when it directly or indirectly through one or more intermediaries controls or is under its or common control, has significant influence over an entity or has common control over the entity. The overview of the related party transactions, their receivables and liabilities for 2018 and 2017 are shown as follows: DESCRIPTION 31 Dec 2018. 31 Dec 2017. Receivables: HRK'000 HRK'000 183 183 Ministry of Finance 7 6 Ministry of Economy 107 208 Ministry of Defence 2.328 2.283 Ministry of Maritime affairs, transport and infrastructure INA industrija nafte d.d. 633 498 Hrvatske autoceste d.o.o. 19.116 18.329 Odašiljači i veze d.o.o. 41 19 Total 22.415 21.526 DESCRIPTION 31 Dec 2018. 31 Dec 2017. Liabilities: HRK'000 HRK'000 INA industrija nafte d.d. 16 8 Narodne novine d.d. 6 6 Hrvatske autoceste d.o.o. 44.636 45.243 Hrvatska pošta d.d. 4 4 Hrvatske vode 8 0 Total 44.670 45.261 DESCRIPTION 2018 2017 Income: HRK'000 HRK'000 Ministry of Finance 2 14 Ministry of Economy 60 64 Ministry of Defence 3.588 3.250 Ministry of Maritime affairs, transport and infrastructure 25.301 24.419 INA industrija nafte d.d. 15.266 9.006 Hrvatske šume d.o.o. 59 65 Odašiljači i veze d.o.o. 215 197 Jadrolinija d.d. 145 148 Jadranski naftovod d.d. 96 91 Hrvatske autoceste d.o.o 1.199 1.675 Total 45.931 38.929 54 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 DESCRIPTION 2018 2017 Expenses: HRK'000 HRK'000 INA industrija nafte d.d. 133 99 Narodne novine d.d. 60 61 Hrvatske vode 473 518 Hrvatska pošta d.d. 24 19 FINA 3 2 Hrvatske autoceste d.o.o 162.633 150.200 Total 163.326 150.899 Remuneration to the Management, namely to the Members of the Management Board, President of the Management Board and Director are shown as follows: 2018 2017 DESCRIPTION HRK'000 HRK'000 Gross salaries and wages 1.181 1.147 Other 18 9 TOTAL 1.199 1.156 37. Financial instruments and risk management Capital risk management The Company manages its capital to ensure the going concern, together with a maximum return to stakeholders by optimising the balance between the debt and equity capital. The Company's capital structure consists of debt that includes loans described in the notes 30 and 34, cash and cash equivalents and shareholders' equity held by the Company’s owners, which includes the Company’s total equity. Financing ratio The Company's management reviews the capital structure. As part of the review, the Board considers the costs and risks associated with each component of equity. 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Non-current and current loan liabilities 5.545.322 6.073.055 Cash and cash equivalents (369.276) (407.629) Net debt 5.176.046 5.665.426 Equity (1.793.994) (2.433.677) 55 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 Financial instrument categories 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Financial assets Loans and receivables (including cash) 399.099 437.068 Financial liabilities Loan liabilities and other liabilities 6.202.696 6.753.318 The above carrying amount represents the Company's maximum exposure to loan risk from receivables. Financial risk management The Management Board monitors and manages financial risks relating to the operations of the Company, through internal risk reports, which analyse the degree of exposure and size of the risk. These risks include market risk (including currency risk and price risk), loan risk, liquidity risk and cash flow interest rate risk. Market risk The Company’s activities expose the Company primarily to financial risks, due to changes in exchange rates and interest rates. The Company does not enter into various derivative financial instruments to manage exposure to interest rate and exchange rate risk. The Company operates in the Croatian market. The Company is unable to influence the price of tolls, as the Government by its decision has to approve any increase in the toll prices. Interest rate risk Interest rate risk is the risk that the value of financial instruments will change due to changes in market interest rates in relation to interest rates applicable to financial instruments. Cash flow interest rate risk is a risk that interest expenses on financial instruments will vary over the period. As the Company uses loans with variable interest rates, the Company is exposed to interest rate risk and does not use any hedging instruments against those risks. Sensitivity analysis on interest rates Sensitivity analysis was performed only for the financial instruments with variable interest rates based on the exposure to interest rates at the end of the reporting period assuming that the outstanding amount at the end of the reporting period was unsettled during whole year. The change of 50 basis points is used for the purpose of internal reports on interest rate risk and represents the assessment of the Management of predictable change in interest rates. If interest rates were 50 basis points higher, and if other variables are held constant, the outflow related to paying of interest would be in the amount of HRK 29.771 thousand in the connection to the interest rate risk. Loan risk Loan risk refers to the risk of not meeting contractual obligations to the other party and thus producing a financial loss to the other party. Loan risk related to current receivables is relatively low, as trade receivables mostly relate to large number of individual customers. Uncollected receivables are taken to court. Most significant Company’s debtor is HEP operator prijenosnog sustava d.o.o. based on the contract of instalment of energy cables relating to the construction of Rijeka ring road. The debtor HEP operator prijenosnog sustava d.o.o. was sued in 2013. 56 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 The following table shows the amounts of deposits and receivables as at 31 December: 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Cash 165.424 105.869 Deposits 203.853 301.760 Receivables that are neither past due nor impaired 6.480 6.312 Past due receivables 46.740 45.667 Total 422.497 459.608 Receivables that are neither past due not impaired mainly relate to receivables from state owned companies and credit card companies. The following table shows ageing structure of past due trade receivables: More than Total Not due 120-365 days 365 days HRK'000 HRK'000 HRK'000 HRK'000 31 December 2018. 23.391 613 22.736 46.740 The following table shows past due and impaired trade receivables: 31 Dec 2018. 31 Dec 2017. DESCRIPTION HRK'000 HRK'000 Gross receivables 46.740 45.667 Impairment (23.085) (22.234) Net receivables 23.655 23.433 Foreign currency risk management The Company is exposed to foreign currency risk from transactions in foreign currencies. The carrying values of the Company’s monetary assets and monetary liabilities denominated in foreign currencies at the reporting date are as follows: Liabilities Assets Balance as at 31 December 2018. 2017. 2018. 2017. HRK'000 HRK'000 HRK'000 HRK'000 EUR 5.545.322 6.073.055 301.219 350.844 USD - - 175 88 Other foreign currencies - - 1 1 Total: 5.545.322 6.073.055 301.395 350.933 Analysis of sensitivity to foreign currency risk The Company is primarily exposed to the countries whose currency is EUR. The following table analyses the foreign currency risk of the Company in the event of a 1% increase in the value of Kuna against Euro. The 1% sensitivity rate is used in internal foreign currency risk reports to key managers and represents the Management's assessment of predictable changes in the exchange rates. The sensitivity analysis includes only open monetary items in foreign currency, and their translation at the end of the period is adjusted based on the 1-percent change in exchange rates. A positive number indicates an increase in profit and other equity where the Croatian Kuna increases by 1% 57 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 against the relevant currency. In the case of decreased value of Croatian Kuna by 1% against the relevant currency, the impact on earnings and other equity would be the same but in the opposite direction. Foreign currency risk management The effect of EUR 2018 2017 DESCRIPTION EUR'000 EUR'000 Influence on the profit/loss for the period 52.439 57.221 Liquidity Risk Management The ultimate responsibility for managing loan risk lies with the management, who set up a quality framework for managing liquidity risk by the short, medium and long positions of the Company and defined the requirements related to liquidity management. The Company manages its liquidity by maintaining adequate reserves, using appropriate loan products from foreign banks as well as other financing sources, through continued monitoring of forecasted and actual cash flows and by adjusting maturity of financial assets and liabilities. Liquidity risk analysis The following table analyses the Company's liabilities based on the remaining period to contractual maturity. The table is prepared on the basis of undiscounted cash outflows by financial liabilities at the earliest date when payment can be requested from the Company. Up to 1 3 months - 1 After 5 1 - 3 months 1 - 5 years LIABILITIES month year years Total HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 31 Dec 2018. Interest-free 54.800 20 185 1.237 0 56.242 Interest bearing 47.203 40.357 416.289 2.363.665 2.677.808 5.545.322 Interest (projected by repayment plan) 22.962 16.314 44.974 424.635 274.184 783.069 Total 124.965 56.691 461.448 2.789.537 2.951.992 6.384.633 31 Dec 2017. Interest-free 52.889 7 113 1.274 54.283 Interest bearing 52.322 78.173 661.669 3.230.506 2.050.385 6.073.055 Interest (projected by repayment plan) 3.392 15.991 86.809 639.231 315.954 1.061.377 Total 108.603 94.171 748.591 3.871.011 2.366.339 7.188.715 The following table analyses the Company’s assets based on the remaining period to contractual maturity. The table is prepared based on undiscounted cash inflow under financial assets at the earliest date on which the Company may request payment. ASSETS Up to 1 1 - 3 months 3 months - 1-5 After 5 Total 58 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 month 1 year years years HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 31 Dec 2018. Interest-free 28.108 852 394 454 29.808 Interest bearing 0 178.022 1.800 179.822 Total 28.108 178.874 394 2.254 209.630 31 Dec 2017. Interest-free 27.351 937 1.067 76 29.431 Interest bearing 165.300 113.865 1.400 0 280.565 Total 192.651 114.802 2.467 76 309.996 The fair value of financial instruments The carrying amounts of cash and cash equivalents approximate their fair values due to current nature of these financial instruments. Similarly, the carrying amount of receivables and liabilities' historical cost subject to regular commercial loan conditions also approximate their fair values. IV CONTINGENT LIABILITIES AND DISPUTES As of 31 December 2018, 77 court disputes were initiated against the Company according to the statements of external lawyers and the sector for legal, general and personnel affairs. Legal cases, for which contingent liabilities are expected, are recognised in the statement of financial position as non-current provisions, since cash outflow is almost certain with this respect. Based on an estimate of possible future outflow, the Company has provided provisions in its financial statements amounting to HRK 12.315 thousand (31 December 2017: HRK 12.773 thousand). V SUBSEQUENT EVENTS There were no events, after the reporting date of the financial position / balance sheet, that would have a significant impact on the Company's annual financial statements for 2018 which should subsequently be disclosed VI APPROVAL OF THE ANNUAL FINANCIAL STATEMENTS The annual financial statements were adopted and approved for issuance by the Management on 28 May 2019. Signed on behalf of the Management: 59 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 60 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 61 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 62 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 63 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 64 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 65 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 66 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 67 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 68 AUTOCESTA RIJEKA-ZAGREB d.d., Zagreb NOTES TO THE FINANCIAL STATEMENTS - continued for the year ended 31 December 2018 69