Financial Statements and Independent Auditor's Report Armenia Renewable Resources and Energy Efficiency Fund 31 December 2018 Contents Independent auditor's report 3 Statement of financial position 6 Statement of profit or loss and other comprehensive income 7 Statement of changes in equity 8 Statement of cash flows 9 Notes to the financial statements 10 Armenia Renewable Resources and Energy Efficiency Fund F nanctal Statements GrantThornton Grant Thornton Audit S.R.L 4D, Gara Herastrau str Independent auditor's :1; Inde end nt a dit r'sGreen Court Bucharest - building C 5th floor report Bucharest, Romania 20334 T +40 21 32 02 328 F +40 21 32 02 327 To the Board of Trustees of Armenia Renewable Resources and Energy Efficiency Opinion We have audited the financial statements of Armenia Renewable Resources and Energy Efficiency (the "Fund"), which comprise the statement of financial position as at 31 December 2018, and the statement of profit or loss and other comprehensive income, statement of changes in net assets and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Fund as at 31 December 2018, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards ("IFRSs"). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Fund in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (the "IESBA Code") together with the ethical requirements that are relevant to our audit of the financial statements in the Republic of Armenia, and we have fulfilled our other ethical responsibilities in accordance with those ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of a matter We draw attention to note 29 to the financial statements, which describes the uncertainty related to the ability of the Fund to operate as a going concern as at 31 December 2018 Management believes that there are arrangements with the existing and potential donor organizations on further funding. Accordingly, the management estimates that in the nearest future the Fund will continue its normal operations. Our opinion is not qualified in respect of this matter. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Fund's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern Grant Thornton Audit S R.L. is a member firm of Grant Thornton International Ltd (Grant Thornton International). References to www.grantthomton.ro 'Grant Thornton' are to the brand under which the Grant Thornton member firms operate and refer to one or more member firms, as the context requires. Grant Thornton International and the member firms are not a worldwide partnership Services are delivered independently by member firms, which are not responsible for the services or activities of one another. Grant Thtomion 1ntemabonal does not provide services to clients. GrantThornton basis of accounting unless management either intends to liquidate the Fund or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Fund's financial reporting process. Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an 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 financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the 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 Fund's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Conclude on the appropriateness of management's 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 Fund's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the 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 auditor's report. However, future events or conditions may cause the Fund to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Grant Thomton Audit SR.L is a member firm of Grant Thomon Interanaional Ltd (Grant Thornton Internalonal) References to "Grant www.grantthomton.ro Thornton are to the brand under which fie Grant Thornton member firms operate and rafer to one or more member firms, as the context requires. Grant Thornion Inlarnational and the member firms are not a worldwide partnership, Services are delivered Independently by member firms, which are not responsible for the services or activilies of one another Grant Thornton International does not provide services to clients. GrantThornton 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. Grant Thornton Audit SRL, Romania Emil Vassilyan, FCCA Engagement Partner Grant Thornton CJSC 22 April 2019 Gagik Gyulbudaghya - Managing rtner - Grant Thornton CJSC Grant Thomton Audit S.R.L. is a member firm of Grant Thomion Intemational Ltd (GrantThomton Intemaionau . References to Grant www.grantthomton.ro Thomton' am to the brand under which the Grant Thornton member firms operate and refto one or more member firms, as the context requires. Grant Thornton Intsnnational and the member firms are not a woddwide partnership. Services are delikered Independently by member firms, which are not responsible for thesernices or activities of one another. Grant Thornton International does not provide services to clients. Statement o financial position As at 31 As at 31 In thousand drais Note December 2018 December 2017 Assets Non-current assets Property and equipment 4 125,416 186,270 Intangible assets 3,617 6,429 Accounts receivable 5 2,591,681 3,116,241 Borrowings provided 6 515,039 33,156 3,235,753 3,342,096 Current assets Inventories 14,017 14,129 Accounts receivable 5 597,086 613,721 Borrowings provided 6 69,645 4,974 Term deposits 7 47,138 339,073 Current income tax assets 973 4,021 Cash and bank balances 8 474,512 520,314 1,203,371 1,496,232 Total assets 4,439,124 4,838,328 Liabilities and net assets Non-current liabilities Grants related to assets 9 128,104 187,207 Borrowings received 10 3,732,399 3,815,674 3,860,503 4,002,881 Current liabilities Borrowings received 10 85,770 84,046 Deferred income 11 332,721 381,028 Accounts payable 12 74,138 206,706 492,629 671,780 Net assets Accumulated result 85,992 163,667 85,992 163,667 Total liabilities and net assets 4,439,124 4,838,328 The financial statements were approved on 22 April 2019 by: Karen Asatryan ,ranush Gorgyan Director { W, ncial Managr The statement of financial position is to b the notes to and forming part of the financial statements set out on pages 9 to 37. Statement of profit or loss and other comprehensive income In thousand drams Year ended Year ended 31 December 31 December Note 2018 2017 Income from grants 13 278,188 625,220 Finance income 14 15,995 10,104 Income from services 15 102,981 88,825 Other income 15,377 27,328 Project expenses 16 (278,188) (630,302) Administrative expenses 17 (148,507) (183,144) Finance costs 10 (29,076) (29,678) Result from operating activities (43,230) (91,647) Impairment losses on financial assets 5,6,7 (31,962) (4,318) Finance income (term deposits) 6,768 5,851 Other financial results 18 (600) (3,186) Result before taxes (69,024) (93,300) Income tax expense 19 (8,651) (10,181) Result for the year (77,675) (103,481) Other comprehensive result Total comprehensive loss for the year (77,675) (103,481) The statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 9 to 37. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 7 Statement of changes in net assets In thousand drams Accumulated result Total As at 1 January 2017 267,148 267,148 Result for the year (103,481) (103,481) Total comprehensive loss for the year (103,481) (103,481) As at 31 December 2017 163,667 163,667 Result for the year (77,675) (77,675) Total comprehensive loss for the year (77,675) (77,675) As at 31 December 2018 85,992 85,992 The statement of changes in net assets is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 9 to 37. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 8 Statement of cash flows In thousand drams Year ended 31 Year ended 31 December 2018 December 2017 Cash flows from operating activities Result for the year (77,675) (103,481) Adjustments for: Depreciation and amortization 64,015 65,605 Income tax expense 8,651 10,181 Finance costs 29,076 29,678 Interest income from borrowings and bank balances (15,995) (10,104) Interest income from term deposits (6,768) (5,851) Income from grants (278,188) (625,220) Movement of the expected credit losses 29,149 2,647 Foreign exchange rate losses 600 3,186 Operating result before working capital changes (247,135) (633,359) Change in receivables 534,323 150,462 Change in inventories 112 (749) Change in payables (132,578) (358,695) Cash generated from/(used in) operations 154,722 (842,341) Interest paid (29,163) (29,606) Income tax paid (5,603) (14,098) Net cash from/(used in) operating activities 119,956 (886,045) Cash flows from investing activities Acquisition of property and equipment and intangible assets (349) (5,443) Repayments of term deposits/(term deposits invested), net 46,823 (95,128) Grants received and return of grants, net 170,778 852,574 Interest income received 19,854 13,594 Repayments of borrowings/(borrowings provided), net (564,953) (38,001) Net cash from/(used in) investing activities (327,847) 727,596 Cash flows from financing activities Repayment of borrowings (80,151) (57,615) Net cash used in financing activities (80,151) (57,615) Net decrease in cash and bank balances (288,042) (216,064) Foreign exchange effect on cash 190 (975) Cash and bank balances at the beginning of the year 762,364 979,403 Cash and bank balances at the end of the year (refer to note 25) 474,512 762,364 The statement of cash flows is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 9 to 37. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 9 Notes to the financial statements 1 Nature of operations and general information Armenia Renewable Resources and Energy Efficiency Fund (the "Fund") has been established in accordance with the resolution N799 of the Government of the Republic of Armenia dated 28 April 2005. The founder of the Fund (the "Founder") is the Republic of Armenia. The objectives of the Fund are to: - facilitate investments in the energy efficiency and renewable energy sectors; - promote the development of Armenian energy efficiency and renewable energy market; - contribute to the reduction of adverse anthropogenic impact on the environment and human health; - develop mechanisms aimed at increasing energy safety and reliability of energy system; - when respective authority is received from the Ministry of Finance of the Republic of Armenia (the "MoF"), initiate credit and grant programs to promote the sector development on behalf of the MoF based on the agreements signed with the MoF. On 30 July 2012 a new Agency agreement was signed between the Fund and the MoF, pursuant to resolution 174-N of the Government of the Republic of Armenia dated 16 February 2012, whereby the Fund agrees to implement Energy Efficiency and Renewable Energy Financing Project. This project envisages the following components: Component 1 Program funds are provided to the participant financial institutions to finance investments by qualifying beneficiaries in energy efficiency and renewable energy projects. Component 2 The Fund makes energy efficiency investments in public buildings. In 2017-2018 the Fund implemented the following projects: * "Energy Efficiency Project" was financed by the World Bank at the amount of US dollar 2.12 million, as well as by the Armenia Renewable Resources and Energy Efficiency Fund at the amount of US dollar 8.5 million using the available working capital resources. The working capital consists of the amounts provided to the Fund according to the agency agreement signed between the Fund and the Ministry of Finance on 30 July 2012, which were provided to the Fund to implement the Renewable Resources and Energy Efficiency Project. The Grant Project has been completed on 30 June 2016, however, the Project implementation is continued with the use of the working capital resources. In particular, during 2016-2017 certain energy efficiency events were organized in the penitentiary institutions of Erebuni, Nubarashen and Armavir under the Ministry of Justice of the Republic of Armenia, as well as in Qanaqer-Zeytun medical center, in Hrazdan municipality and in Hrazdan pre-school educational institutions No. 12 and 13, in Armenian-Russian (Slavonic) University and in Yerevan Dancing Art State College. * "Project Preparation for Industrial Scope Solar Power Project", which is financed through project preparation grant dated 30 June 2015 signed between the Government of the Republic of Armenia and the International Bank for Reconstruction and Development. The goal of the project is to support the Republic of Armenia for the preparation of the expected project on industrial scope of solar energy, which includes the determining possible locations of solar power stations, conducting Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 10 technical and business feasibility study of possible locations, mapping initial resources, assessing the capability to connect to local set, and assessing connection costs. * "Geothermal Exploratory Drilling Project", which is financed by the Grant Agreement TF0A0544 dated 16 June 2015 signed between the Government of the Republic of Armenia and the International Bank for Reconstruction and Development. The goal of the project is to perform exploratory drilling in Qarqar, a possible geothermal location, in order to assess the sufficiency of resources, approve the quality and attract the private sector to build a geothermal station. The ultimate goal of the project is to build geothermal station in Qarqar. * In 2017 "Community Based Energy Efficiency Improvement Project for Legal and Physical Entities in Non-gasificated Communities in Armenia"- Armenia Renewable Resources and Energy Efficiency Fund, "ACBA LEASING" CO CJSC, "Converse Bank" CJSC and "Global Credit" UCO CJSC signed contracts on energy efficiency improvement project in non-gasificated communities in Armenia. The purpose of the Project is the financing of investments in the pure energy sphere with the help of financial institutions. This is aimed at improving the energy-efficiency level in 280 communities of Armenia. The Project also pursues the objective to finance the investments in the sphere of clean energy development. * The purpose of "Community Energy Efficiency Project" realized by the "Community Energy Efficiency Project"- Armenia Renewable Resources and Energy Efficiency Fund together with "ACBA-Credit Agricole Bank" CJSC, "Converse Bank" CJSC, is to finance the investments directed to the implementation of energy efficiency projects in the communities of the Republic of Armenia. The Project also pursues the objective to decrease non-efficient energy consumption and to increase the usage of pure, efficient, secure and cheap energy technologies. The work implemented will decrease the monthly amount paid for the energy spent on the electricity and water-proofing equalling it to zero in the future. * The purpose of the "Provision of Engineering Advisory Services in the framework of German- Armenian Fund Project "Energy Efficiency for MSMEs"" Project (financed by KfW) is to support the financing of energy efficiency events in MSMEs of Armenia. The legal address of the Fund is 1 Melik Adamyan street, Yerevan, Republic of Armenia. The average number of employees of the Fund during 2018 was 21 (2017: 19). 2 Basis of preparation 2.1 Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRSs") as issued by the International Accounting Standards Board ("IASB"). They have been prepared under the assumption that the Fund operates on a going concern basis. Further, the Fund has adopted new guidance for accounting for financial instruments (refer to note 2.5). This guidance was applied using the transitional relief allowing the entity not to restate prior periods. Currently, IFRSs do not contain specific guidance for non-profit organizations and non-governmental organizations concerning the accounting treatment and presentation of financial statements. Where IFRSs do not give guidance on how to treat transactions specific to not for profit sector, accounting policies have been based on the general principles of IFRSs, as detailed in the International Accounting Standards Board ("IASB") The Conceptual Framework for Financial Reporting. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 11 2.2 Basis of measurement The financial statements have been prepared on the historical cost basis, and fair values, as applicable. 2.3 Functional and presentation currency The national currency of Armenia is the Armenian dram ("dram"), which is the Fund's functional currency, since this currency best reflects the economic substance of the underlying events and transactions of the Fund. These financial statements are presented in Armenian drams, since management believes that this currency is more useful for the users of these financial statements. All financial information presented in Armenian drams has been rounded to the nearest thousand. 2.4 Use of estimates and judgment The preparation of financial statements in conformity with IFRSs requires management to make critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 20 to the financial statements. 2.5 Adoption of new and revised standards In the current year the Fund has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the "IASB") and International Financial Reporting Interpretations Committee (the "IFRIC") of the IASB that are relevant to its operations and effective for annual reporting periods beginning on 1 January 2018. The nature and the effect of these changes are disclosed below. New and revised standards and interpretations that are effective for annual periods beginning on or after 1 January 2018 IFRS 9 Financial Instruments IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement. The new standard introduces extensive changes to IAS 39's guidance on the classification and measurement of financial assets and introduces a new "expected credit loss" model for the impairment of financial assets. IFRS 9 also provides new guidance on the application of hedge accounting. When adopting IFRS 9, the Fund has applied transitional relief and opted not to restate prior periods. Differences arising from the adoption of IFRS 9 in relation to classification, measurement and impairment are recognized in retained earnings. The adoption of IFRS 9 has impacted the impairment of financial assets applying the expected credit loss model. This affects the Fund's accounts receivable and investments in debt-type assets measured at amortized cost. For accounts receivable, the Fund applies a simplified model of recognizing lifetime expected credit losses as these items do not have a significant financing component (refer to note 22(b)). IFRIC 22 Foreign Currency Transactions and Advance Consideration IFRIC 22 looks at what exchange rate to use for translation when payments are made or received in advance of the related asset, expense or income. IFRIC 22 addresses this issue by clarifying that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which the Fund initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the Fund shall determine a date of the transaction for each payment or receipt of advance consideration. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 12 Amendments to IFRS 9: Prepayment Features with Negative Compensation Under IFRS 9, a debt instrument can be measured at amortized cost or at fair value through other comprehensive income, provided that the contractual cash flows are "solely payments of principal and interest on the principal amount outstanding" (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of the event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract. The amendments should be applied retrospectively and are effective from 1 January 2019, with earlier application permitted. The Fund's management have not yet assessed the impact of these amendments on these financial statements. IFRS 16 Leases IFRS 16 presents new requirements and amendments to the accounting of leases. IFRS 16 will require lessees to account for leases "on-balance sheet" by recognizing a "right-of-use" asset and a lease liability. IFRS 16 also: * changes the definition of a lease; * sets requirements on how to account for the asset and liability, including complexities such as non-lease elements, variable lease payments and option periods; * provides exemptions for short-term leases and leases of low value assets; * changes the accounting for sale and leaseback arrangements; * largely retains IAS 17's approach to lessor accounting; * introduces new disclosure requirements. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted. The Fund's management have not yet assessed the impact of IFRS 16 on these financial statements. IFRIC 23 Uncertainty over Income Tax Treatment IFRIC 23 provides guidance on how to reflect the effects of uncertainty in accounting for income taxes under lAS 12, in particular (i) whether uncertain tax treatments should be considered separately, (ii) assumptions for taxation authorities' examinations, (iii) determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits, and tax rates, and (iv) effect of changes in facts and circumstances. IFRIC 23 is effective for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted. Annual Improvements 2015-2017 The Annual Improvements 2015-2017 made several minor amendments to a number of IFRSs. The amendments relevant to the Fund are summarized below: IAS 12 Income Taxes: Income tax consequences of payments on instruments classified as equity The amendments to IAS 12 clarify that the income tax consequences of dividends are recognized in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events. IAS 12 is effective for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 13 3 Significant accounting policies 3.1 Foreign currencies Foreign currency transactions In preparing the financial statements, transactions in currencies other than the functional currency are recorded at the rates of exchange defined by the Central Bank of Armenia prevailing on the dates of the transactions. At each reporting date, monetary items denominated in foreign currencies are retranslated at the rates defined by the Central Bank of Armenia prevailing on the reporting date, which is 483.75 drams for 1 US dollar and 553.65 drams for 1 euro as at 31 December 2018 (31 December 2017: 484.10 drams for 1 US dollar, 580.10 drams for 1 euro). Non-monetary items are not retranslated and are measured at historic cost (translated using the exchange rates at the transaction date), except for non-monetary items carried at fair value that are denominated in foreign currencies which are retranslated at the rates prevailing on the date when the fair value was determined. Exchange differences arising on the settlement and retranslation of monetary items, are included in profit or loss for the period. 3.2 Property and equipment Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Cost comprises purchase price including import duties and non-refundable purchase taxes and other directly attributable costs. When an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. The gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss. Expenditure to replace a component of an item of property and equipment that is accounted for separately is capitalized with the carrying amount of the component being written off. Other subsequent expenditure is capitalized if future economic benefits will arise from the expenditure. All other expenditure, including repair and maintenance, is recognized in the statement of profit or loss and other comprehensive income as incurred. Depreciation is charged to the result for the year on a straight line basis over the estimated useful lives of the individual assets. Depreciation commences when assets are available for use. The estimated useful lives are as follows: Machinery and equipment - 4-5 years Vehicles - 5 years Fittings - 5 years Other - 1-5 years. 3.3 Intangible assets Intangible assets, which are acquired by the Fund and which have finite useful lives, are stated at cost less accumulated amortization and impairment losses. Amortization is charged to the result for the year or is added to the cost of other asset on a straight-line basis over the estimated useful lives of the intangible assets, which is estimated at 5 years for the computer software. 3.4 Leased assets In Payments on operating lease agreements are recognized as an expense on a straight-line basis. Associated costs, such as maintenance and insurance, are expensed as incurred. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 14 3.5 Inventories Inventories are assets held for sale in the ordinary course of business or in the form of materials or supplies to be consumed in the production process or in the rendering of services. Items such as spare parts, stand-by equipment and servicing equipment are also recognized as inventories unless they meet the definition of property and equipment. Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. 3.6 Financial instruments Recognition and derecognition Financial assets and financial liabilities are recognized when the Fund becomes a part to the contractual provisions of the financial instrument. Financial assets are derecognized when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. Financial liabilities are derecognized when they are extinguished, discharged, cancelled or expire. Classification and initial measurement of financial assets All financial assets are initially measured at fair value adjusted for transaction costs. Financial assets are classified into the following categories: * amortized cost * fair value through profit or loss (FVTPL) * fair value through other comprehensive income (FVOCI). In the periods presented the Fund does not have any financial assets categorized as FVOCI. The classification is determined by both: * the Fund's business model for managing the financial asset * the contractual cash flow characteristics of the financial asset. All income and expenses relating to financial assets that are recognized in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of accounts receivable which is presented within "Impairment losses on financial assets". A summary of the Fund's financial assets by category is given in note 21.2. Subsequent measurement of financial assets Financial assets at amortized cost Financial assets are measured at amortized cost if the assets meet the following conditions (and are not designated as FVTPL): * they are held within a business model whose objective is to hold the financial assets and collect its contractual cash flows * the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding After initial recognition, these are measured at amortized cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial. The Fund's cash and cash equivalents, accounts and most other receivable fall into this category of financial instruments as well as term deposits that were previously classified as held-to-maturity under IAS 39. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 15 Impairment of financial assets IFRS 9's impairment requirements use more forward-looking information to recognize expected credit losses - the "expected credit loss (ECL) model". This replaces lAS 39's "incurred loss model". Instruments within the scope of the new requirements included loans and other debt-type financial assets measured at amortized cost and FVOCI, accounts receivable, contract assets recognized and measured under IFRS 15 and loan commitments and some financial guarantee contracts (for the issuer) that are not measured at fair value through profit or loss. Recognition of credit losses is no longer dependent on the Fund first identifying a credit loss event. Instead the Fund considers a broader range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument. In applying this forward-looking approach, a distinction is made between: * financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk ("Stage 1") and * financial instruments that have deteriorated significantly in credit quality since initial recognition and whose credit risk is not low ("Stage 2"). "Stage 3" would cover financial assets that have objective evidence of impairment at the reporting date. "12-month expected credit losses" are recognized for the first category while "lifetime expected credit losses" are recognized for the second category. Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of the financial instrument. Previous financial asset impairment under 1AS 39 In the prior year, the impairment of financial assets at amortized cost was based on the incurred loss model. Individually significant financial assets at amortized cost were considered for impairment when they were past due or when other objective evidence was received that a specific counterparty will default. Financial assets at amortized cost that were not considered to be individually impaired were reviewed for impairment in groups, which are determined by reference to the industry and region of the counterparty and other shared credit risk characteristics. The impairment loss estimate was then based on recent historical counterparty default rates for each identified group. Financial assets at amortized cost The Fund makes use of a simplified approach in accounting for financial assets at amortized cost (accounts receivable, provided borrowings and term deposits) and records the loss allowance as lifetime expected credit losses. These are the expected shortfalls in contractual cash flows, considering the potential for default at any point during the life of the financial instrument. In calculating, the Fund uses its historical experience, external indicators and forward-looking information to calculate the expected credit losses using a provision matrix. The Fund assesses impairment of financial assets on a collective basis as they possess shared credit risk characteristics Refer to note 22(b)for a detailed analysis of how the impairment requirements of IFRS 9 are applied. Borrowings provided The Fund creates an allowance for all portfolios, which are overdue by more than 90 days, because the historical experience shows that borrowings that are past due by more than 90 days are generally not recoverable. The borrowings that have objective evidence of impairment at the reporting date are included in "Stage 3". The principal amounts and interests of overdue borrowings up to 30 days are included in "Stage 1". "12-month expected credit losses" are recognized for the first category. The principal amounts and interests of overdue borrowings starting from 30 to 90 days are included in "Stage 2", and "lifetime expected credit losses" are recognized for the second category. Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of the financial instrument. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 16 Classification and measurement of financial liabilities As the accounting for financial liabilities remains largely the same under IFRS 9 compared to IAS 39, the Fund's financial liabilities were not impacted by the adoption of IFRS 9. However, for completeness, the accounting policy is disclosed below. The Fund's financial liabilities include borrowings received and accounts payable. A summary of the Fund's financial liabilities by category is given in note 21.2. Borrowings received Borrowings received are recognized initially at fair value, net of issuance costs associated with the borrowings. Subsequent to initial recognition, borrowings are stated at amortized cost with any difference between cost and redemption value recognized in the statement of profit or loss and other comprehensive income over the period of the borrowings on an effective interest basis. Interest and other costs incurred in connection with borrowings are expensed as incurred as part of finance expenses. Partial or complete remittance of borrowings received is immediately recognized as income in the period, when such remittance becomes possible. Management's estimates and assumptions on the borrowings received are disclosed in note 20. In the statement of cash flows the borrowings received are stated as cash flows from financing activities. Accounts payable Accounts payable are stated at fair value and subsequently stated at amortized cost. 3.7 Cash and cash equivalents The Fund's cash and bank balances, also called cash equivalents, comprise cash in hand, bank accounts, designated account balances of the Central Treasury, cash in transit and short-term investments with a maturity period of less than 3 months. For the purpose of the statement of cash flows, cash equivalents are on-demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Cash equivalents are held for the purpose of meeting short- term cash commitments rather than for investment or other purposes. The Fund classifies investments as a cash equivalent if it is readily convertible to a known amount of cash and is subject to an insignificant risk of changes in value. 3.8 Grants Grants are not recognized until there is reasonable assurance that the Fund will comply with the conditions attaching to them and the grants will be received. Grants with a primary condition to purchase, construct or otherwise acquire non-current assets are recognized as deferred income in the statement of financial position and transferred to the result on a systematic and rational basis over the useful lives of the related assets. Other grants are recognized as income over the periods necessary to match them with the cost for which they are intended to compensate, on a systematic basis. Grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Fund with no future related costs are recognized as income in the period in which they become receivable. The grant provided to the Fund as a financial support (when no conditions are attached to the grant), is recognized in the result of the year when the Fund receives such a grant. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 17 3.9 Income tax Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. 3.10 Employee benefits Short-term employee benefits are benefits expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related services and include: (a) wages, salaries and bonuses; (b) paid annual leaves and paid disability leaves; When employees render services to the Fund during the accounting period, the Fund recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service: (a) as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, the Fund shall recognize that excess as an asset (prepaid expense) to the extent that the prepayment will lead to a reduction in future payments or a cash receivable. (b) as an expense, unless the amount is included in the cost of an asset. Paid absences The expected cost of short-term employee benefits in the form of paid absences is recognized as follows: (a) in the case of accumulating paid absences, when the employees render service that increases their entitlement to future paid absences. (b) in the case of non-accumulating paid absences, when the absences occur. Bonuses The expected cost of bonus payments is recognized when and only when the Fund has a present legal or constructive obligation to make such payments as a result of past events and a reliable estimate of the obligation can be made. A present obligation exists when, and only when, the entity has no realistic alternative but to make the payments. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 18 3.11 Revenue Revenue of the Fund arises from the contributions received, rendered services, interests on the borrowings provided by the Fund, etc. To determine whether to recognize revenue, the Fund follows a 5-step process: 1. Identifying the contract with a customer 2. Identifying the performance obligations 3. Determining the transaction price 4. Allocating the transaction price to the performance obligations 5. Recognizing revenue when/as performance obligation(s) are satisfied. Revenue is recognized either at a point in time or over time, when (or as) the Fund satisfies performance obligations by transferring the promised goods or services to its customers. The Fund recognizes contract liabilities for consideration received in respect of unsatisfied performance obligations and reports these amounts as advances from customers in the statement of financial position. Similarly, if the Fund satisfies a performance obligation before it receives the consideration, the Fund recognizes either a contract asset or a receivable in its statement of financial position, depending on whether something other than the passage of time is required before the consideration is due. Income from grants The recognition policy of income from grants is presented in note 3.8. Rendering of services This income is recognized, when services are provided, which is evidenced by documents approved by the counterparty. This income is included in "Income from rendering of services". Interest income Interest revenue is accrued on a timely basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 19 4 Property and equipment In thousand drams Fixtures Machinery Computers and and and fittings equipment Vehicles equipment and other Total Cost As at 1 January 2017 279,040 29,470 47,578 16,254 372,342 Additions - - 300 851 1,151 Disposals - - (6,554) (2,441) (8,995) As at 31 December 2017 279,040 29,470 41,324 14,664 364,498 Additions 138 - - 211 349 As at 31 December 2018 279,178 29,470 41,324 14,875 364,847 Accumulated depreciation As at 1 January 2017 46,708 22,746 39,420 15,685 124,559 Charge for the year 56,648 2,934 2,289 793 62,664 Eliminated on disposal - - (6,554) (2,441) (8,995) As at 31 December 2017 103,356 25,680 35,155 14,037 178,228 Charge for the year 55,649 2,934 2,235 385 61,203 As at 31 December 2018 159,005 28,614 37,390 14,422 239,431 Carrying amount As at 31 December 2017 175,684 3,790 6,169 627 186,270 As at 31 December 2018 120,173 856 3,934 453 125,416 Depreciation expense has been allocated as follows: In thousand drams Year ended 31 Year ended 31 December 2018 December 2017 Administrative expenses 3,314 3,665 Project expenses 57,889 58,999 61,203 62,664 As at 31 December 2018 the cost of the property and equipment of the Fund with nil carrying amount is drams 79,340 thousand (as at 31 December 2017: drams 58,015 thousand). According to the Government decree No. 173-A dated 15 February 2018, the Fund has received a community-owned land as a contribution of 97.3709 hectares with a cadastral cost of drams 140,170 thousand and then transferred it to the Organization established for the implementation of solar photovoltaic plant construction project. This transaction is not included in the additions and disposals of the property and equipment, since the Fund acted as an agent in the process of transferring the land to this Organization. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 20 5 Accounts receivable In thousand drams As at 31 As at 31 December 2018 December 2017 Current Accounts receivable 596,808 592,092 Allowances for credit losses (1,215) - Grants receivable - 4,192 Advances and prepayments 1,298 16,562 Receivables from the State budget - 875 Other 195 - 597,086 613,721 Non-current Accounts receivable from energy efficiency investments 2,596,957 3,116,241 Allowances for credit losses (5,276) - 2,591,681 3,116,241 Accounts receivable 3,188,767 3,729,962 Advances and prepayments include the amounts paid to the following organizations: In thousand drams As at 31 As at 31 December 2018 December 2017 "Z Profile" LLC and "Araratshin" LLC consortium - 15,504 Other 1,298 1,058 1,298 16,562 Current accounts receivable include the amounts receivable from the following services: In thousand drams As at 31 As of 31 December 2018 December 2017 Receivables from rendering of consulting services - 12,605 Receivables from rendering of energy efficiency services 596,808 579,487 596,808 592,092 Receivables from energy efficiency investments and services consist of the following components: In thousand drams As at 31 December 2018 As of 31 December 2017 Current Non-current Current Non-current Energy efficiency investments 593,815 2,596,957 577,271 3,116,241 Energy service 2,993 - 2,216 - 596,808 2,596,957 579,487 3,116,241 The description of receivables from services on energy efficiency is disclosed below. According to the resolution No. 174-N of the Government of the Republic of Armenia dated February 16, 2012 and the agency contract concluded between the Fund and the Ministry of Finance of the Republic of Armenia in 2012, the Ministry of Finance of the Republic of Armenia has transferred cash resources to the Fund under its custody to further finance the implementation of energy efficiency and renewable energy project. These resources were provided to the Fund at the interest rate of 0.75% and with the maturity period until 2045. These resources are recognized in the statement of financial position as borrowings received, and the accrued Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 21 interest expenses on these funds received are presented in the statement of profit or loss and other comprehensive income as finance costs (refer to note 10). The Fund implements the "Energy Efficiency Project" using the resources received in its custody from the Ministry of Finance of the Republic of Armenia as well as those received from the Grant agreement TF012163 concluded between the International Bank for Reconstruction and Development and the Government of the Republic of Armenia on 20 April 2012. In the framework of the Project the Fund makes investments in public facilities in the form of rendering of services, which consist of two components: a) energy efficiency investments; and b) energy services. These services are provided by the Fund as follows: - the Fund selects beneficiaries (public facilities), which have functional and realistic mechanisms available to secure the timely redemption of the borrowed resources. Then the Fund concludes contracts with contractors, which oblige the contractors to implement construction works in the public facilities selected in advance to ensure the defined energy efficiency level (component 1-energy efficiency investments); - the Fund implements preparation, investigation in the energy sector, procurement, financial management, monitoring, energy efficiency measurements and assurances, as well as other services in relation to "Energy Efficiency Project" (component 2-power services). In order to implement energy efficiency services, the Fund, signs contract with the contractor for construction works, and at the same time concludes energy efficiency services provision contract with the beneficiary (public facilities). This contract defines the cost of energy efficiency services (energy efficiency investments and energy services) rendered by the Fund, as well as the redemption schedule for the deferred payments of this cost. As a result, in the statement of financial position the Fund recognizes both payables to the contractors and receivables on the services of energy efficiency (energy efficiency investments) related to the component 1. The Fund recognizes the receivables on energy services in relation to the component 2, when the services are provided. Income from energy services is presented in the statement of profit or loss and other comprehensive income under income from services (refer to note 15). The net carrying value of accounts receivable is considered a reasonable approximation of fair value. All of the Fund's accounts receivable have been reviewed for indicators of impairment. The accounts receivable are mostly from public facilities (government entities). Note 22(b) includes disclosures relating to the credit risk exposures and analysis relating to the allowance for expected credit losses. The IAS 39 measurement basis has applied an incurred loss model, whereas the current year applies IFRS 9, which requires the use of expected loss model. Refer to note 22 (a) for the currencies in which the accounts receivable are denominated. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 22 ' N О N ' N N � ^ О О N N м � � N � 'V � U � С � - С N и 7 aN0 n й О � 0�0 � а^0 Ои1 N Ф О а0 h О h N N 01 �� с w °D сл cV �n �- � v Г LL Ё � (о`1 с й зй шп л � rn� С , N � �р � и � и � и � � и cLL � у (О (О о о О� о и v � у и и и и � oi й й й а С ? О I� v о с N °� о Ф , О toD ��рΡ I ��рΡ to0 � n^ О) tn м f� � 3 д 'д' (О О О и О � � й О � �� с �' Е с м м м м � аfOо r° и � �� м � �' � а у у д м � < й f0 и т О у й rn `� N м � м � ао � ао � N � N м ttII�' w � ш м й со г� � ао ао � � г� � С U С N N v N Г f0 ¢ т о о с� й м N�O 'n й й м v � � м и и,� � пi и с� о � и и о и с� й о с� г� °' о о ^ а° о о � ш � `r о й со v �� •� м ш N и � °,� ° и а � о � �� о мsГм'� о о о о°� `оо°о° и и и С lp � � � « т и � 'v' N 'n �� L�t�L о о о cv с� г� �,_ ососос � � � с � ? � 7 � ? � О � � О О О g Е , � � г� ао о с �°� « о о о о о о с l0 N N N N N�рΡ N�рΡ t� � С � О О О О О С� у � � � ��� о м м о о о т � `т й `т с с 0 О О •й t � � � v° v° v° Q Q Q -� � � � � � N � �� о о о О т�т� v аио °о 'л со Q •й � � ш й а°'о и ш и � � о•°-� � с� и rn ,n Г N fП д�о� о ri� v cv �i � гv м С .� о � � L о � � � т т tл и и о о о о о о � � 0 й � �_ �_ � '� 'S_ р� U U � й и и и и и и и'� и'� и Q � � � сиGо,Gи су сусу СО v�f •й �a' �' �гс0�сс0�N � �т_ ФтФ`т_ С у с � G у С� G у Й С�j С у С�j ш¢vVi Q й " с€с€с€ о с€ с�с€ т з т д � ''; ='• � ='• ь' ш � w °'- �'' ш ' ; °'- Е о а с с с с с с с с с с с с г ¢ в с� ш г"г°"г°" c�i z°'- z°'-z°'- � о w v с� � с� у й � м N N N 7 Ш U '� Q •С �' й О L N � ш � Г о о Г � Г =v д � м i о� а�о лv с� Ё и v v v м м зй Q N ` N м М ш с '�D Q. �` т м С WLL ° и с И � т (� � 1 1 1 � 1 1 1 ° � в+ U С .С � � й т v Q с � � � � Г С о ы си � и � � � и � � v n. М М N � Е .U - а С V' �1' .Г.i � � т 1� и а0 � N � _ � N � v�D- rn �°� ° м и i° и N `� N С � `-' 'Ct 'V � м Г Г о � о � �, Г •-- Г •- � ° о о о о � N N N N N � � �- N � � О О Г О ai ui со ое � Г� м � о о с� с� о г� с� � � с� N N N й 3 Г �� Г � о � � � о � е- .- Г Г ш с сп о о о о д ш v су пi су пi � Е � rn и Г и ш �° о о Г о с о Е cD v ri .= ш V о о с� м ш � а и_ и rn с �о v г_`о с_`о с�`� с_`а t с о � v° v° -°о v° д � и и и и о V � � � � ш ш Е и и '� n � v v -° с т+-' о о о� о� v ш '� о и и ш s с о о с`� `т ° а сЕо й й ° й 'о и С Х. �, � 7 N N С С .. �, � и о и N � � U Т = � с с � � � О U т f2, io � т и•а о f0 с � � й � и ° Е � � € � � � о � � � о о о ¢ � � w w о w i ---�с Ф р "° с• �, � �С �С У С V _ С С С С f0 • 'С (6 ° с Й N й и Ф � .L д д� т N Е о с N coi � у N Ф f"`С т N п� w 16 �� f0 а Q С (6 С Ф f0 f0 Q Q Q= Х � т о т � г _ ш 8 Cash and bank balances In thousand drams As at 31 As at 31 December 2018 December 2017 Current bank accounts 128,970 105,417 Designated accounts in the Central Treasury-agency contracts 25,481 46.420 Designated accounts in the Central Treasury-grant contracts 320,061 368,477 474,512 520,314 Refer to note 22 for the currencies in which the Central Treasury and bank balances are denominated. 9 Grants related to assets In thousand drams 2018 2017 Balance at the beginning of the year 187,207 247,052 Additions (property and equipment and intangible assets) - 490 Realized to income (refer to note 13) (59,103) (60,335) Balance at the end of the year 128,104 187,207 The balance at the end of the year of the grants related to assets has arisen from the property and equipment and intangible assets. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 25 �° й N � с й г� � rn ш �асi,SЙЕ � N со rn ° с. °° N � � N С � � -�р и _ И ° л � � N 4 ш с гсо й ао °v ш о о� слi � ы � Ф v� � � N (О О) Й'U N � й С� �� N � � N V�� ш� � л Ш й� о � л �� ,✓ ш rn ш С у а � � О � � ° С г�а Ш и 00 00 Со � и Ф ы `� 1� М � '� У и � Q w, s- N � О�р Ш о с а Е � � ш � � � � � о � � о � � � .� v N и V� � = _ с м n. v � й � w° т � °� г^n с ш N й �� Е � Ё Е Е •с и с� оо ,Q •о ш,а а` г`а а .= с� м о n`_ сЕа n. � � и � С 7 w � '�О ° й 'с � е�}} О st Ф � � N О 7 Ш 1� М О ��°� �w �,�N, � N tt � 3 N Ш (6 v ¢ с р � •� Ф U S] т � � w N о С С � N 00 1� и С.�+ .G о �. (О � О LL С G7 U с М 00 .�- О '"� й � СО � ОО �j .L-_. .= пi м й ,ш '3 о с д � о � >, го v о о Ш U w Ш и о о ..-с. с с.L+ � °? о и и .D °� � �.- Ф с`0 v 1� 1� с V и О С О О с0 ш о а� � 'С 7 С >` 7 '0 7 � U Ш LL о С V и и L uj � и •_ � N N � о с .о .У 7 и ° � � Ш С L1 °- •С N � � � � о о д '� � � � v ш � ` С � Е ° � с°i ° о Е � � а? и и с� Е ш ш °-� а- .-- С ш v N °ry � и ��° `� о Е С •- �- U"�" у w О Е `��° `о � с Е а� `' � �- U О О р fp +_° �= j f� "' Ш и о � ° � О .s_. Е О U х � . ° с О Q (р � с 'с Е О °7 ° � 3 � "С3 � ш с`о и � . � Ш � Е v � � д т:°_-' ti > Cj Q � а, n�v ш '� � ш Е ,� w Ш cLi.oc•=.о•д ,°n i � L � � ° � (А � � и оо 3 о�i °' с о � •с о � � � с � w •� •� 'С Е t� �' Е со с w Е n- f0 •- о с��3 о и � '� и с О � � � ° ° � ш т о о v и � о Е с а � � °� °� � � °� с ° со со 'а� °w � с� 0 с.� �.� � w � � у � 11, д ji д и�, w,и, о 0 о ат о а,го ид с`с. с с v ш о г'� � г`� у '3 с Е у w' Е `nrE и'tE � �lL ��г w°-� � ��...Q ��....¢ о о о > ° ш Z � � Н т w.5 и � 11 Deferred income In thousand drams 2018 2017 Balance at the beginning of the year 381,028 138,643 Additions 170,778 821,914 Return of grants - (14,154) Transferred to grant related to assets (490) Income recognition (refer to note 13) (219,085) (564,885) Balance at the end of the year 332,721 381,028 The balance of deferred income at the end of the year consists of the following sources: In thousand drams As at 31 December 2018 As at 31 December 2017 International International Development RA Development RA Association Government Association Government "Solar power project preparation" 45,284 2,547 89,155 2,512 "Geothermal exploratory drilling project" 281,588 1,538 286,048 1,549 "Energy efficiency project" 1,764 - 1,764 - 328,636 4,085 376,967 4,061 12 Accounts payable In thousand drams As at 31 As at 31 December 2018 December 2017 Payables on works and services 9,517 148,106 Advances from customers 50,452 42,021 Taxes and duties payable 5,121 8,824 Employee benefits 8,932 7,605 Other 116 150 74,138 206,706 Taxes and duties payable include the balances on the following types of duties: In thousand drams As at 31 As at 31 December 2018 December 2017 Value Added Tax 779 4,913 Taxes on employees' benefits 4,211 3,837 Other 131 74 5,121 8,824_ No interest is charged on payables. The Fund has financial risk management policies to ensure that all payables are paid within the credit timeframe. Refer to note 22 for more information about the Fund's exposure to foreign currency risk. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 27 13 Income from grants In thousand drams Year ended 31 Year ended 31 December 2018 December 2017 Income from grants related to assets (refer to note 9) 59,103 60,335 Income from deferred income (refer to note 11) 219,085 564,885 278,188 625,220 14 Finance income In thousand drams Year ended 31 Year ended 31 December 2018 December 2017 Interest income from borrowings provided (refer to note 6) 15,995 4,384 Interest income on bank account balances - 5,720 15,995 10,104 15 Income from services In thousand drams Year ended 31 Year ended 31 December 2018 December 2017 Consulting services 19,684 22,496 Energy services 49,964 62,559 Other 33,333 3,770 102,981 88,825 16 Project expenses In thousand drams Year ended 31 December 2018 Year ended 31 December 2017 Grants Fund Grants Fund allocation allocation Total allocation allocation Total "Geothermal exploratory drilling project" 19,511 - 19,511 120,331 - 120,331 "Solar power project preparation" 199,574 - 199,574 443,966 - 443,966 "Energy efficiency project" - - - 588 5,082 5,670 219,085 - 219,085 564,885 5,082 569,967 Depreciation and amortization of the property and equipment 59,103 - 59,103 60,335 - 60,335 278,188 - 278,188 625,220 5,082 630,302 17 Administrative expenses In thousand drams Year ended 31 Year ended 31 December 2018 December 2017 Employee benefits 102,329 83,914 Services received 13,424 22,073 Post and communication expenses 598 2,924 Trip and representation expenses 2,370 22,635 Office and utility expenses 858 2,618 Depreciation and amortization 4,912 4,616 Audit and consulting services 3,286 7,874 Bank and insurance charges 2,130 120 Lease expenses 13,332 14,692 Other 5,268 21,678 148,507 183,144 Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 28 18 Other financial items In thousand drams Year ended 31 Year ended 31 December 2018 December 2017 Loss from exchange differences on: Financial assets measured at amortized cost (1,885) 622 Financial liabilities measured at amortized cost 1,285 (3,808) (600) (3,186) 19 Income tax expense In thousand drams Year ended 31 Year ended 31 December 2018 December 2017 Current tax 8,651 10,181 8,651 10,181 Reconciliation of effective tax rate is as follows: In thousand drams Year ended 31 Effective tax Year ended 31 Effective tax December 2018 rate (%) December 2017 rate (%) Result before taxation (under IFRSs) (69,024) (93,300) Tax calculated at a tax rate of 20% (2017: 20%) (13,805) 20% (18,660) 20% (Non-taxable)/non- deductible items, net 22,456 (33%) 28,841 (31%) Income tax expense 8,651 (13%) 10,181 (11%) 20 Critical accounting estimates and judgments Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Fund makes estimates and assumptions concerning the future. The resulting accounting estimates may be different from the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Useful lives of property and equipment Management has estimated useful lives of the property and equipment. Management believes that estimated useful lives of the property and equipment are not materially different from economical lives of those assets. If actual useful lives of property and equipment are different from estimations, financial statements may be materially different. Accounts receivable - As described in note 5 receivables from rendering of energy efficiency services are generated by the implementation of energy efficiency investments in public facilities. Within the scope of these services the Fund enters into contracts with contractors that perform construction works on public facilities directed to energy efficiency. The Fund records the cost of energy efficiency investments on the basis of acts of acceptance on construction work submitted by the contractors as accounts receivable from public facilities and defines their repayment schedule. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 29 Management believes that the carrying amounts of receivables from rendering of energy efficiency services (energy efficiency investments and energy services) approximate their fair values; accordingly, they are not discounted using market rates, for the following reasons: - the Fund is a non-for profit organization, and it does not pursue a purpose to gain profit; - the amounts received for rendering of services are to be used for a predefined purpose; - the amounts are not under the control of the Fund, - due to the small size of the financial markets in Armenia, it is not practical to define a reasonable discount rate. - Management believes that receivables from rendering of energy efficiency services (energy efficiency investments and energy services) are recoverable, taking into account the past experience and the fact, that the counterparties are under the State control. Therefore, the management has calculated expected loss for these receivables based on the default probability for sovereign rating provided to the Republic of Armenia by international rating agencies (S7P, Fitch or Moody's) (see note 22(b)). - Management believes that the receivables from rendering of energy efficiency services (energy efficiency investments and energy services) are the assets of the Fund and should be recorded as such in the statement of financial position (although legally the Fund is the agent of the Ministry of Finance of the Republic of Armenia and acts on behalf of it) for the following reasons: - services were provided using the resources received from the Ministry of Finance of the Republic of Armenia, and the Fund has a liability to pay to the Ministry of Finance of the Republic of Armenia; - the Fund bears a foreign currency risk related to this transaction, since the amounts received from the Ministry of Finance of the Republic of Armenia are generally denominated in US dollar, and the payments for the energy services provided by the Fund made done in the Armenian dram. Borrowings received and provided The Fund received borrowings for implementation of "Energy efficiency project" as presented in note 10 and provided borrowings to financial institutions as presented in note 6. Management believes that the carrying amounts of the borrowings received and provided approximate their fair values, so they are not discounted by market rates considering the absence of appropriate financial market in the Republic of Armenia for receiving and providing borrowings of such amounts and with such terms, as well as the fact that the Fund is a non-for- profit organization, and it does not pursue a purpose to gain profit. However, if management changes its estimations, the financial statements of the Fund may be changed significantly. The following are the judgements made by management in applying the accounting policies of the Fund that have significant effect on the financial statements. Revenue from rendered services and applicable taxes Armenia Renewable Resources and Energy Efficiency Fund (the Authority) by request of the Ministry of Energy Infrastructures and Natural Resources of RA is managing the process for selection of private developer or consortia for design, finance, build, own and operate the proposed grid-connected Masrik-1 Solar Photovoltaic (PV) Power Plant. In accordance with point 5.6 of the invitation to participate in procurement procedures approved by this decision, the winning company has to pay drams 40,000 thousand to the Fund as a preparatory fee in immediately available funds, without any deductions whatsoever for taxes, duties, charges or other withholdings. The invitation for the submission of applications does not clearly state that the Fund's prepayment fee is free of charge or is granted as a compensation for the expenses and works done. Funds received by the Fund in the result of the competition were considered as income from rendering of services, and an invoice was issued. The amount of drams 6,667 thousand of VAT allocated to the tax account was paid to the State budget as a VAT liability. However, if management changes its estimations, the financial statements of the Fund may be changed significantly. Armenia Renewable Resources and Energy Effic4ency Fund Financial Statements 30 21 Financial instruments 21.1 Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition and the basis on which income and expenses are recognized, in respect of each class of financial asset and financial liability are disclosed in note 3.6. 21.2 Categories of financial instruments The carrying amounts of financial assets and financial liabilities in each category are as follows: Financial assets In thousand drams As at 31 As at 31 December 2018 December 2017 Amortized cost Accounts receivable 3,187,273 3,712,525 Borrowings provided 584,684 38,130 Cash and bank balances 474,512 520,314 Term deposits 47,138 339,073 4,293,607 4,610,042 Financial liabilities In thousand drams As at 31 As at 31 December 2018 December 2017 Amortized cost Borrowings received 3,818,169 3,899,720 Accounts payable 18,565 155,861 3,836,734 4,055,581 22 Financial risk management The Fund is exposed to various risks in relation to financial instruments. The main types of risks are market risk, credit risk and liquidity risk. Financial risk factors a) Market risk The Fund is exposed to market risk through its use of financial instruments and specifically to currency risk, which result from both its operating and investing activities. Foreign currency risk The Fund undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations arise. Exposures to currency exchange rates arise from the Fund's borrowings received, which are primarily denominated in US dollar. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 31 Foreign currency denominated financial assets and financial liabilities, which expose the Fund to currency risk are disclosed below. The amounts shown are those reported to key management translated into Armenian drams at the closing rate: Item As at 31 December 2018 US dollar Euro Financial assets Cash and bank balances 439,132 8,032 Term deposits 49,911 - 489,043 8,032 Financial liabilities Borrowings received 2,181,407 - 2,181,407 - Net position (1,692,364) 8,032 Item As at 31 December 2017 US dollar Euro Financial assets Accounts receivable - 7,873 Cash and bank balances 468,784 2,436 Term deposits 339,073 - 807,857 10,309 Financial liabilities Borrowings received 2,228,064 - 2,228,064 - Net position (1,420,207) 10,309 The following table details the Fund's sensitivity to a 10% (2017: 10%) increase and decrease in dram against US dollar and Euro. 10% (2017: 10%) represents management's assessment of the possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% (2017: 10%) change in foreign currency rates. If Armenian dram had strengthened/(weakened) against US dollar and Euro by 10% (2017: 10%) then this would have had the following impact: In thousand drams US dollar impact Euro impact 2018 2017 2018 2017 Result (169,236) (142,020) 803 1,030 (169,236) (142,020) 803 1,030 Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Fund's exposure to currency risk. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 32 b) Credit risk Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Fund. The Fund is exposed to credit risk from financial assets, including cash and cash equivalents held at banks, accounts receivable, borrowings provided and term deposits. The credit risk is managed on a group basis based on the Fund's credit risk management policies and procedures. The credit risk in respect of cash balances held with banks and deposits with banks are managed via diversification of bank deposits, and are only with major reputable financial institutions. The Fund continuously monitors the credit quality of customers. Where available, external credit ratings and/or reports on customers are obtained and used. The Fund's policy is to deal only with credit worthy counterparties. The credit terms for customers as negotiated with customers are subject to an internal approval process which considers the credit rating scorecard. The ongoing credit risk is managed through regular review of ageing analysis, together with credit limits per customer. Accounts receivable consist of a large number of customers. The Fund does not hold any security on the accounts receivable balance. In addition, the Fund does not hold collateral relating to other financial assets. Accounts receivable The Fund applies the IFRS 9 simplified model of recognizing lifetime expected credit losses for all accounts receivable as these items do not have a significant financing component and from public facilities (government entities). In measuring the expected credit losses, the accounts receivable have been assessed on a collective basis as they possess shared credit risk characteristics. They have been grouped based on the days past due. Accounts receivable are due from the Government agencies, and the expected loss rates are based on the default probability for sovereign rating provided to the Republic of Armenia by international rating agencies. The sovereign rating of the Republic of Armenia granted by S&P in 2017 and 2018 is B+. The one-year default probability for this rating is 0.2%. The probability of default is adjusted to reflect current and forwarding looking macro-economic factors affecting the customer's ability to settle the amount outstanding. The Fund has identified the gross domestic product (GDP), external government debt and the indicator of economic activity to be the most relevant factors and according adjusts the historical loss rates for expected changes in these factors. The loss given default (LGD) has been taken as 100%, since the balances are not collateralized. The exposure at default (EAD) is the maximum exposure at default at the reporting date. ECL=PD*LGD*EAD. Lifetime As at 31 December 2018 Expected Gross carrying expected credit loss amount credit loss Current Energy efficiency investments 593,815 Energy services 2,993 0.20% 596,808 1,215 Non-current Energy efficiency investments 2,596,957 0.20% 2,596,957 5,276 Total 3,193,765 6,491 Borrowings provided Targeted borrowings are provided to financial and non-financial institution intermediaries and commercial banks for implementation of "Community Based Energy Efficiency Improvement Project for Legal and Physical Entities in Non-gasificated Communities in Armenia" Project (see note 1). Financial institutions (credit organizations and commercial banks) bears the collectability risk of the borrowings provided. The collectability of borrowings provided through non-financial institution intermediaries is secured by the repayments of the final borrower. These borrowings are fully provided for. Provided borrowings are not secured. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 33 The Fund creates an allowance for all portfolios, which are secured by the payments made by the final borrower, and are overdue by more than 90 days, because the historical experience shows that borrowings that are past due by more than 90 days are generally not recoverable. The borrowings that have objective evidence of impairment at the reporting date are included in "Stage 3". The principal amounts and interests of overdue borrowings up to 30 days are included in "Stage 1". "12-month expected credit losses" are recognized for the first category. The principal amounts and interests of overdue borrowings starting from 30 to 90 days are included in "Stage 2", and "lifetime expected credit losses" are recognized for the second category. Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of the financial instrument. The expected loss rates for borrowings provided are based on the default probability for sovereign rating provided to the commercial banks by international rating agencies. The sovereign rating of the commercial banks granted by international rating agencies in 2017 and 2018 is B+. The one-year default probability for this rating is 2.08%. No probability rating issued for credit organization; accordingly, the Fund has used the average data for commercial banks, which is B. The one-year default probability for this rating is 3.6%. The LGD has been taken as 100%, since the balances are not collateralized. EAD is the maximum exposure at default at the reporting date. ECL=PD*LGD*EAD. Term deposits The expected credit loss rates are based on the change notches external credit rating. For this criterion, the corporate rating will be taken into the account. A significant change notches in the credit score assigned by the Big Three credit rating agencies (Standard & Poor's, Moody's, and Fitch) is indicative of a significant increase in credit risk. c) Liquidity risk Liquidity risk is the risk that the Fund will be unable to meet its obligations. The Fund's policy is to run a prudent liquidity management policy by means of holding sufficient cash and bank balances, as well as highly liquid assets for making all operational and debt service related payments when those become due. The following table details the Fund's remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Fund can be required to pay. The table includes both interest and principal cash flows. 2018 Non-interest Fixed interest rate bearing instruments Total Weighted average effective interest rate (%) 0.75% Less than 6 months - 44,922 44,922 6 months to 1 year 18,565 40,848 59,413 1-5 years - 327,562 327,562 More than 5 years - 3,404,837 3,404,837 18,565 3,818,169 3,836,734 2017 Non-interest Fixed interest rate bearing instruments Total Weighted average effective interest rate (%) 0.75% Less than 6 months - 45,019 45,019 6 months to 1 year 155,861 40,858 196,719 1-5 years - 327,635 327,635 More than 5 years - 3,486,208 3,486,208 155,861 3,899,720 4,055,581 Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 34 The Fund considers expected cash flows from financial assets in assessing and managing liquidity risk, particularly its cash resources and accounts receivable. 23 Commitments 23.1 Operating lease commitments Non-cancelable operating lease commitments are disclosed below: In thousand drams As at 31 As at 31 December 2018 December 2017 Within one year 13,320 13,332 1 to 5 years 52,170 - 65,490 13,332 24 Contingencies 24.1 Business environment Armenia continues to undergo political and economic changes. As an emerging market, Armenia does not possess a developed business and regulatory infrastructure that generally exists in a more mature free market economy. In addition, economic conditions continue to limit the volume of activity in the financial markets, which may not be reflective of the values for financial instruments. The main obstacle to further economic development is a low level of economic and institutional development, along with a centralized economic base, regional instability and international economic crisis. Deterioration of economic situation of countries collaborating with the Republic of Armenia led to the shortage of money transfers from abroad, upon which the economy of Armenia is significantly dependent. Further decline in international prices of mining products, uncertainties due to possibilities of attraction of direct capital investments, inflation, may lead to deterioration of the situation of Armenian economy and of the Fund. However, as the number of variables and assumptions involved in these uncertainties is big, management cannot make a reliable estimate of the amounts by which the carrying amounts of assets and liabilities of the Fund may be affected. Management of the Fund believes that in the current conditions appropriate measures are implemented in order to ensure economic stability of the Fund. 24.2 Taxes The taxation system in Armenia is relatively new and is characterized by frequently changing legislation, which is often subject to interpretation. Often differing interpretations exist among various taxation authorities and jurisdictions. Taxes are subject to review and investigations by tax authorities, which are enabled by law to impose severe fines and penalties. These facts may create tax risks in Armenia substantially more than in other developed countries. Management believes that it has adequately provided for tax liabilities based on its interpretation of tax legislation. However, the relevant authorities may have differing interpretations and the effects could be significant. 24.3 Environmental matters Management is of the opinion that the Fund has met the Government's requirements concerning environmental matters and, therefore, believes that the Fund does not have any current material environmental liabilities. However, environmental legislation in Armenia is in process of development and potential changes in the legislation and its interpretation may give rise to material liabilities in the future. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 35 25 Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents include cash in banks and short- term investments with a maturity period of less than 3 months. Cash and bank balances at the end of the financial year as shown in the statement of cash flows can be reconciled to the related items in the statement of financial position, as follows: In thousand drams As at 31 As at 31 December 2018 December 2017 Bank balances 474,512 520,314 Short-term investments - 242,050 474,512 762,364 26 Reconciliation of liabilities arising from borrowings received The changes in the Fund's liabilities arising from borrowings received can be classified as follows: In thousand drams Long-term borrowings as of 1 January 2018 3,899,720 Cash flows Repayments (principal amount) (80,151) Repayments (interests) (29,163) Non-cash Interest accrual 29,076 Foreign exchange gain (1,313) As at 31 December 2018 3,818,169 In thousand drams Long-term borrowings as of I January 2017 3,955,103 Cash flows Repayments (principal amount) (57,615) Repayments (interests) (29,606) Non-cash Interest accrual 29,678 Foreign exchange loss 2,160 As at 31 December 2017 3,899,720 27 Related parties 27.1 Control relationships The Fund's founder and the final controller is the Republic of Armenia. 27.2 Transactions with management Key management received the following remuneration during the year, which is included in employee benefits. In thousand drams Year ended 31 Year ended 31 December 2018 December 2017 Salaries and bonuses 15,677 12,562 15,677 12,562 Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 36 27.1 Transactions with the Ministry of Finance of the Republic of Armenia In thousand drams Year ended 31 Year ended 31 Transactions December 2018 December 2017 Repayment of borrowings 80,151 57,615 Interest expense 29,076 29,678 109,227 87,293 28 Subsequent events There are no significant subsequent events. 29 Going concern The financial statements of the Fund have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During 2018 the Fund incurred a loss of drams 77,675 thousand (2017: drams 103,481 thousand). Additionally, in 2018 the result from operating activities is a negative figure (drams 43,230 thousand). However, the management is confident that the financial losses the Fund suffered will not affect the ability of the Fund to realize its assets and discharge its liabilities in the normal course of the business. Management believes that the Fund will record positive results in the nearest future, since it has agreements with donor organizations to implement a number of projects. The main reasons for the delay in approving the existing projects and the funding of the approved projects are: * Change of the Fund Director: over the past two years three directors have been changed; * Political changes in the Republic of Armenia and, consequently, changes in the structure of the Government, * The Fund's liquidation possibility in the framework of the Government optimization; * Changes in the composition of the governing body of the Fund. Armenia Renewable Resources and Energy Efficiency Fund Financial Statements 37