HZ PUTNICKI PRIJEVOZ d.o.o., Zagreb Strojarska cesta 11 Annual consolidated financial statements and the Independent Auditor's Report for the year 2018 Page Responsibility for the annual consolidated financial statements 1 Independent Auditor's Report 2-9 Consolidated Statement of comprehensive income 10 Consolidated Statement of financial position / Consolidated Balance sheet 11 Consolidated Statement of cash flows 12 Consolidated Statement of changes in equity 13 Notes to the annual consolidated financial statements 14- 54 RESPONSIBILITY FOR THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS The Management Board of the company H2 PUTNICKI PRIJEVOZ d.o.o., Zagreb, Strojarska cesta 11, ("the Company") is responsible for ensuring that the annual consolidated financial statements of the Company and depending company ("the Group") for the year 2018 are prepared in accordance with the Accounting Act (Official Gazette No 78/15, 134/15, 120/16 and 116/18) and International Financial Reporting Standards as adopted by the European Commission and published in the Official Journal of the European Union to give a true and fair view of the consolidated financial position, the consolidated results of operations, the consolidated cash flows and the consolidated changes in equity of the Group for that period. After making enquiries, the Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Management Board has adopted the going concern basis in preparing the consolidated financial statements of the Group. In preparing the annual consolidated financial statements, the Management Board is responsible for: * suitable accounting policies are selected and then applied consistently in accordance with applicable financial reporting standards * judgments and estimates are reasonable and prudent; * preparing of the annual consolidated financial statements on the going concern basis unless such assumption is not appropriate. The Management Board is responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the consolidated financial position, the consolidated results of operations of the Group, consolidated cash flows and consolidated changes in equity and their compliance with the Accounting Act (Official Gazette No 78/15, 134/15, 120/16 and 116/18) and the International Financial Reporting Standards as adopted by the European Commission and published in the Official Journal of the European Union. The Management board is also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Signed on behalf o the Management Board: Zeljko Ukic, MI8den Lugari6, Damir Rubdi6, President of the Member of the Member of the Management Board Management Board Management Board H2 PUTNIKI PRIJEVOZ d.o.o. Strojarska cesta 11 10 000 Zagreb The Republic of Croatia Zagreb, 6 September 2019 MOORE STEPHENS Audit d 0 o za revizqske usluge Radnka cesta 54 10000 Zagreb HRVATSKA Tel:+3865 (0) 1 3667 994 Fax:+385 (0) 1 3667 997 E-maf:audit-revizija@audt.hr INDEPENDENT AUDITOR'S REPORT To the Owner of the company H2 PUTNICKI PRIJEVOZ d.o.o., Zagreb Report on the Audit of the Consolidated Annual Financial Statements Qualified opinion We have audited the annual consolidated financial statements of the company HZ PUTNICKI PRIJEVOZ d.o,o., Zagreb, Strojarska cesta 11, (the "Company") and depending company ("the Group") for the year ended 31 December 2018, which comprise the Consolidated Statement of financial position (Balance Sheet) as at 31 December 2018, Consolidated Statement comprehensive income, Consolidated Statement of cash flows and Consolidated Statement of changes in equity for the year then ended, and accompanying Notes to the annual consolidated financial statements, including a summary of significant accounting policies and other explanations. In our opinion, except for the possible effects of the matter described in the Basis for Qualified opinion, the accompanying consolidated annual financial statements, give a true and fair view of the consolidated financial position of the Group as at 31 December 2018, and of its consolidated financial performance and its consolidated cash flows of the Group for the year then ended in accordance with the Accounting Act and the international Financial Reporting Standards ("IFRS") as adopted by the European Commission and published in the Official Journal of the European Union. Basis for Qualified opinion In the consolidated statement of financial position (Consolidated Balance sheet) as at 31 December 2018, the Group stated total value of the real estate in the amount of HRK 63,669 thousand within which relate to buildings in the amount of HRK 28,599 thousand, and to the investment property in the amount of HRK 35,070 thousand for which ownership is not regulated by registration in the land registers. Furthermore, the value of the land that is an integral part of these real estates is not stated in the business books. Given that the settling of property rights is ongoing, we are unable to determine the effects of any corrections, if any, to the Company's annual consolidated financial statements for the year 2018. We conducted our audit in accordance with Accounting Act, Auditing Act and International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated annual financial statements section of our Independent Auditor's report. 2 ALTDIT MOORE STEPHENS AUDIT 7ACRER We are independent of the Group 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 qualfied opinion. Other matters The Company prepared separate annual financial statements for the year ended 31 December 2018, and for a better understanding of the Company's operations as a whole, users should read the separate annual financial statements of the Company in connection with these annual consolidated financial statements. Audit of the consolidated financial statements of the Group for the year ended December 31, 2017 was performed by the audit firm BDO Croatia d.o.o., Zagreb, which in its Independent Auditor's Report as of September 18, 2018 expressed a modified opinion on these annual consolidated financial statements related to the potential effects of regulating property ownership and the sufficiency of provisions for initiated litigation processes. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated annual financial statements of the current period and include identified most significant risks of material misstatement due to error or fraud with the highest impact on our audit strategy, on our resources available and the time spent by the engaged audit team. These matters were addressed in the context of our audit of the consolidated annual financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined that the issues below are the key audit issues to be reported in our Independent Auditor's Report. Related party transactions Description How we have audited Key audit matters Our audit procedures included, among See Accounting Policies, Note 2.25. Key others: accounting estimates and judgments and * understanding and documenting the note 37. Related Party Transactions in process of identifying related party Annual Consolidated Financial Statements. transactions and evaluating the design of controls related to the fraud risk We considered the related party transactions identified being significant to the audit as the risk is that * we have verified that transactions have these transactions are not conducted at been approved in accordance with market prices, and/or the accounting internal procedures including the treatment of the rights and obligations of involvement of key personnel at the these transactions are not correct, it could appropriate level influence the results of the Company. * we have analyzed the supporting documentation to make sure that the Furthermore, for financial reporting transactions were at market principles purposes, IAS 24 Related party disclosure, and their business rationale requires complete and appropriate * we have evaluated that the transactions disclosure of the transactions with related (rights and obligations) are recorded in parties. accordance with the terms of the contract * we have confirmed all receivables and liabilities from related companies 3 AUDIT MOORE STEPHENS A I IAC,RF.B * we have identified the differences between related parties and what they relate to * verification of required disclosures in accordance with lAS 24 (see Note 39) By our audit procedures, we have been assured that related party transactions in material assets are recorded and disclosed in accordance with International Financia Reporting Standards. Valuation of Property, plant and Equipment and Investment property Description How we have audited Key audit matters See Note 2.11. Property, plant and Our audit procedures included, among equipment, 2.12. Investment property, 2.13. others: Impairment of non-financial assets, 2.25. * assessing the compliance of property, Key accounting estimates and judgements, plant and equipment and investment note 9. Depreciation and amortization, note property recognition policies with 16. Property, plant and equipment and note relevant financial reporting standards; 17. Investment property. * analysis of the Management Board and Property, plant and equipment at 31 the Supervisory Board meetings December 2018 amounts to HRK 1,789,027 minutes regarding information to the thousand, while property investments investment plans and investment project amount to HRK 35,070 thousand, decisions representing 88% of total assets in the * test of controls and test of details for the Group's Consolidated Statement of financial purchase of the Property, plant and position / Consolidated Balance sheet. equipment in 2018 according to the Impairment requires Management to make selected sample significant judgments relating to the * we have evaluated the estimated useful estimated level of income, the operating life of the assets used by the Group costs and the applicable discount rates. when calculating the depreciation as well as the beginning of the depreciation Given the material significance of this assets, calculation for activated assets and the its role as a key material resource in the cessation of for the assets non in use. Group's operations and the complexity of * based on the sample, we tested accounting treatment (procurement, disposal of long-term tangible and measurement, depreciation calculation, cost intangible assets capitalization, impairment, etc.), this issue is 0 a review of the recoverable value of a of particular significance for our audit. raiway vehicle owned by the Company (amount of planned free cash flow, selected period of planned free cash flow, end of depreciation period, selected WACC) 4 MOORE STEPHENS AUDIT A_I_M___7 * evaluation of the impairment indicators analysis with the requirements of IAS 36 * interview with the responsible experts in charge of asset management * it was established that the registration of property ownership rights is not fully resolved. The settling of property rights is ongoing. Other than the above mentioned, we have verified by our audit procedures that property, plant, equipment and property investment in material assets are recorded and disclosed in accordance with International Financial Reporting Standards. Litigations and potential liabilities Description How we revised Key audit Matters See Accounting Policies, note 2.21. Provisions, note 2.25. Key accounting Our audit procedures included, among estimates and judgements and notes 12. and others: 27. Provisions in annual consolidated financial statements. * compliance assessment of the litigations The Group has stated the provisions for provision recognition policy with the with contingent liabilities due to court cases in the relevant financial reporting which the Company is a defendant as at 31 standards; December 2018 in the amount of HRK * review of the purpose and nature of the 81.281 thousand (31 December 2017 in the material provisions amount of HRK 86.365 thousand). * analysis of the attorney's response to our written inquiries and other Due to its specific activity, the Company is supporting documentation prepared by exposed to a significant number of long- the Company standing court disputes that require complex * review of the previously recorded assessments with a high level of judgment provision amounts to estimate the and uncertainty, which can lead to significant accuracy of previous judgments and misstatement of the provisions cost. estimates The outcome of the court proceedings is * review of the required disclosures outside the control of the Company, and related to the provisions in the financial accordingly the Management Board makes statements to determine whether they estimates on the outcome of court disputes are accurate and complete. based on opinions of the internal legal service and external attorneys representing the Company. By our audit procedures, we have been assured that provisions for initiated court Given the significance of the amount and disputes in materially significant aspects complexity of the outcome assessment have been recorded and disclosed in process, the issue of court disputes and accordance with International Financial potential liabilities was of particular Reporting Standards. significance for our audit. 5 AUDIT MOORE STEPHENS SKE USLUGE. 2.AC3 Other information in the Annual Report The Management Board is responsible for other information. Other information includes the information included in the Annual Report but does not include the annual consolidated financial statements and our Independent Auditor's Report on these statements. Our qualified opinion on the annual consolidated 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 Other Legal Requirements, and we do not express any kind of conclusion with assurance on them. Related to our audit of the annual consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the annual consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated as well whether the non-financial information required by the provisions of by paragraph 1 or paragraph 2 of Article 21a of the Accounting Act are presented in the separate non-financial report t. If, based on the work we have done, we conclude that there is a significant misstatement of these other information, we are required to report this fact. In that context, except as set forth in the Basis for Qualified opinion and Other matters, we do not have anything to report. Responsibilities of the Management Board and those who are responsible for managing the annual consolidated financial statements The Management Board of the Company is responsible for the preparation of annual consolidated financial statements that provide true and fair view in accordance with the IFRSs as adopted by the European Commission and published in the Official Journal of the European Union, and for such internal controls as the Management Board determines are necessary to enable the preparation of annual consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the annual consolidated financial statements, the Management Board of the Company is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management Board 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 Audit of Annual Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the annual consolidated 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 consolidated financial statements. 6 AUI MOORE STEPHENS AUDITARF1 As an integral part of the audit in accordance with IAS, we create professional judgments and maintain professional skepticism during the audit. We also: identify and assess the risks of material misstatement of the annual consolidated 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 of the Company. * conclude on the appropriateness of the used accounting policies based on the going concern used by the Company's Management Board and, based on the obtained audit evidence, conclude whether there is significant uncertainty about events or circumstances that may cast significant doubt on the Group's ability to continue operating as a going concern. If we conclude that there is significant uncertainty, we are required to draw attention in our Independent Auditor's Report to related disclosures in the annual consolidated financial statements or, if appropriate, to modify our opinion. Our conclusions are based on the obtained audit evidence until the date of our Independent Auditor's Report. However, future events or conditions may cause the Group to discontinue continuing operations as a going concern. * evaluate the overall presentation, structure and content of the annual consolidated financial statements, including the disclosures, and whether the annual consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with the 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. Report on other legal requirements Report based on the requirements of Regulation (EU) No. 537(2014 1. On 26 September 2018, the General Assembly of the Company appointed us to carry out an audit of the annual consolidated financial statements for the year 2018. 2. As at the date of this report, we have been continuously engaged in carrying out the Group's statutory audits, from the audit of the Group's annual consolidated financial statements for the year 2018, which is a total of 1 year. 7 AUDIT MOORE STEPHENS 3. In addition to the matters we have included in our Independent Auditor's Report as Key Audit Matters within the subsection Report on the audit of annual consolidated financial statements, we have nothing to report in relation to point (c) of Article 10 of Regulation (EU) No. 537/2014. 4. By our statutory audit of the Group's annual consolidated financial statements for the year 2018, we are able to detect irregularities, including fraud in accordance with Section 225. Responding to Non-Compliance with Laws and Regulations of the IESBA Code, which requires us, in carrying out our audit engagement, to establish whether the Group complied with laws and regulations that are generally recognized to have a direct impact on the determination of significant amounts and their disclosures in annual consolidated financial statements, as well as other laws and regulations that do not have a direct effect on the determination of significant amounts and their disclosures in annual consolidated financial statements, but compliance with which may to be the key to the operational aspects of the Group's business, its ability to continue to operate as a going concern or to avoid significant penalties. Unless we encounter, or find out about, non-compliance with any of the aforementioned laws or regulations that are apparently insignificant, according to our judgment of its content and its influence, financially or otherwise, for the Group, its shareholders and the wider public, we are obliged to inform the Group thereof and request to investigate this case and take appropriate measures to resolve the irregularity and to prevent the reappearance of these irregularities in the future. If the Group on the date of Consolidated Statement of financial position does not correct irregularities based on which incorrect disclosures in the audited annual consolidated financial statements arise that are cumulatively equal to or greater than the amount of materiality to the annual consolidate financial statements as a whole, we are required to modify our opinion in the Independent auditor's report. In the audit of the Group's annual consolidated financial statements for the year 2018, we determined the materiality for financial statements as a whole in the amount of HRK 13,400,000, representing approximately 1.5% of operating revenues, because these revenues represent a stable business indicator including key revenues from the activities the Group is engaged in, namely revenue from passenger transportation, revenue from maintenance and income from state aid to encourage passenger transport. 5. Our audit opinion is consistent with the additional audit report prepared for the Company's Audit Committee in accordance with provisions of the Article 11 of Regulation (EU) No. 537/2014. 6. We have not provided to the Group prohibited non-audit services during the period between the initial date of the Group's audited annual consolidated financial statements for the year 2018 and the date of this report. In addition, we have not provided services for the design and implementation of internal control procedures or risk management related to the preparation and / or control of financial information or the design and implementation of technological systems for financial information in the preceding year. Therefore, we have remained independent of the Group in the performance of the audit. 8 ALJDIT MOORE STEPHENS AUDIT ZAGREB Report based on the requirements of the Accounting Act 1. In our opinion, based on the work that we performed during the audit, the information in the Group's Management Report for the year 2018 are in accordance with the accompanying annual financial statements of the Group for the year 2018. 2. In our opinion, based on the work that we performed during the audit, the Group's Management Report for the year 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 for the year 2018. In Zagreb, 6 September 2019 AUDIT d.o.o. Radnidka cesta 54 10000 Zagreb Darko Karid, director, certified audit r / 9 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2018 POSIT 1 ON Notes 2018. 2017. HRK '000 HRK'000 Sales revenue 3 313.077 318.925 Revenues based on the use of own products, goods and service 6.564 7.649 Other income 4 579 526 550,846 Operating revenue 899.167 877.420 Changes in the value of work in progress and finished goods (44) (20) Costs of raw materials 5 (159.584) (152,118) Cost of goods sold 6 (16.187) (10.371) Other operating expenses 7 (142 659) (149,106) Personnel expenses 8 (318188) (328.587) Depreciation and amortization 9 (136,259) (136.651) Other expenses 10 (72,664) (70.497) Value adjustment 11 (20.332) (1.635) Provisions 12 (24.504) (9.973) Operating expenses (890.421) (858.958) Profit from operating activities 8.746 18.462 Finance income 7.070 4.059 Finance costs (11,329) (16,995) Net finance costs 13 (4.259) (12.936) TOTAL REVENUE 906.237 881.479 TOTAL EXPENSES (901.750) (875.953) PROFIT BEFORE TAX 4.487 5.526 Income tax 14 0 0 PROFIT FOR THE YEAR 4.487 5.526 Other comprehensive income 0 0 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 4.487 5.526 The accompanying notes form an integral part of these annual consolidated financial statements. 10 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB CONSOLIDATED STATEMENT OF FINANCIAL POSITION / CONSOLIDATED BALANCE SHEET as at 31 December 2018 31.12.2017, 1.1.2017. POSITION Notes 31.12.2018. restated restated HRK'000 HRK '000 HRK'000 ASSETS Intangible assets 15 13.288 4.097 4.688 Property, plant and equipment 16 1.789.027 1 818.449 1.906.410 Investment property 17 35,070 36.981 38.892 Financial assets 18 27.962 27.299 29862 TOTAL NON-CURRENT ASSETS 1,865.347 1.886.826 1.979.852 Supplies 19 45.457 53.996 31.105 Trade receivables 20 43.645 44.370 45.846 Receivables from employees 21 5.553 5.562 5.501 Receivables from the state and other institutions 22 12.269 12.769 6.398 Other claims 23 905 109 1.036 Financial assets 60 142 90.109 Cash and cash equivalents 24 85.707 87.808 60.718 Prepayments and accrued income 25 4.070 4.510 4.278 TOTAL CURRENT ASSETS 197.666 209.266 244.991 TOTAL ASSETS 2.063.013 2.096.092 2.224.843 OFF-BALANCE SHEET RECORDS 36 2.265.647 2.617.868 347.979 CAPITAL I RESERVES Share (subscribed) capital 872.367 872.367 872.367 Accumulated loss (91.252) (96,710) (96.983) Profit for the year 4.487 5.526 (98) TOTAL CAPITAL AND RESERVES 26 785.602 781.183 775.286 Provisions 29 108.205 100.802 119.183 Long-term liabilities 28 425.913 388.817 369.879 Liabilities for loans, deposits and etc. 29 770 1.067 1.323 Liabilities to banks and other financial institutions 30 22-474 21.149 121.830 Commitments for advances 203 1.766 2.898 Commitments towards suppliers 31 90.925 98.090 81.319 Liabilities to employees 32 19.540 16.447 18.644 Liabilities for taxes, contributions and similar charges 33 12.346 12.487 14.164 Other obligations 34 31.139 40.901 22.840 Deferred payment and future period revenue 35 565.896 633.383 697.477 Short-term liabilities 743.293 825.290 960.495 TOTAL CAPITAL AND LIABILITIES 36 2.063.013 2.096.092 2.224.843 OFF-BALANCE SHEET RECORDS 28 2.265.647 2.617.868 347.979 The accompanying notes form an integral part of these annual consolidated financial statements, 11I H± PUTNICKI PRIJEVOZ d.o.o., ZAGREB CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2018 - indirect method 2018. 2017. HRK'000 HRK '000 Cash flow from operating activities Profit before taxation 4.487 5.526 Depreciation 136.259 136.651 Impairment 20.332 1.635 Provisions 24.504 9.973 Interests expenses (76.043) (75.788) Interests income 11.328 16.995 Changes in inventories (1.666) (3,026) Changes in receivables from related companies (8.174) (7.717) Changes in trade receivables 8.559 (23.325) Changes in receivables from the state and other institutions (874) 965 Changes in other receivables 9 (61) Changes in liabilities to the related companies 1.031 (5.353) Changes in liabilities for deposits and guarantees (1,327) (91) Changes in liabilities for prepayments 440 (232) Changes in trade payables (1.266) (1.132) Changes in liabilities to the employees (7.165) 16.771 Changes in liabilities for taxes and contributions 3.093 (2.196) Changes in other short-term liabilities (141) 1,677 Other increases or decreases in working capital (9.762) (18.117) Changes in future period revenue and deferred costs 8,556 11.694 Use of provisions 8.926 8.965 Interests paid (11.328) (16.995) Interests collected 1.667 3.026 Net cash flow from operating activities 111.445 59,845 Cash flow from investing activities Inflows from sale of long-term tangible and intangible assets 562 760 Inflows from deposits 0 89.967 Other inflows from investing activities 0 2.563 Expenditure for financial assets (581) 0 Expenditure for n advances given for property (61.518) (5.312) Expenditure for the acquisition of tangible and intangible assets (95.490) (43.942) Net cash flows from investing activities (1 57.027) 44.036 Cash flow from financing activities Inflows from loans 67.732 42.740 Outflows for loan repayments (24.183) (119.472) Distribution of profit to the budget of the Republic of Croatia (68) (59) Net cash flows from financing activities 43.481 (76.791) TOTAL NET CASH FLOW (2.101) 27.090 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 87.808 60.718 CASH AND CASH EQUIVALENTS AT THE END OF PERIOD 85.707 87.808 DECREASE I INCREASE IN CASH AND CASH EQUIVALENTS (2.101) 27.090 The accompanying notes form an integral part of these annual consolidated financial statements. 12 H2 PUTNICKI PRIJEVOZ d.o.o., ZAGREB CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018 Share Accumulated Profit for the D E S C R I P T I0 N capital loss current year TOTAL HRK'000 HRK '000 HRK'000 HRK '000 Balance on 31 December 2016 872.367 (88.349) (98) 783.920 Correction of an error of previous period 0 (8.634) 0 (8.634) Balance on 31 December 2016 (restated) 872.367 (96.983) (98) 775.286 Transfer losses for the period 2016 0 (98) 98 0 Additions 0 430 0 430 Reduction 0 (59) 0 (59) Profit for the current year 0 0 5526 5.526 Balance on 31 December 2017 (restated) 872.367 (96.710) 5.526 781.183 Profit transfer for the period 2017 0 5.458 (5.458) 0 Payment of profit to the budget of the Republic of Croatia 0 0 (68) (68) Profit for the current year 0 0 4.487 4.487 Balance on 31 December 2018 872.367 (91.252) 4.487 785.802 The accompanying notes form an integral part of these annual consolidated financial statements '13 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 1. GENERAL INFORMATION 1.1. Legal frame, activities and employees H2 PUTNICKI PRIJEVOZ d.o.o., Zagreb ("the Company") was founded on 30 August 2006 pursuant to the Law on the division of the company H2 HRVATSKE 2ELJEZNICE d-o.o. Zagreb and registered with the Commercial Court in Zagreb under company subject number 080590508 and personal identification number 80572192786. The Company's headquarters are in Zagreb, Strojarska cesta 11. As at 31 December 2018 the registered share capital amounts to HRK 872,367 thousand (as at 31 December 2017 same amount). The founder and sole owner of the Company is the Republic of Croatia. By a decision of the Commercial Court in Zagreb as of 19 January 2016, the Company's share capital was increased from HRK 75,627 thousand by the amount of HRK 796,740 thousand to HRK 872,367 thousand pursuant to the Company's General Assembly decision on the increase of the share capital as of 21 December 2015. The Company is parent company of the Group H2 PUTNIOKI PRIJEVOZ ("the Group") and is registered for the transport of passengers in domestic and international railway traffic. The Group consists of the Company and its subsidiary, as follows: 2018 2017 Share of the Share of the Company Company in in ownership and voting ownership and voting rights (%) rights (%) Tehni6ki servisi 2eljezni6kih vozila d.o.o., Zagreb 100% 100% 1.2. Employees As at 31 December 2018 the Group had 2.516 employees (31 December 2017: 2.638 employees). The structure of the employees by qualification level is presented below; DESCRIPTION 31.12.2018 31.12,2017, Ph,D. 1 1 Master's degree 10 10 University degree 182 194 Bachelor 110 118 High school education 1.821 1.894 Low-skilled qualification 73 30 High skilled workers 29 1 Skilled workers 103 111 Semi-skilled workers 11 11 Unskilled workers 178 268 Total 2.516 2.638 14 H± PUTNIdKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 1.3. Governance and management Bodies of the Company are the General Assembly, Supervisory Board and the Management Board. As the founder, the Republic of Croatia exercises its rights in the General Assembly through the Croatian Government and competent ministry. The Supervisory Board has four members. The Management Board has three members appointed by the General Assembly. The Supervisory Board Irena Gerovac Zrni6 president since 8 April 2019, member since 28 March 2019 Gordan Han-ek deputy chairman since B April 19, member since 28 March 2019 Tomislav Dru2ak member since 28 March 2019 Zdeslav Milas member since 28 March 2019 Dalibor Petrovib member since 2 February 2015 until 2 February 2019 Snje2ana Josipovi6 president since 28 June 2013 until 28 June 2017 Dalibor Obradovi6 deputy chairman since May 19, 2016 until June 28, 2017 Hrvoje Livaja member since 7 January 2014 until 7 January 2018 The Management Board Zeljko Uki6 president of the Management Board since 2 October 2017 Mladen Lugari6 member of the Management Board since 2 October 2017 Damir Rub6i6 member of the Management Board since 2 October 2017 The compensations to the Company's Management Board and the Supervisory Board members are disclosed in the notes 8 and 10 to the annual consolidated financial statements. 1.4. Subsidiaries As at 31 December 2018 the Group had the following subsidiaries: Share in the SUBSIDIARY capital (%) Basic activity Subsidiaries - Group Tehni6ki servisi ieljezni6kih vozila d.o.o., Zagreb 100 Railway vehicles maintenance cleaning services Subsidiary over which the Group has no control Tvornica teljezni6kih vozila Gredelj d.o.o. in Manufacturing, reconstructing bankruptcy, Zagreb 100 and modernizing railway vehicles Proizvadnja-Regeneracija d.o.o. in bankruptcy Zagreb 77 15 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1. Statement on Compliance and basis of the presentation The consolidated financial statements of the Group for the year 2018 are prepared in accordance with the Accounting Act (Official Gazette 78/15, 134/15, 120/16 and 116/18) and the International Financial Reporting Standards ("IFRS") in force in the European Union. In addition to the consolidated financial statements, the Company also prepares separate financial statements. These consolidated financial statements that have been prepared in accordance with the Accounting Act should be read in conjunction with the separate annual financial statements available in the register of annual financial statements 2.2. Basics of measurement The annual consolidated financial statements have been prepared by the application of basic accounting presumption of the business event inception upon which the effects of operations are recognized when arisen and are shown in the financial statements for the period to which they relate and with the basic accounting presumption of the going concern. The consolidated financial statements are prepared on a historical cost basis, with the exception of financial assets and financial liabilities that are stated at fair value in accordance with IFRS 9 "Financial Instruments". 2.3. Basis for Consolidation The consolidated financial statements consist of the financial statements of the Group and the financial statements of companies controlled by the Group (subsidiaries). The Group has control in those companies in which it has the power to govern the financial and operating policies of the investee company in order to reap the benefits of its operations. All significant transactions and balances between Group companies are eliminated on consolidation. 2.4. Functional and reporting currency The consolidated financial statements of the Group are prepared in Croatian kuna as the functional and reporting currency of the Group. The consolidated financial statements are presented in thousands of Croatian kuna ('000 HRK'), which, since this is the currency in which most of the Group's business events are reported, is also the functional currency of the Group. At 31 December 2018 the exchange rate for I USD and I EUR was HRK 6.47 or HRK 7.42 (31 December 2017: HRK 6.27 or HRK 7.51). 16 H2 PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUTING POLICIES - continued 2.5. Adoption of new and revised international financial reporting standards (IFRS) Standards and interpretations in force in the current period The following new standards and amended existing standards issued by the International Committee for Accounting Standards and Interpretations issued by the International Financial Reporting Interpretation Committee and adopted in the European Union are effective for the current period: * IFRS 9 Financial Instruments: Classification and Measurement The Standard is effective for annual periods beginning on or after 1 January 2018, with earlier use being allowed. IFRS 9 "Financial Instruments" reflects all phases of a financial instrument project and changes lAS 39 Financial Instruments: Recognition and Measurement as well as all prior versions of IFRS 9. The Standard introduces new requirements for classification, measurement, impairment and hedge accounting. The Management Board adopted this standard with the effective date and its application did not have a significant impact on the Group's financial statements. * IFRS 15 Revenue from contracts with customers The Standard is effective for annual periods beginning on or after 1 January 2018. The standard introduces a five-step model that will apply to revenues generated under customer contracts (with limited exceptions), regardless of the type of income transaction or industry. The Standard requirements will also apply to the recognition and measurement of gains and losses on the disposal of some non-financial assets that are not part of the Group's regular activities (for example, the sale of property, plant and equipment or intangible assets). Extensive disclosures will be required, including disaggregation of total revenue; information on the obligations execution; changes in the amount of contract assets and liabilities between periods and key estimates and judgments. The Management Board adopted a standard with the effective date and its application did not have a significant impact on the Group's financial statements. * 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 intent 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 Group 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. The Clarification has not yet been adopted in the European Union. 17 H2 PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUTING POLICIES - continued 2.5 Adoption of new and revised international financial reporting standards (IFRS) - continued Standards and interpretations effective in the current period - continued Amendments and supplement to [AS 40: Transfer of Investment property Amendments shall be effective for annual periods beginning on or after 1 January 2018, with earlier implementation permitted. Supplements clarify at which point the Group should transfer real estate, including real estate under construction to or from investment property. Amendments state that change in the manner of use arises when the property meets or ceases to meet the definition of investment property and there is an evidence of a change. The change of the management's intention to use the property itself does not give evidence of manner of use. These Amendments have not yet been adopted in the European Union. * Amendments to IFRS 2: Classification and measurement of share-based payment 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. IFRIC 22: Foreign currency transactions and prepayments The Interpretation is in effect for the annual periods beginning on or after January 1, 2018, with earlier implementation permitted. The Interpretation clarifies the accounting treatment of transactions involving the receipt or payment of the prepayments in the foreign currency. The Interpretation applies to foreign currency transactions in which a company recognizes a non-cash asset or a non-cash obligation arising out of the payment or receipt of prepayments before the company recognizes the relevant assets, expenses or income. The Interpretation states that the transaction date for the purpose of determining the exchange rate takes the date of initial recognition of non-monetary assets (prepayments) or deferred income (liabilities). In cases where there are multiple payments or the receipt of prepayments, the company must determine the date of the transaction for each payment. Standards and interpretations adopted by the Board, which are not yet in effect and which had not been already adopted by the Company IFRS 16 Leases The standard is in effect for the annual periods beginning on or after January 1, 2019. IFRS 16 defines the rules for recognition, measurement, presentation and disclosure for the leases from the aspects of both parties, i.e. the buyer (the "lessee") and the supplier (the "lessorl) In accordance with the new standard, the lessees need to recognize most of the leases in their financial statements. A single accounting model will be applied to all leases, with certain exceptions. Accounting treatment of leases by the lessor will not be significantly altered. Management of the Company has decided not to apply new standard for leases retroactively completely but to use directive on exemption for lessee. During the transition to the new standard, the obligation to pay on the basis of existing operating leases will be discounted using appropriate incremental borrowing rate and will be recognized as a liability for rent. The property with right of use will display the amount of the lease obligation adjusted for the amount prepaid or accrued payment for rent. 18 H± PUTNICKI PR1JEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACC OUTING POLICIES - continued 2.5. Adoption of new and revised international financial reporting standards (IFRS) - continued 0 IFRS 16 Leases (continued) Based on the current management estimate, the Company expects that the transition to the new standard as of 1 January 1 2019 will have the following effects: - Increase of assets with right of use for approximately HRK 1,088 thousand - Increase of liabilities by approximately HRK 1,088 thousand * Long-term interests in associates and joint ventures (Amendments to the ]AS 28) The Amendments shall be in effect for the annual periods beginning on or after January 1 2019, with earlier implementation permitted. The Amendment clarifies that an entity applies IFRS 9, including its impairment requirements, 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 adopted in the European Union. * IFRS 17: Insurance contracts The Standard is effective for annual periods beginning on or after 1 January 2021. Ea rlier appl ication is perm itted if I FRS 15 Revenues from C ustom er Agreem ent and IEFRS 9 Financial Instruments have been applied. IFRS 17 Insurance contracts establish principles for recognition, measurement, presentation and disclosure of insurance contracts within the scope of the Standard. The purpose of IFRS 17 is to ensure that the entity provides relevant information that faithfully represents such contracts. These data provide the basis for the users of the financial statements to assess the effect of the insurance contract on the financial position, financial result and the cash flows of the entity. This interpretation has not yet been adopted in the European Union. * Prepayment features with negative compensation (Amendments to the IFRS 9) The Amendments shall enter into force for annual periods commencing on or after 1 January 2019 with earlier implementation permitted. Existing requirements in IFRS 9 related to cancellation rights to allow measurement at amortized cost (or, depending on the business model, at fair value through other comprehensive income) even in the case of negligence. * Long-term interests in associates and joint ventures (Amendments to the [AS 28) The Amendments shall be in effect for the annual periods beginning on or after 1 January 2019 with earlier implementation permitted. The Amendment clarifies that an entity applies I FRS 9, in cl uding its im pairment req u irem ents, to long-term i nterests. i n a n associ ate 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 adopted in the European Union. H± PUTNI6KI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2.6. Use of estimates and judgments The preparation of consolidated financial statements in accordance with IFRS requires Management to make judgments, estimates and assumptions that affect the applied policies and disclosed amount of assets and liabilities, revenue and expenses. The estimates and underlying assumptions are based on historical experience and various other factors that are considered to be reasonable in the circumstances, the results of which is starting point for estimating the carrying values of assets and liabilities that can't be obtained from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods. Judgments made by Management in the application of IFRS that have significant effect on the consolidated financial statements and estimates with a high risk of materially significant corrections in the next periods are disclosed in Note 2.25. Key accounting estimates and judgments. 2.7. Revenue recognition a) Revenue from the passenger tickets sale Revenues realized in the Group relate to the services provided to the passenger and other services related to railway traffic. Revenue recognition in accordance with IFRS 15 is based on the principle of recognition of revenue when control over a product or service is transferred to customers. Revenue generated by providing services is recognized in the amount expected as a fee as soon as the transfer of control over the services is performed. Passenger services provided by the Group are typically executed within a few hours / days. Revenues from the passenger tickets sale are recorded as income in the period of the transport service. The transaction price is the amount of contractual remuneration that the Group expects to be entitled to in return for the promised merchandise or customer service. Revenues are stated in amounts deducted for value added tax, estimated returns, rebates and discounts. According to the above, revenue recognition takes place at the same time as lAS 18 - Revenue was effective and no significant irnpact of IFRS 15 Revenue from contract with customers is determined. b) Income from state aid Government grants in the form of direct financial support under public service contracts (PSOs) for services of general economic interest in public rail transport without any additional related conditions, are recognized as part of other income in the statement of comprehensive income for the period in which they were received. State aid is recognized when there is sufficient assurance that the Group will meet the conditions and that the aid will be received. 20 H2 PUTNIdKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.7. Revenue recognition (continued) State aids are recognized in the income statement on a systematic basis over the period in which the Group's related costs are recognized as expense for which the coverage of the aid is intended. Government grants associated with tangible assets which is being amortized are recognized in profit or loss in the periods and in amount of the depreciation charge is recognized. Government grants associated with non-amortized assets are recognized in profit or loss over the periods in which they are incurred, i.e. the expected useful lives of such assets. Claims for state support to offset expenditures or losses already incurred or to provide current financial support to the Group without future related costs are recognized as revenue for the period in which the claim arises. c) Revenues from the sale of services If the conditions that the amount of revenues can be measured reliably and there is possibility that Group will receive a fee are met the service revenues are recognized in the period in which they are provided. The revenues from service contract is recognized in relation to the level of performance of a contract. The levels of performance of a contract are as follows: * the services performed are recognized in relation to the level of execution, determined as a percentage of the time spent over the balance sheet date, in relation to the total planned time; * maintenance fees included in the price of the sold product are recognized in proportion to the share in the total cost of maintaining the sold product, taking into account the number of previous maintenance services for previously sold products; and * contract revenue based on time and material expense is recognized at agreed prices in the period in which the hours worked and in which direct costs were incurred. d) Interest Income Interest income is deferred on a timely basis, on the basis of unpaid principal and at the applicable effective interest rate, which accurately discounts estimated future cash receipts through the expected life of the financial instrument or the net book amount of financial assets. Interest income is recognized as a financial income in the income statement. e) Lease income Income from operating leases is calculated on a straight-line basis over the lease term. f) Dividend income and profit share Dividend income and profit share are recognized when the right to dividend and profit is established. 21 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.8. Operating expenses Operating expenses are recognized in profit or loss on the basis of the direct link between the costs incurred and the specific income item. Confronting revenue expenditures involves simultaneous or combined recognition of revenue and expense arising directly or jointly from the same transactions or other events. Expense is recognized immediately in the income statement when an expenditure does not generate future economic benefits or in proportion and which future economic benefits are not such that they qualify for recognition in the balance sheet as assets. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Other borrowing costs are recognized as expense, 2.9. Foreign currency transactions Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss. Non-monetary assets and items that are measured based on historical cost in a foreign currency are not translated using new exchange rates. Non-monetary assets and liabilities that are measured based on a historical cost in a foreign currency are translated using the exchange rate at the date of transaction. 2.10. Intangible assets Non-current intangible assets include software and leasehold improvements regarding rights of usage and are capitalized to the extent that future economic benefits are probable and will flow to the Group. Subsequent expenditure on capitalized intangible assets is capitalized only if it is probable that it increases the future economic benefits embodied in the specific asset to which it relates and those benefits will flow to the Group. All other expenditure is recognized in the profit or loss as an expense as incurred. Amortization is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets, Intangible assets are amortized from the date on which they are available for use. The estimated useful lives of intangible assets are as follows: Software 5 years Leasehold improvements regarding rights of usage 5 -10 years 22 H2 PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.11. Property, plant and equipment Property, plant and equipment are stated at cost less for accumulated depreciation and accumulated impairment losses, if any. Cost includes the purchase price and directly associated cost of bringing the asset to a working condition for its intended use. Assets under construction are not depreciated. Depreciation of the property, plant and equipment is calculated using a straight-line method for the purpose of allocating the cost of that asset over its estimated useful life as follows: 2018. 2017. Buildings 10 - 50 years 10 - 50 years Plant and equipment 2 - 20 years 2 - 20 years Transport vehicles 20 - 50 years 20 - 50 years Tools and plant inventory 4 -10 years 4 -10 years Other tangible assets 10 years 10 years The estimated useful life is reviewed at each reporting date and adjusted if appropriate. if the carrying amount of the asset exceeds the estimated recoverable amount, the difference is written off to the recoverable amount. Gains and losses on disposals are determined as the difference between the income from the disposal and the carrying amounts of the asset disposed, and are recognized in profit or loss within other income/expenses. Subsequent expenditure is included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the Statement of comprehensive income during the financial period in which they are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond its originally assessed standard performance, the expenditures are capitalized as an additional cost of property, plant and equipment. Costs eligible for capitalization include costs of periodic, pre- planned significant inspections and overhauls necessary for further operation. 2.12. Investment property Property investments include properties that is held for rent by renting or increasing their market value or for both purposes. Built-in equipment is considered to be an integral part of investment property. The cost of the purchase includes all costs directly linked to the acquisition of that property. Investments in real estate, i.e. construction, are classified as fixed assets until they are ready to be used. The Group uses a cost model for all investments property when re-measuring investment properties. 23 HZ PUTNIdKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.12. Investment property (continued) Amortization is calculated using the straight-line method for the purpose of allocating the cost of that asset over its estimated useful life as follows: Estimated useful life of use (years) 2018. 2017. Investment property 10-50 10-50 Subsequent expenditure for investment property is capitalized only if it is probable that it increases the future economic benefits embodied in the specific asset to which it relates and it can be reliably measured. Regular maintenance expenditure is recognized in income statement as an expense as incurred. Costs of replacing an item of property investment are recognized in the carrying amount of this asset if it is probable that the future economic benefits included in that item will flow to the Group and their value can be measured reliably. The costs of regular maintenance of real estate investments are recognized in the income statement as they arise- An investment property is derecognized upon disposal or when the investment property is permanently withdrawn from use as well as when no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognized. 2.13. Impairment of non - financial assets At each reporting date, the Group reviews the carrying amounts of its non-financial assets (apart from inventory and deferred tax assets which are separately reviewed) to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined net of depreciation or amortization had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. 24 H± PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.14. Investments in related companies (i) Subsidiaries Subsidiaries are all related companies over which the Group has control over financial and business policies, which usually includes more than half of the voting rights. The existence and effect of potential voting rights that can be used or exchanged, are considered when assessing whether the Group has control over other business. Investments in subsidiaries are initially recognized at cost, and subsequently at cost less impairment. Investments in subsidiaries for impairment are carried out on an annual basis. (ii) Associated companies Associated companies are those in which the Group has significant influence, but has no control, which usually includes 20% to 50% of the voting rights. Investments in associates are initially recognized at cost and at cost less impairment. Testing of investments in associates for impairment is carried out on an annual basis. 2.15. Financial assets The Group has adopted IFRS 9 - Financial Instruments as at 1 January 2018 and its application has not had a significant impact on the Group's annual financial statements. The Group recognizes financial assets in its financial statements when it becomes party to the contractual provisions of the instrument. Depending on the business model for asset management and contractual features of financial flows, the Group measures financial assets at amortized cost, fair value through other comprehensive income or fair value through profit or loss. The Group classifies assets as shown below: DESCRIPTION Classification / measurement Non - current assets Financial assets at fair value through profit or loss Equity instruments I fair value through profit or loss Current assets Cash and cash equivalents (deposits) Hold to collect I amortized cost Receivables from customers and other receivables Hold to collect I amortized cost The business model reflects the way in which the Group manages assets to realize cash flows - whether the Group's objective is (i) solely the collection of contractual cash flows from assets ('holding due to contractual cash flows') or (ii) cash flows and cash flows arising from the sale of assets ("hold due to contractual cash flows and sales"), and if none of the points above are applicable, financial assets are classified as part of another business model and are measured at fair value through profit or loss. 25 H± PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.15. Financial assets (continued) i) Financial assets through profit or loss initial recognition The Group recognizes a financial asset or liability when and only when it becomes a party to the contractual provisions of the instrument. Instruments are classified at fair value through profit or loss if the Group holds them for trading or are designated as such at initial recognition. Financial instruments are designated at fair value through profit or loss if the Group manages these investments and makes decisions about their purchase and sale on the basis of their fair value. At initial recognition, direct transaction costs are recognized in profit or loss at the time they arise. Subsequent measurement Financial instruments classified at fair value through profit or loss are measured at fair value and changes are recognized in profit or loss. With the application of the new IFRS 9 standard, all investments in equity instruments are presented at fair value through profit or loss. ii) Loans The Group loans are held within a business model whose purpose is to hold a financial asset in order to charge contractual cash flows. Contractual terms at a particular date are cash flows that represent only payments of principal and interest. At that, the principal is the fair value of the asset at initial recognition. Based on the above, the given loans are measured at amortized cost. Measurement at amortized cost implies that interest income is calculated using the effective interest rate and applied to the gross book value of the asset at the calculation. iii) Trade receivables Receivables from customers that do not have a significant financial component at initial recognition have been measured in accordance with IFRS 15 at their transaction price. iv) Impairment The Group recognizes a loss allowance for expected credit losses. At each reporting date, the Group measures expected credit losses and recognizes the same in the financial statements. Expected credit losses from financial instruments are measured in a manner that reflects: - an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes - Time value of money - Reasonable and supportable information about past events, current conditions and forecasts of future economic conditions Regarding trade receivables, the Group applies a simplified approach allowed by IFRS 9 to measure expected credit losses by using expected provisions for credit losses. To measure anticipated trade receivables losses, the Group has by analyzing the age structure and historical data determined potential future losses. 26 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For theyear ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.15. Financial assets (continued) v) Derecognition of financial assets The Group ceases to recognize financial assets when; - Contractual rights has been expired - It transfers financial assets and the transfer is subject to conditions for termination of recognition The Group transfers financial assets if and only if, or: (a) transferring contractual rights (b) retain contractual rights to receive cash flows from a financial asset but assumes a contractual obligation to pay cash flows to one or more recipients in the arrangement. When the Group transfers financial assets, it is required to estimate the extent to which it retains the risks and rewards of ownership of the financial asset. In this case, when all risks and rewards of ownership are transferred, the Group ceases to recognize financial assets and recognizes separately as assets or liabilities all rights and obligations that have arisen or are retained in the transfer. If almost all the risks and rewards of ownership of financial assets are retained, the Group continues to recognize financial assets. vi) Derecognition of financial assets (continued) If the Group neither transfers nor retains all the risks and rewards of ownership of financial assets, the Group determines whether it has retained control of the financial asset or not. If no control over financial assets is retained, the Group derecognizes financial assets and recognizes separately as assets or liabilities all rights and obligations that have arisen or are retained in the transfer. If control is retained, the Group continues to recognize financial assets to the extent that it continues to participate in that financial asset. 2.16. Financial obligations Initial Recognition and Measurement Financial liabilities are classified as financial liabilities that are measured at amortized cost. All financial liabilities are initially recognized at fair value plus the associated transaction costs. The Group's financial liabilities include liabilities to suppliers and other liabilities, overdrafts and loans. Subsequent measurement After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest rate method. Borrowing costs that can be directly linked to the acquisition, construction or production of a qualifying asset, a means that necessarily requires a considerable amount of time to be ready for intended use or sale, are attributed to the cost of purchasing that asset until the asset is largely available intended use or sale. Borrowings are classified as short-term liabilities unless the Group has the unconditional right to postpone the obligation to pay at least 12 months after the reporting date. Short-term lending and supplier loans are shown on the original borrowed amount deducted by repayments. The interest expense is charged to the profit and loss account for the period in which the interest relates. 27 H2 PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.16. Financial obligations (continued) Derecognition The Group ceases to recognize the liability in the financial statements when and only when the obligation has been settled. When the existing financial liability is replaced by another by the same creditor under substantially different terms or the terms of the existing obligations have changed significantly, such change or modification is treated as termination of the original obligation and recognition of the new liability, and the difference in the corresponding carrying amounts is recognized in the profit and loss account. 2.17. Inventories Inventories are stated per cost and net realizable value, depending on which is lower. The cost of inventories comprises all purchase costs, the cost of conversion and other costs that have been incurred in bringing the inventories to their present location and condition. The net realizable value represents the estimated selling price during the normal course of operations minus all estimated costs of completion and necessary costs to be incurred in selling. If the value of inventories is higher than the estimated net selling price, an allowance is created and charged to the Comprehensive Income Statement for the current year. Small inventories, packing and car tires are written off by 100% at the moment they are put into use. 2.18. Cash and cash equivalents Cash and cash equivalents include cash on account and in cash register and they are stated in the balance sheet. The book values of cash and cash equivalents are generally approximate to their fair values. For the purpose of reporting cash flows, cash and cash equivalents comprise cash and deposits with banks with maturities up to three months. 2.19. Accounting lease of leases - the lessee is the Group Leased assets, where the Group accepts almost all the benefits and risks of ownership are classified as finance leases. Financial leases are capitalized on the estimated current value of the corresponding lease payments. Each lease payment is classified in the liabilities and financial expenses in order to obtain a constant rate on the remaining financial condition. The related lending obligation, less any financial expense, is recognized as a liability for long-term liabilities. The interest component of financial expense is charged to profit or loss during the lease period. Assets acquired under a finance lease are amortized over the useful life of the asset. Leases of property in which the benefits and risks of ownership are retained by the lessor are classified as operating leases. Payments based on operating leases are charged to profit or loss on a straight-line basis over the lease term. If a business lease expires prior to the expiry of the lease term, all payments to the lessor in the form of a penalty are recognized as an expense within profit or loss for the period in which the lease expires. 28 H± PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.20. Employee benefits (i) Pensions obligations and post-employment benefits In the normal course of business through salary deductions, the Group makes payments to the mandatory pension funds on behalf of its employees as required by law. All contributions made to the mandatory pension funds are recorded as salary expense when incurred. The Group is not obliged to provide any other post-employment benefits with respect to these pension schemes. This obligation applies to all staff hired on the basis of employment contract. The contributions are paid at a certain percentage determined on the basis of gross salary. Contributions on behalf of the employees and the employer are accounted for as the expense for the period in which they arise. 2018. 2017. Contribution to pension insurance 206/o 20% Contribution to health insurance 15% 15% Employment fund contributions 1,7% 1,7% Occupational injury 0,5% 0.5% (ii) Termination benefits Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits as expenses when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. (iii) Regular retirement benefits Retirement benefits falling due more than 12 months after the reporting date are discounted to their present value based on the calculation performed at each reporting date by an independent actuary, using assumptions regarding the number of staff likely to earn regular retirement benefits, estimated benefit cost and the discount rate which is determined as average expected rate of return on investment in government bonds of the Republic of Croatia which are quoted on the market and their currency and maturity dates are in accordance with currency and estimated duration of liabilities for the benefit payment. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized immediately in profit or loss. Based on the currently valid collective agreement, retired workers are entitled to a regular severance pay in the amount of HRK 8,000. (iv) Long-term employee benefits The Group recognizes the obligation to long-term employee benefits (jubilee awards) equally in the period in which the award was made based on the actual number of years of service. The reward for long-term work is from 1.500 to 5.000 HRK net for working in the Group from 10 to 40 years of continuous employment with the employer. The long-term employee benefit obligation is measured by an independent actuary at the end of each reporting period using the assumptions on the number of employees to which benefits should be paid, the estimated cost of benefits and the discount rate as the average expected return on investment in government bonds. Actuarial gains and losses arising from compliance and changes based on experience in actuarial assumptions are immediately recognized in profit or loss. 29 H± PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.21. Provision Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. Provisions are made for litigations, regular retirement benefits and jubilee awards and termination benefits. 2.22. Taxation (i) Income Tax The Income tax expense consists of current and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Taxable profit differs from profit as reported in the income statement 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 Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. (ii) Value Added Tax (VAT) The Tax Authorities requires VAT settlement on a net basis. VAT resulting from sales and purchase transactions is recognized and reported in the statement of financial position on a net basis. In the case of impairment of receivables, the impairment loss is recognized in the gross amount of receivables, including VAT. 2.23. Contingent liabilities and assets Contingent liabilities are not recognized in the financial statements but are only disclosed in the notes to the annual financial statements. Potential assets are not recognized in the annual financial statements, yet are recognized at the time when inflow of economic benefits becomes probable. 2.24. Events after the Date of the Consolidated Statement of financial position I Consolidated Balance sheet Events which occur after the date of consolidated Statement of financial position I consolidated Balance sheet that provide additional information about the Group's position on the date of consolidated Statement of financial position / consolidated Balance sheet (adjusting events) are reflected in the annual consolidated financial statements. Post-year-end events that are not adjusting events are disclosed in the notes to the annual consolidated financial statements when material. HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.25. Key accounting judgement and estimates During the preparation of the Group's consolidated annual financial statements, the Board used certain estimates and assumptions that affect disclosed income, expense, assets and liabilities and disclosure of contingent liabilities during and on the reporting date. However, the uncertainty associated with these assumptions and estimates can result in significant changes in the carrying amount of the related assets or liability in future periods. Key assumptions related to the future and other key sources of uncertainty on the date of the consolidated Statement of financial position that bear significant risk of significant changes in the carrying amounts of assets and liabilities in the following financial years are as follows: The preparation of consolidated financial statements in accordance with IFRS requires the Management to make judgments, estimates and assumptions that affect the application of policies and amounts disclosed for assets, liabilities, income and expenses and disclosure of contingent liabilities. Actual results may differ from such estimates. The estimates and underlying assumptions are reviewed on an ongoing basis, Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods. (i) Useful lives of property, plant and equipment Determining the useful life of an asset is based on historical experience with similar assets as well as anticipated technological development. The suitability of the estimated useful life is considered annually, or whenever there are indications of significant changes in assumptions. We believe that this is an important accounting estimate, as it includes the assumptions about technological development and significantly depends on the Group's investment plans. Furthermore, given the significant share of Group's depreciable assets in total Group's assets, the impact of major changes in these assumptions could be significant for the financial position and results of the Group's business. In the course of 2018, there was no change in the estimated life of the property, plant and equipment or depreciation rate. (ii) The recoverability of trade and other receivables The recoverable amount of trade and other receivables is estimated at present value of future cash flows discounted at the market interest rate at the measurement date. Short-term receivables with no stated interest rate are measured by the amount of original invoice if the effect of discounting is not significant. (iii) Recoverability of inventories The Group performs a value adjustment of inventory by age structure. In the year 2018 due to sales of slow moving and obsolete inventory, the Group reduced the value adjustment of inventories by HRK 13,391 thousands. (iv) Actuarial estimates used for calculation of retirement benefits The cost of defined benefits is determined using actuarial estimates. Actuarial estimates involve assumptions about discount rates, future salary increases and the mortality or fluctuation rates. Due to the long-term nature of those plans, these estimates contain an element of uncertainty. 31 HZ PUTNIdKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)) 2.25. Key accounting judgement and estimates (continued) (v) Consequences of certain court disputes The Group is a party to numerous court disputes arising from regular business. Provisions are recorded if there is a present obligation as a result of the past event (taking into account all available evidence including the opinion of legal experts) where it is likely that settlement of the obligation would require a resource outflow and if the amount of the liability can be reliably estimated (see notes 12 and 29). (vi) Ownership of land and buildings The Group has recorded real estate for which the process of determining and registering ownership rights has not been fully resolved. The Group acquired the majority of real estate in the division process of the Hrvatske ±eljeznice d.o.o. With this division, the Hrvatske 2eljeznice d.o.o. was divided into 5 companies: HZ Holding d.o.o., HZ Vu6a vlakova d.o.o., H2 Infrastruktura d.o.o., H2 Putni6ki priejvoz d.o.o. and H2 Cargo d.o.o. Later the company HZ Holding d.o.o. merged with the company HZ Infrastruktura d.o.o., and the company HZ Vu6a viakova d.o.o. was divided and merged with the companies H2 Cargo d.o.o. and H2 Putni6ki prijevoz d.o.o. The division plan also divides assets into companies. Issues related to the real estate status of companies HZ Putni6ki prijevoz d.o.o., H2 Infrastruktura d.o.o. and H2 Cargo d.o.o. is not entirely solved until today. 2.26. Comparative data During 2018, the Group has adjusted the individual positions of the consolidated financial statements relating to the previous periods. The adjustments were made retroactively by restating the annual consolidated financial statements for the previous comparative periods, and the effects are shown below: Consolidated statement of financial position / Consolidated balance sheet Previous condition Change Restated HRK'000 1 January 2017 1 January 2017 13.322 (8-634) 4.688 intangible assets - goodwill Transfer losses (88,349) (8.634) (96.983) An impairment loss of HRK 8,634 thousand was carried out at the expense of the loss incurred. 32 HZ PUTNIdKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 3. SALES REVENUE DESCRIPTION 2018. 2017. HRK '000 HRK '000 Revenue from domestic passenger transportation 172 857 168.905 Revenue from international passenger transportation 33.769 32.774 Revenue from suburban passengers transportation (ZET- H?_PP) 52.733 56,536 Revenue from passenger transportation - specific trains 766 729 Revenue from the sale of goods and material 8.273 9.762 Revenue from the sale of wagon and locomotive maintenance products and services 44.482 49.995 Other sales revenue 197 224 TOTAL 313.077 318.925 4. OTHER OPERATING INCOME DESCRIPT 1ON 2018. 2017. HRK '000 HRK'000 Income from passenger transport incentives 461.700 441.667 Income from the state grants for the modernization of railway vehicles 76.043 75.788 Income from previously adjusted inventories 13.391 894 Income from cancellation of long-term provisions 8.174 19.529 Proceeds from the lease of wagons and locomotives 2.222 1.316 Cost calculation revenue 2.003 1.392 Collected Revenue by Solutions 1.667 101 Income from collection of receivables written off 1.021 1.508 Revenue from damages 924 884 Revenue from fees due to traffic delays 897 532 Income from sale of tangible fixed assets 620 760 Form Revenue 508 2.034 Business premises lease income 419 419 Revenue from the leasing of advertising space 394 224 Other operating income 9.543 3.798 Total 579.526 550.846 5. COST OF RAW MATERIAL 2018. 2017. DESCRIPTION HRK'000 HRK'000 Cost of raw material and material 4.326 10.650 Cost of spare parts 47.485 37.079 Cost of small inventory 2.336 3.012 Energy cost 105.437 101.377 Total 159.584 152.118 33 H± PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 6. COST OF GOODS SOLD Costs of goods sold in the amount of HRK 16.187 thousand (2017. in the amount of HRK 10.371 thousand) relate to the purchase value of goods sold. 7. OTHER EXTERNAL EXPENDITURE DESCR I PTION 2018. 2017. HRK'000 HRK'000 Towing, telephone, postal services and transport cost 13.086 10,282 Outside services in the production and sale of goods and services 10.908 4.152 Ongoing maintenance services 1.640 898 Maintenance Services 25.739 34.093 Rental and leasing services 5.040 6.271 Maneuver and TPV services 7.113 9.944 Route Rental Services (H2 Infrastruktura) 74.191 77.504 Ticket sales services 1.047 1.546 Expenses of propaganda, advertisements, fairs 299 467 Property security services 454 276 Intellectual services 145 236 Utilities 237 1.726 Other external costs 2.760 1.711 Total 142.659 149106 8. STAFF COSTS DESCRIPTION 2018. 2017 HRK'000 HRK 000 Net salaries and wages 189.564 198900 Taxes and contributions from salaries 69.434 69.804 Contributions on salaries 59.190 59.883 Total 318.188 328.587 Total staff costs including employee benefits and employee rights (Note 10) and for the year 2018 amounts to HRK 356,257 thousand (2017: HRK 359,037 thousand). Employee reimbursements consists of transportation costs to and from work, per diems and travel expenses and employee's material rights, of assistance, rewards, gifts, and unused vacation expenses. The Management Board remunerations are as follows: DESCRIPTION 2018. 2017. HRK '000 HRK '000 Net salaries and wages 808 398 Taxes and contributions from salaries 618 278 Contributions on salaries 245 113 Total 1.671 789 34 H± PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 9. DEPRECIATION AND AMORTISATION DESCRIPTION 2018. 2017. HRK'000 HRK'000 Amortization of the intangible assets (Note 15) 2.528 1.684 Depreciation of property, plant and equipment (Note 16) 131.820 133.056 Depreciation of the investments property (Note 17) 1.911 1.911 Total 136.259 136.651 10. OTHER EXPENSES DESCRIPTION 2018. 2017. HRK'000 HRK '000 Reimbursement of cost to the employees 2.808 2.866 Employees material rights 24.467 16.697 Mileage 10.794 10.887 Fines, penalties, compensations and similar 9.873 13.775 IT services - SAP 8.267 7.920 Value of abolished material and inventories write-off 5.156 580 Intellectual services 2.288 6.924 Insurance premiums 1.835 2.265 Travel agency commissions 1.496 1.615 Banking services and payment system costs 1.330 930 IT Services of H2 Infrastruktura d.o.o., Zagreb 717 1.078 Taxes not depending on income and fees 655 758 Scholarship fees 249 330 Compensations to members of the Supervisory Board and Audit Committee 244 380 Representation costs 232 184 Scholarship costs 219 285 Other operating expenses 2.034 3.023 Total 72.664 70.497 11. IMPAIRMENT DESCRIPTION 2018. 2017. HRK'000 HRK '000 Impairment of long-term tangible assets (Note 16) 18,714 689 impairment of inventories 20 435 Impairment of short-term receivables 1.598 511 Total 20.332 1.635 35 H± PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 12. PROVISIONS DESCRIPTION 2018. 2017 HRK'000 HRK'000 Provisions for incentive severance payments 10.041 1,474 Provisions for legal proceedings 13.486 5.652 Provisions for jubilee awards 977 674 Other provisions 0 2.173 Total 24.504 9.973 13. NET FINANCIAL RESULT SCRP O2018. 2017. HRK'000 HRK'000 Financial income Interest income 1.666 3.026 Foreign exchange gains 5.404 1033 Total financial revenue 7.070 4.059 Financial expenses Other financial expenses 0 (195) Interest expense (11329) (16.800) Total financial expenses (11.329) (16.995) Net financial result (4.269) (12.936) 36 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 14. INCOME TAX The Group is a taxpayer, in accordance with the tax laws and regulations of the Republic of Croatia. The tax base is defined as the difference between the income and the expense of the period, increased by tax non-deductible expenditures. The profit tax rate is 18% (2017: 18%). The reconciliation of the income tax is shown as follows: DESCRIPTION 2018. 2017. HRK '000 HRK'000 Consolidation profit before tax 4,487 5.526 Consolidation postings 683 (4927) Accounting profit before tax 5170 599 Tax deductible expenses 44,154 13.840 Tax incentives (13581) (128) Profit after increase / decrease 35.743 14.311 Tax losses transferred from the previous periods (350.292) (364.603) Tax losses that can not be brought forward 313.046 0 Tax loss to be transferred (1.503) (350.292) The Group is able to transfer tax losses to future periods for the purpose of reducing taxable profit for the next five (5) years. As of December 31, 2018, the total carry forward losses were determined to be HRK 1,503 thousand and could be redeemed until December 31, 2022. In accordance with the tax regulations, the Tax Authorities may at any time inspect the books and the records of the Group within a period of three years after the expiration of the year in which the tax liability is reported and may impose additional tax liabilities and penalties. The Management Board of the Group is not aware of any circumstances that could result in a significant potential liability in this respect. 37 H2 PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 15. INTANGIBLE ASSETS - restated Concessions, DESCRIPTION patents, licenses, Goodwill TOTAL other rights HRK'000 HRK'000 HRK'000 Purchase value 31 December 2016 (restated) 39.513 0 39.513 Additions 564 0 564 Transfer from tangible assets under construction 892 0 892 Sales or expenditures (5) 0 (5) 31 December 2017 40.964 0 40.964 Additions 157 0 157 Transfer from tangible assets under construction 11.585 0 11.585 Sales or expenditures (422) (422) 31 December 2018 52.284 0 52.284 Accumulated amortization 31 December 2016 (restated) 34,825 0 34.825 Amortization for 2017 1.684 0 1.684 Transfers 361 0 361 Sales or expenditures (3) 0 (3) 31 December 2017 36.867 0 36.867 Amortization for the year 2018 2,528 0 2.528 Sales or expenditures (399) 0 (399) 31 December 2018 38.996 0 38,996 Net book value 0 31 December 2016 4.688 0 4.688 31 December 2017 4.097 0 4.097 31 December 2018 13.288 0 13.288 38 HZ PUTNI6KI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 16. PROPERTY, PLANT AND EQUIPMENT Tools, plant DES C R I PT I0 N (HRK '000) Buildings Plant and equipment inventories and Other Assets under Prepayments Total transportation construction assets Purchase value 1 January 2017 84.222 61.298 5.838.827 3.185 11.498 6.737 6.005.767 Additions 22 1.665 1.697 0 50,875 5.312 59 571 Transfer from assets under construction 998 0 50.889 0 (54.169) 0 (2.282) Reductions 0 (35) (49) 0 (114) (9.221) (9.419) Sale or disposal 0 (3) (224.795) 0 0 0 (224.798) 31 December 2017 85.242 62.925 5.666.569 3.185 8.090 2.828 5.828.839 Additions 0 614 1.075 0 95.647 61.518 158.854 Transfer from assets under construction 101 0 83.371 0 (83.472) 0 0 Transfer from f to 154 0 (154) 0 0 0 0 Transfer to the intangible assets 0 0 0 0 (11.585) 0 (11.585) Sale or disposal (39) (905) (264.845) 0 (1.198) (24.958) (291.945) 31 December 2018 85.458 62.634 5.486.016 3.185 7.482 39.388 5.684.163 Accumulated depreciation I Impairment 1 January 2017 53.545 57.779 3.985.228 2.805 0 0 4.099.357 Depreciation for the year 2017 1.589 1.294 130.127 0 0 0 133.010 Reduction of value 0 (35) (49) 0 0 0 (84) Transfer from / to 22 716 1,165 0 0 0 1-903 Sale-or disposal 0 (3) (223,793) 0 0 0 (23796) 31 December 2017 55.156 59.751 3.892.678 2.805 0 0 4.010.390 Depreciation for the year 2018 1.588 1.118 129.114 0 0 0 131.820 Transfer from ! to 154 0 (154) 0 0 0 0 Impairment 0 0 18.714 0 0 0 18.714 Sale or disposal (39) (904) (264.845) 0 0 0 (265.788) 31 December 2018 56.859 59.965 3.775.507 2.805 0 0 3.895.136 Carrying amount 1 January 2017 30.677 3.519 1.853.599 380 11.498 6.737 1.906.410 31 December 2017 30.086 3.174 1.773.891 380 8.090 2.828 1.818.449 31 December 2015 28.599 2.669 1.710.509 380 7.482 39.388 1.789.027 39 H2 PUTNIdKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued /il At 31 December 2018, over a significant number of real estates recorded in the business books, the Group does not have a regulated ownership by entering into land registers. The procedure for settlement of the ownership rights is in progress. 17. INVESTMENT PROPERTY Investment property DESCRIPTION HRK '000 Purchase value 1 January 2017 108.170 31 December 2017 108.170 31 December 2018 108.170 Accumulated depreciation 1 January 2017 69.278 Amortization for the year 2017 1,911 31 December 2017 71.189 Amortization for the year 2018 1.911 31. December 2018 73.100 Carrying amount 1 January 2017 38.892 31 December 2017 36.981 31 December 2018 35.070 18. LONG-TERM FINANCIAL ASSETS DES CRI PTI ON 31,12.2018. 31.12.2017. HRK'ODO HRK'000 Financial assets at fair value throuqh profit or loss Eurofima 27.960 27.297 BCC 2 2 27.962 27.299 Other long term Financial assets Tvornica ieljezni6kih vozila Gredelj d.o.o, in bankcrupcy , Zagreb 536.749 536.749 Proizvodnja-Regeneracija d.o.o. in bankcrupcy , Zagreb 15.099 15.099 Minus: Value adjustments (551.848) (551.848) 0 0 Total 27,962 27.299 40 H± PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 19. INVENTORIES DESCRIPTION 31 122018. 31.12,2017 HRK '000 HRK '000 Raw materials 7.552 7.245 Spare parts 83.046 106.079 Minus: Impairment of obsolete inventories of raw materials and spare parts (48.352) (61,743) 42.246 51.581 Small inventory and packing 16.023 14.838 Minus: Impairment of small inventory and packing (14.431) (13716) 1.592 1-122 Finished goods 523 526 Long term assets held for sale 11 15 Advances given 1.085 752 Total 45.457 53.996 20. TRADE RECEIVABLES D ES C RI PT I 0 N 31.12.2018. 31.122017. HRK'000 HRK'000 Domestic trade receivables 131.977 131.419 Foreign trade receivables 270 914 Minus: Impairment (88.6021 (87.963) Total 43.645 44.370 Movements in the impairment allowance of trade receivables are shown as follows: DESCRIPTION 2018. 2017. HRK'000 HRK '000 Balance at 1 January (87.963) (89.268) New impairment (1.660) (510) Collection 1.021 1.508 Write-off during the year 0 307 Balance at 31 December (88.602) (87.963) Age analysis (structure) of the trade receivables is as follows: Due 30-60 60-90 90-120 > 120 Undue < 30 days days days days days Total HRK'000 HRK '000 HRK'000 HRK '000 HRK'000 HRK '000 HRK '000 31.12.2018 18.387 8.970 6.096 997 6.371 2.824 43.645 31.12.2017 16.077 6.605 5.649 472 6.097 9.470 44.370 41 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 21. RECEIVABLES FROM EMPLOYEES DESCRIPTION 31 12,2018 31.12.2017. HRK'000 HRK '000 Short-term receivables from employees for shortages and damage 5.489 5.492 Other receivables from employees 64 70 Total 5.553 5.562 22. RECEIVABLES FROM THE STATE AND OTHER INSTITUTIONS DESCRIPTION 31.12.2018, 31.122017. HRK'000 HRK'000 VAT receivables 9.714 10.258 Receivables from the Croatian Health Insurance Institute 1.551 1,019 Receivables for prepaid corporate income tax 417 1.474 Other receivables 587 18 Total 12.269 12.769 23. OTHER RECEIVABLES DESCR I PTION 31.12.2018. 31 12,2017. HRK'000 HRK 000 Prepayments in the country 268 109 Receivables based on court rulings 637 0 Total 905 109 24. CASH AND CASH EQUIVALENTS DESCRIPTION 31.12.2018. 31.12,2017. HRK'000 HRK '000 Gyro account balances 41.544 55.024 Foreign currency account balances 38.370 25.690 Cash in hands-Croatian kuna 5.793 7,049 Deposits with'a maturity of up to three months 0 45 Total 85.707 87.808 42 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 25. PREPAID EXPENSES AND ACCRUED INCOME DESCRIPTION 31,12.2018, 31.12,2017. HRK '000 HRK'000 Prepayments for the accident in Rudine 3534 3,534 Other paid future expenses 536 976 Total 4.070 4.510 Costs related to the accident in Rudine, which are charged to the Group until the final verdict, include damages costs and cost of out of court settlements in the amount of HRK 2,543 thousand, as well as the costs of substitution of transportation with buses because of the impassability of railway track in the amount of HRK 970 thousand and the cost of treating injured passengers in the amount of HRK 21 thousand. 26. CAPITAL NAD RESERVES li/ The subscribed capital of the Group amounts to HRK 872,367 thousand (31 December 2017: same amount) and represents own permanent sources for the Group's operations as well as share capital registered at the Commercial Court in Zagreb. The sole member of the Group is the Republic of Croatia. On 24 September 2015, the Government of the Republic of Croatia adopted a decision on granting the consent for the conversion of receivables from the debt assumption on the basis of given guarantees and unpaid compulsory contributions to the Group's equity in the total amount of HRK 796,740 thousand. The share capital increase was registered at the Commercial Court in Zagreb on 19 January 2016. /ii/ The accumulated losses are stated as at 31 December 2018 in the amount of HRK 91.252 thousand (31 December 2017 in the amount of HRK 96.710 thousand). /iii/ Profit for the current year is stated as at 31 December 2018 in the amount of HRK 4.487 thousand (31 December 2017 in the amount of HRK 5.526 thousand). 27. PROVISIONS DESCRIPTION 31.12.2018. 31.12'2017. HRK '000 HRK'000 Provisions for jubilee awards and retirement benefits 11.421 11.948 Provisions of incentive severance payments 10,041 7.194 Provisions for court litigations 86.365 81.282 Provision for repair costs during the warranty period 378 378 Total 108.205 100.802 43 H2 PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 27. PROVISIONS (continued) Movements in provisions are shown as follows: Provisions Provisions for jubilee Provisions of for expenses D E S C R I P T 10 N awards and incentive Provisions within retirement severance for court warranty benefits payments litigations periods TOTAL HRK000 HRK'000 HRK'000 HRK000 HRK'000 31 December 2017 11.948 7,195 81.281 378 100.802 New provisions 977 10.041 13485 0 24.503 Used provisions (1.470) (5.400) (2.056) 0 (8.926) Cancellations of provisions (34) (1.795) (6.345) 0 (8174) 31 December 2018 11.421 10.041 86.365 378 108.205 According to the Collective agreements the Group has an obligation to pay jubilee awards, regular retirement benefits and other benefits to its employees. In accordance with the respective agreements, when employees leaving to regular retirement, they are entitled to a regular retirement benefit of HRK 8 thousand. The provision for regular retirement benefits and jubilee awards are calculation by authorized actuary. The calculation of the jubilee awards was made according to the following amounts: Numberof years Amount in HRK 10 1.500 15 2.000 20 2.500 25 3.000 30 3.500 35 4.000 40 5000 Actuary estimates are based on the following main assumptions: Estimate 2018. 2017. Fluctuation rate 5,3% 5,3% Discount rate 2,4% 2,2% 44 H± PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 28. LONG-TERM LIABILITIES DESCRIPTION 31.122018. 3112.2017, HRK '000 HRK '000 Liabilities to banks and other financial institutions /il 448.387 409.965 Minus: current portion (Note 32,) (22.474) (21.148) Total 425.913 388.817 li/ Liabilities to the banks and other financial institutions are stated as follows: DESCRIPTION 31.122018. 31.12.2017 HRK'000 HRK'000 Croatian Bank for Reconstruction and Development, 285.655 289.355 International Bank for Reconstruction and Development 162.732 105.973 Hrvatska Potanska Banka d.d., Zagreb 0 14.637 Minus: current portion (Note 32.) (22.474) (21.148) Total 425.913 388.817 Liabilities to the banks on 31 December 2018 are stated as follows: Debt balance as at Contract Interest 31 Dec 2018 Due date and Creditor date rate (HRK'000) repayment Collateral Ministry of finance guarantee, H2PP bills 2020-2030. of exchange and HBOR 28.01.2014 3% 285.655 quarterly promissory notes variable margin + 6M 2018 -2032, Ministry of finance IBRD 06.05.2015, EURIBOR 162.732 half-yearly guarantee Total 44.387 li/ As at 28 January 2014, the Group signed a loan agreement with Croatian Bank for Reconstruction and Development, in the amount of EUR 38,510,629 for the purchase of new trains. As at 31 December 2018, the amount of debt outstanding amounts to HRK 285,655 thousand. Loan repayment begins on 30 September 2020. /ii/ As at 6 May 2015, the Group signed a loan agreement with the International Bank for Reconstruction and Development (IBRD) in the amount of EUR 43,000,000 to help finance the Sustainable Croatian Railways Project in Europe. As of 31 December 201 8 the amount of withdrawn funds amounts to HRK 162,732 thousand. Loan repayment started as of 15 June 2018. The movements in liabilities to the banks and other financial institutions during the year may be summarized as follows: DESCRIPTION 2018. 2017. HRK'000 HRK'000 1 January 409.965 491.659 New borrowings 67.732 42.740 Amounts repaid (own assets) (24.183) (119.742) Foreign exchange differences (5.127) (4.692) 31 December 448.387 409.965 45 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued The long-term liabilities to the banks and other financial institutions become due for the repayment as follows: DESCRIPTION 31.12.2018 31.12.2017 HRK'000 HRK'000 Maturity up to one year 22.474 21.148 Due in one to two years 37.913 26.959 Due in two to three years 51.018 37.982 Due in three to four years 51.018 51.110 Due in four to five years 51.018 51.110 Due in over five years 234.946 221.656 Total 448.387 409.965 29. LIABILITIES FOR LOANS, DEPOSITS ETC. DESCRIPTION 31.12.2018. 31.12.2017. HRK'000 HRK'000 Liabilities for deposits - reconciliation 770 1.066 Total 770 1.066 30. LIABILITIES TO BANKS AND OTHER FINANCIAL INSTITUTIONS DESCRIPTION 31.12.2018. 31.12.2017. HRK'000 HRK '000 Current portion of the long-term liabilities to banks (see Note 30) 22,474 21.148 Total 22.474 21.148 31. TRADE PAYABLES DESCRIPTION 31.12.2018. 31.12.2017. HRK'000 HRK'000 Domestic trade payables 89.400 97.426 Foreign trade payables 1525 664 Total 90.925 98.090 Age analysis (structure) of trade payables is as follows: Due 30-60 60-90 90-120 > 120 Undue < 30 days days days days days Total HRK '000 HRK '000 HRK'000 HRK'000 HRK '000 HRK'000 HRK'000 31.12.2018 85.099 3909 1039 335 282 261 90.925 31 .12.2017 93.755 3459 155 31 61. 629 98.090 46 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 32. LIABILITIES TO EMPLOYEES D E SCR IPT ON 31.12.2018. 31322017. HRK'000 HRK'000 Liabilities for net salaries and contributions 18.316 15-184 Other liabilities to ernployees 1224 1.263 Total 19.540 16.447 33. LIABILITIES FOR TAXES, CONTRIBUTIONS AND SIMILAR FEES DESCRIPTION 31.12-2018. 31,12.2017. HRK'000 HRK '000 Liabilities for taxes and contributions from salaries 7.785 7.832 Liabilities for contributions on salaries 2.880 2.933 Liabilities for VAT 1,669 1.714 Other liabilities 12 8 Total 12.346 12.487 34. OTHER LIABILITIES DESCRIPTION 31.12.2018. 31.12.2017. HRK '000 HRK '000 Liabilities to the Ministry of Finance for activated guarantees lil 30.823 29.288 Other short-term liabilities 316 11,613 Total 31.139 40.901 li/ Liabilities to the Ministry of Finance of the Republic of Croatia relate to regressive rights claims of the Ministry of Finance due payments per activated guarantees based on which the Ministry of Finance has settled part of the due liabilities to the commercial banks instead of the Company. Namely, in the past years, the Ministry of Finance has issued several guarantees to commercial banks as a guarantee for the repayment of the lending obligations of the Company. The Guarantee Issuance Agreement between the Republic of Croatia and the Company for the settlement of long-term obligations states that if the guarantee is paid out of the State Budget funds, the amount paid is considered to be due receivable of the Ministry of Finance. The loan beneficiary is obliged immediately after the payment was made by the Ministry of Finance to allocate amount of the repaid funds increased by the statutory default interest with all the relevant costs. 47 H± PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 35. ACCRUED EXPENSES AND DEFERRED INCOME DESCRIPTION 31.12.2018. 31.12.2017. HRK'000 HRK'000 State subsidies for purchase and modernization of fixed assets /il 546.186 613.467 Deferred income 4.885 3.233 Accrued expenses for the current year 6.743 8.641 Accrued expenses for the unused vacation days 8.082 8.042 Total 565.896 633.383 li/ State subsidies for the modernization of railway vehicles refer to funds provided by the Republic of Croatia for modernizing and regular maintaining of railway vehicles. 36. OFF BALANCE SHEET RECORDS DESCRIPTION 3112,2018. 31.12.2017. HRK'000 HRK '000 Received warranties 614.721 116.823 Given warranties 1.408.186 2.260.204 Actual costs for the utilization of space 819 819 Monoblocks in Goga 1.969 1,969 Locomotives in the ownership of railways of the former SFRY in Croatia 23.403 23.403 Receivables for the passenger wagons in the former Yugoslavia 74.692 74.692 Property in inaccessible area 13.458 13.458 Receivables from the Zajednica J2 (Union of Yugoslav Railways) 74.251 71.358 Receivables from ,,HZHB" 42.540 42.540 Balance of cash registers 4.574 5.567 Other 7.034 7.035 Total 2.265.647 2.617.868 37. TRANSACTIONS WITH THE RELATED PARTIES A party is associated with an entity when it is directly or indirectly controlled by one or more intermediaries, controlled by or under the control of a subject, has a share in a subject that gives it significant influence over that subject and has a common control over the subject. Total amounts of related party transactions, receivables and payables at year-end and associated expense and income for 2018 and 2017 are presented as follows: 48 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 37. TRANSACTIONS WITH THE RELATED PARTIES (continued) Related party Operating activities Financial activities Receivables Liabilities Income Expense Receivables Liabilities Income Expense HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 HRK HRK '000 2018 li/ Subsidiary companies (Grouo) T2V Gredelj d.o,o. u stetaju, Zagreb 13.259 15.961 629 7.793 0 12 0 12 Proizvodnja i regeneracija d.o.o. u ste6aju, Zagreb 603 0 0 0 0 0 0 0 Minus: Value Adjustment (13.742) 0 0 0 0 0 0 0 Total i/i 120 15.961 629 7.793 0 12 0 12 /iil Subsidiary over which the company has no control HZ infrastruktura d.o.o., Zagreb 4.352 22.347 7.799 109.554 0 0 11 9 H?- Cargo d.o.o., Zagreb 6.616 1.408 10.661 18.235 0 0 233 8 Agencija za integralni transport d.o.o., Zagreb 0 0 35 5 0 0 4 0 OV Odr2avanje vagona d.o.o., Zagreb 650 5.497 1.382 18.454 1 0 4 0 Radionica 2eljeznikih vozila Cakovec d.o.o., Oakovec 0 0 143 147 0 0 1 0 Remont i proizvodnja 2eljezni6kih vozila Slavonski Brod 121 0 325 1 2 0 7 0 Croatia express putni6ka agencija d.o.o., Zagreb 1.202 6 625 208 2 0 125 0 Pru2ne gradevine d,o.o., Zagreb 832 0 2.402 9 0 0 64 0 Less: value adjustment (5.034) 0 0 0 0 0 0 0 Total liil 8.739 29.258 23.372 146.613 5 0 449 17 liiil Other railway business companies owned by the Hep Ods d.o.o. , Zagreb 91 36 0 290 0 0 0 0 Hep Opskrba d.o.o., Zagreb 0 133 0 461 0 0 0 0 Hep-Toplinarstvo d.o.o., Zagreb 0 210 0 1.043 0 0 0 3 HP-Hrvatska pogta d.d., Zagreb 0 19 0 123 0 0 0 0 HRT-Hrvatska radio televizija d.o.o., Zagreb 0 0 0 19 0 0 0 0 Hrvatske autoceste d.o.o., Zagreb 0 0 0 42 0 0 0 0 Narodne novine d.d. 0 11 0 75 0 0 0 0 FINA Zagreb 0 0 0 10 0 0 0 0 Less: value adjustment (91) 0 0 0 0 0 0 0 Total Iiil 0 409 0 2.064 0 0 0 3 TOTAL 8.859 45.628 24.001 156.469 5 12 449 32 49 H± PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 37. TRANSACTIONS WITH THE RELATED PARTIES (continued) Related party Operating activities Financial activities Receivables Liabilities Income Expense Receivables Liabilities Income Expense HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 HRK HRK '000 2018 li/ Subsidiary companies (Group) T2V Gredelj d.o.o. u ste6aju, Zagreb 13.180 19.304 1.114 10.791 0 0 7 D Proizvodnja i regeneracija d.o.o- u ste6aju, Zagreb 603 0 0 0 0 0 0 0 Minus: Value Adjustment (13.742) 0 0 0 0 0 0 0 Total /if 41 19.304 1.114 10.791 0 0 7 0 lii/ Subsidiary over which the company has no control H2 infrastruktura d.o.o., Zagreb 3.108 20.653 5.310 115.881 2 0 38 102 HZ Cargo d.O.O., Zagreb 6.873 2.459 13.750 12.149 1.021 0 1.240 636 Agencija za integralni transport d.o.o., Zagreb 91 0 141 0 0 0 0 0 OV Odr2avanje vagona d.o.o., Zagreb 257 7.151 1.529 21.991 0 0 2 0 Radionica 2eljezni6kih vozila Cakovec d.o.o., takovec 63 0 62 0 0 0 0 0 Remont i proizvodnja 2eJjeznifkih vozila Slavonski Brod 142 0 303 0 0 0 12 0 Croatia express putni6ka agencija d.o.o., Zagreb 1.426 0 1.088 162 0 0 68 0 Pruine gradevine do.o., Zagreb 1.214 0 2.119 0 0 0 37 0 Less: value adjustment (3.473) 0 0 0 0 0 0 0 Total lill 9.701 30.263 24.302 150.183 1.023 0 1.397 738 iil Other railway business companies owned by the Hep Ods d.o.o., Zagreb 91 46 0 294 0 0 0 0 Hep Opskrba d.o.o,, Zagreb 0 145 0 420 0 0 0 0 Hep-Toplinarstvo d.o.o., Zagreb 0 212 0 1.621 0 0 0 0 HP-Hrvatska pogta d.d., Zagreb 0 20 0 111 0 0 0 0 HRT-Hrvatska radio televizija d.o.o., Zagreb 0 0 0 21 0 0 0 0 Hrvatske vode d.o.o., Zagreb 0 0 0 2 0 0 0 0 Hrvatske autoceste d.o.o., Zagreb 0 0 0 41 0 0 0 0 Narodne novine d.d. 0 5 0 76 0 0 0 0 FINA Zagreb 0 3 0 16 0 0 0 0 Other 48 4 42 0 0 0 0 0 Less: value adiustment (139) 0 0 0 0 0 0 0 Total iiil 0 435 42 2.602 0 0 0 8 TOTAL 9.742 50.002 25.458 163.576 1.023 0 1.404 746 50 H2 PUTNIdKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018-- continued 38. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Capital risk management The Group manages its capital to ensure that it will be able to continue as a going concern while maximizing the return to stakeholders through the optimization of the debt and equity balance. The capital structure of the Group consists of debt, which includes credits, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, legal and other reserves and retained earnings/accumulated losses. The net debt to equity ratio is presented as follows: DESCRIPTION 31.12.2018 31.12201. HRK '000 HRK '000 Liabilities to the bank and other financial institutions 448.387 409.966 Cash and cash equivalents (85,707) (87.808) Net debt 362.680 322.158 Equity 785.602 781.183 Net debt to equity ratio 0,46 0,41 After the capital increase, "Capital and reserves" are positive in 2018 and on 31 December 2018 the ratio of debt and equity was 0.46. Categories of financial instruments DESCRIPTION 31.12.2018. 3112,2017. HRK'000 HRK'000 Financial assets Loans and receivables (including cash and cash equivalents) 148.140 150.760 Financial liabilities Amortized cost 603311 580.724 Financial risk management objectives The Group controls and manages financial risk which could affect the Group's operations through internal risk reports which analyze exposures by degree and magnitude of the market risk, interest rate risk, credit risk, currency risk and liquidity risk. Market risk The Group operates in Croatian and international markets. The Management Board determines the prices of its products and services, separately for domestic and international markets. There were no significant changes in the impact of market risk on the Group's business. Interest rate risk The interest rate risk is a risk that the value of a financial instrument will fluctuate due to changes in market rates relative to the interest rate applicable to the financial instrument. Interest rate cash flow risk is the risk that the interest cost of an instrument will fluctuate overtime. There were no significant changes of the influence of the credit risks on the Group's operations. 51 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 38. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Credit risk Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Group. Financial assets that potentially expose the Group to credit risk consist mainly of cash, cash equivalents and trade receivables. Trade receivables have been adjusted for bad and doubtful receivables. There were no significant changes of the influence of the credit risks on the Group's operations. Currency risk The official currency of the Group is the Croatian Kuna ("HRK"). However, certain transactions denominated in foreign currencies are calculated in the Croatian Kuna by applying the exchange rates in effect at the date of Consolidated Statement of Financial Position / Consolidated Balance sheet, and consequently, the Group is potentially exposed to risks of changes in currency rates. Net carrying amount of monetary assets and liabilities of the Group denominated in foreign currencies on the reporting date is shown as follows: Liabilities Assets Balance on 31 December 2018. 2017. 2018. 2017. HRK'000 HRK'000 HRK'000 HRK'000 EUR 168.007 109.976 274 929 CHF 0 0 27.962 27.299 Liquidity risk A liquidity risk is a risk that the Group would not be able to fulfill its financial liabilities to the other contractual party. A Group manages liquidity risk in a way that observes continuously and analyses expected and actual cash flow on the basis of maturity of financial assets and liabilities. Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based on quoted market prices, if available. If market prices are not available, fair value is estimated using discounted cash flow models or other appropriate pricing techniques. Changes in the assumptions underlying the estimates, including discount rates and estimated future cash flows, significantly affect the estimates. For this reason, the estimated fair value cannot be obtained from the sale of a financial instrument at this point. Valuation techniques and assumptions in determining the fair value When calculating the fair value, the Group takes into account the rules of IFRS fair value hierarchy that reflects the significance of inputs used in the valuation process. Each instrument is individually assessed in detail. The levels of the fair value hierarchy is determined based on the lowest level and input data which are important for determining the fair value of the instrument. 52 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 38. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) The Consolidated Balance sheet items that are measured at fair value are categorized into three levels of the IFRS fair value hierarchy, as follows: * 1st level indicators - fair value indicators derived from (unadjusted) prices listed on active markets for identical assets and identical liabilities. * 2nd level indicators - fair value indicators derived from other information, not the listed prices from the Ist level, and relating to observed asset or liability (i.e. their prices) or indirectly (derived from prices) and * 3rd level indicators - indicators derived from valuation method in which used input data on assets or liabilities are not based on the available market information (unobservable inputs). The Group's assets measured at fair value as at 31 December 2018 are shown in the following table: Level I Level 2 Level 3 Total t 000 HRK u 000 HRK u 000 HRK L 000 HRK Financial assets stated at fair value through profit or loss Investments in equity instruments 0 0 27.962 27.962 Total assets at fair value 0 0 27.962 27.962 The Group's assets measured at fair value as at 31 December 2017 are shown in the following table: Level 1 Level 2 Level 3 Total u 000 HRK u 000 HRK u 000 HRK u 000 HRK Financial assets stated at fair value through profit or loss Investments in securities 0 0 27.299 27.299 Total assets at fair value 0 0 27.299 27.299 The Group adopted IFRS 13 under which it is obliged to issue the hierarchy of fair value of financial assets which is not measured at fair value as well as the write-off of evaluation method and inputs used. Loans and receivables (including deposits with banks) are stated at amortized cost less provision for impairment. Although the result of a variable/fixed interest rate, due to their specific nature, the Group's Management believes that the carrying amount of these instruments does not significantly differ from their fair value, under the assumption that all payments based on exposure, the value of which was not reduced, will be collected as contracted, not taking into account any future losses. The fair value of loans is estimated based on inputs the price of which is not market available; therefore, they would be classified on level 2 on the fa[r value hierarchy list. Investments with available market price which are classified under the portfolio of investment held to maturity would be allocated on level 1. 53 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 - continued 39. COURT DISPUTES AND CONTIGENT LIABILITIES /il The Group as a Defendant, together with the companies H2 Infrastruktura d.o.o., Zagreb and HZ Cargo d.o,o., Zagreb, participates in numerous court disputes. According to the plan of division of the company H2 Hrvatske 2eljeznice d.o.o., Zagreb, the eventual obligations incurred in these disputes are borne by newly founded companies based on their participation in the capital. As the legal successor of the merged company H2 Vu6a vlakova d.o.o., Zagreb, the Group inherited its court litigations. Furthermore, the Group is also the defendant in certain individual court litigations. As at 31 December 2018, the Group made provision for the contingent liabilities arising from these legal proceedings in the amount of HRK 86.365 thousand (see Note 27). fill The Group is exposed to contingent liabilities in the amount of HRK 1,254,605 thousand (31 December 2017 in the amount of HRK 2,128,739 thousand) based on the guarantees given to subsidiaries. 40. EVENTS AFTER THE DATE OF CONSOLIDATED STATEMENT OF FINANCIAL POSTION / CONSOLIDATED BALANCE SHEET After consolidated statement of financial position / consolidated balance sheet date there were no events that could significantly affect the annual consolidated financial statements for the year 2018 and consequently be published. 41. APROVAL OF THE ANNUAL FINANCIAL STATEMENTS The annual consolidated financial statements presented on the previous pages have been prepared and pproved by the Group's Management Board on 6 September 2019. Signed on behalf of the Management Board: 2e]jko Ukic, Mlad(n Lugaric, Damir Rubid, President of the Management Member of the Member of the Board Management Board Management Board HZ PUTNIKI PRIJEVOZ d.oo. Strojarska cesta 11 10 000 Zagreb 54