HRVATSKE CESTE d.o.o. Vončinina 3, Zagreb The Annual Financial Statements and Independent Auditor's Report for the year ended 31 December 2017 HRVATSKE CESTE d.o.o. Vončinina 3, Zagreb CONTENTS Page Responsibility for the Annual Financial Statements 1 Independent Auditor's Report 2–7 Income statement 8 Statement of financial position / Balance sheet 9 – 10 Statement of Changes in Equity 11 Statement of Cash Flows 12 Notes to the Financial Statements 13 – 56 Financial Statements of Public Good 57 - 59 RESPONSIBILITY FOR THE ANNUAL FINANCIAL STATEMENTS The Management Board of the company HRVATSKE CESTE d.o.o., Zagreb, Vončinina 3 (“the Company’’) is responsible for ensuring that the annual financial statements for the year 201 7, are prepared in accordance with the Accounting Act (National Gazette No. 78/15, 134/15, 120/16), the International Financial Reporting Standards and in accordance with the Roads Act (National Gazette No. 84/11, 22/13, 54/13, 148/13, 92/14) to give a true and fair view of the financial position, the results of operations, changes in equity and cash flows of the Company for that period. After making enquiries, the Board has a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Board has adopted the going concern basis in preparing the annual financial statements of the Company. In preparing the annual financial statements, the Management is responsible for:  selection and consistent application of suitable accounting policies in accordance with the applicable financial reporting framework;  giving reasonable and prudent judgments and estimates; and  using the going concern basis of accounting, unless it is inappropriate to presume so. The Management is responsible for keeping the proper accounting records, which at any time with reasonable certainty present the financial position, the results of operations, changes in equity and cash flows of the Company, and also their compliance with the Accounting Act (NN 78/15, 134/15 i 120/16), the International Financial Reporting Standards and in accordance with the Roads Act (National Gazette No. 84/11, 22/13, 54/13, 148/13, 92/14). The Management is also responsible for safe keeping the assets of the Company and also for taking reasonable steps for prevention and detection of fraud and other irregularities. Signed for and on behalf of the Management Board: . Josip Škorić, Chairman of the Board Alen Leverić, Board member Nikša Konjevod, Board member HRVATSKE CESTE d.o.o. Vončinina 3 10 000 Zagreb 30 April 2018 1 Tel: +385 1 2395 741 BDO Croatia d.o.o. Fax: +385 1 2303 691 10000 Zagreb E-mail: bdo-croatia.hr Trg J. F. Kennedy 6b INDEPENDENT AUDITOR'S REPORT To the Owner of the company Hrvatske ceste d.o.o., Zagreb Report on the audit of the annual financial statements Opinion We have audited the annual financial statements of the company Hrvatske ceste d.o.o., Zagreb, Vončinina 3 (the “Company") for the year ended 31 December 2017, which comprise the Statement of financial position (Balance Sheet) as at 31 December 2017, Income Statement, Statement of other comprehensive income, Statement of changes in equity and Statement of cash flows for the year then ended, and Notes to the financial statements, including a summary of significant accounting policies and other explanations. In our opinion, the accompanying annual financial statements, give a true and fair view of the financial position of the Company as at 31 December 2017, and of its financial performance and cash flows of the Company for the year then ended in accordance with the Accounting Act, the International Financial Reporting Standards (the “IFRS") and the Roads Act. Basis for Opinion We conducted our audit in accordance with Accounting Act, Audit Act and International Auditing Standards (ISAs). Our responsibilities under those standards are further described in our Independent Auditor’s report under section Auditor’s responsibilities for the audit of the annual financial statements. We are independent of the Company in accordance with the Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of matter /i/ We draw attention to Notes 2.9.b) and c) and 14 to the financial statements which explain that financial statements are prepared in accordance with the International Financial Reporting Standards with some exceptions determined by the Roads Act. Our opinion has not been modified in this respect. /ii/ We draw attention to Note 16 to the financial statements which explain that the Company has not completely regulated proprietary-legal relations, i.e. ownership over real estate. Procedures of clearing up and recording of ownership over the real estate are in progress. Our opinion has not been modified in this respect. /iii/ We draw attention to Note 40 to the financial statements where it is determined that a significant number of court disputes are initiated against the Company. Our opinion has not been modified in this respect. 2 Registrirano kod Trgovačkog suda u Zagrebu pod brojem 080044149 OIB 76394522236 BDO Croatia d.o.o. Key Audit Matters Key audit matters are those issues that were, by our professional judgment, of the utmost importance in our audit of the annual financial statements of the current period and include the recognized most significant risks of significant misstatement due to error or fraud with the greatest impact on our audit strategy, the disposition of our available resources and the time spent by the engaging audit team. We have dealt with these issues in the context of our audit of the annual financial statements as a whole and in forming our opinion about them, and we do not give a separate opinion on these issues. We have identified that the issues listed below are the key audit matters to be disclosed in our Independent Auditor's Report. Key Audit Issues How We Addressed Key Audit Issues Investment maintenance and reconstruction of real estate, plant and equipment In the 2017 annual financial statements, the In the audit, we focused on: Company realized real estate, plant and • verifying whether the transactions were equipment enhancements and decreases in recorded in 2017 in accordance with the 2017 as set out in Note 16. accounting policies of the Company, i Investment maintenance and reconstruction of • check whether for all road reconstructions real estate, plant and equipment is defined as an estimate of the share of reconstruction in a key audit matter because it involves the investment project has been made and significant estimates. whether this estimate is reasonable, Additionally, we have considered whether the Related Disclosures in Related Annual accounting policies are in accordance with Financial Statements International Financial Reporting Standards Please see Notes 2.7 (c) (Accounting Policies) and whether changes in accounting policies and Note 16. are disclosed in the notes to the financial statements. The results of our auditing procedures were satisfactory. The risk of non-fulfillment of the contractual During our audit, we reviewed the loan provisions of the contract with the lender agreement and the contracted business related to the business indicators indicators. Then we checked the calculation of business Contracts with the lenders include contractual indicators that were defined by contract with provisions based on the business indicators. In the lender and concluded that the Company case of non-fulfillment of these contractual did not meet the contracted business provisions by the Company, the loan obligation indicators. becomes due. However, on 21 December 2017, the Company Related Disclosures in Related Annual received a written statement from the lender Financial Statements that it will not use the right of early payment Please see note 28. of loans irrespective of unfulfilled contractual provisions. The results of our auditing procedures were satisfactory. 3 BDO Croatia d.o.o. Other Information in the Annual Report The Management is responsible for other information. Other information includes information included in the Annual report, but do not include the annual financial statements and our Independent auditor's report on them. Our opinion on the annual financial statements does not include other information, except to the extent explicitly stated in the part of our Independent auditor's report, entitled Report on compliance with other legal or regulatory requirements, and we do not express any form of assurance conclusion thereon. In connection with our audit of the annual 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 financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. In this sense, except as stated in the Section Emphasis of matters, we do not have anything to report. Responsibilities of the Management and Those Charged with Governance for the annual financial statements The Management is responsible for the preparation of annual financial statements that give a true and fair view in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of annual financial statements that are free from material misstatement, whether due to fraud or error. In preparing the annual financial statements, the Management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s Responsibilities for the audit of the annual financial statements Our objectives are to obtain reasonable assurance about whether the annual financial statements as a whole are free from material misstatement, whether due to fraud or error and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual financial statements. 4 BDO Croatia d.o.o. Auditor's Responsibilities for the audit of the annual financial statements (continued) As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the annual financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Management.  Conclude on the appropriateness of the Management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the annual financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.  Evaluate the overall presentation, structure, and content of the annual financial statements, including the disclosures, and whether the annual financial statements represent the underlying transactions and events in a manner that achieves a fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also give a statement to those in charge of management that we have acted in accordance with the relevant ethical requirements regarding the independence and we will communicate with them on all relationships and other matters that can reasonably be considered to affect our independence as well as, where applicable, on related protections. Among the issues we are communicating with those in charge of managing, we determine those issues that are of utmost importance in auditing the annual financial statements for the current period and are therefore key audit issues. We describe these issues in our Independent Auditor's Report unless the law or regulation prevents public disclosure or when we decide in extremely rare circumstances that the issue should not be disclosed in our Independent Auditor's Report as it can reasonably be expected that the negative consequences of disclosure will outweigh the benefits of public interest in such communication. Report on Compliance with Other Legal or Regulatory Requirements 5 BDO Croatia d.o.o. Report on other legal requirements Report based on the requirements of Regulation (EU) No. 537/2014 On 26 July 2017, we appointed the General Assembly of the Company based on the proposal of the Company's Management Board to audit the annual financial statements for 2017. At the date of this Report, we are continuously engaged in carrying out the Company's legal audits of the Company's annual financial statements for the year 2013, up to the Company's annual financial statements for the year 2017, a total of 5 years. In addition to the issues we have mentioned in our report of the Independent Auditor as Key Audit Issues, we have nothing to report in connection with point (c), paragraph 2, Article 10 of Regulation (EU) No. 537/2014. By our statutory audit of the Company's annual financial statements for the year 2017 we are able to detect irregularities, including fraud under Section 225, Response to Non-Compliance with the IESBA Code and the Rules of the IESBA Code that requires us to audit our engagement to see if the Company complied with the laws and regulations are generally recognized to have a direct impact on the determination of significant amounts and disclosures in their annual financial statements, as well as other laws and regulations that do not have a direct effect on the determination of significant amounts and disclosures in its annual financial statements, but compliance with which may be crucial for operational aspects the Company's business, its ability to continue with unlimited business time or to avoid significant penalties. Except in case we encounter, or find out about, disrespect of any of the foregoing 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 Company, its shareholders and the wider public, we are obliged to inform the Company 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 Company does not correct any irregularities arising on the basis of which incorrect disclosures in the audited annual financial statements that are cumulatively equal to or greater than the amount of significance to the financial statements as a whole are required to modify our opinion in an independent auditor's report. In the audit of the Company's annual financial statements for the year 2017, we determined the significance for the financial statements as a whole in the amount of HRK 29 million, which represents approximately 1.5% of total costs and investments as at 31 December 2017. We have selected the criterion of total costs and investments as the measure of significance since we consider it to be the most appropriate benchmark in relation to the Company's activities. Our audit opinion is consistent with the additional audit report of the Company's Board of Directors. 6 BDO Croatia d.o.o. Report based on the requirements of the Accounting Act The Management is responsible for the preparation of the Management report as part of the Annual report of the Company. We are obliged to express an opinion on the compliance of the Management report as part of the Annual report of the Company with the annual financial statements of the Company. In our opinion, based on our audit of the annual financial statements of the Company, information in the Management report as part of the Annual report of the Company for the year ended 31 December 2017, are in accordance with the financial information stated in the annual financial statements of the Company set out on pages 8 to 56 on which we expressed our opinion as stated in the section Opinion above. In our opinion, based on the work that we performed during the audit, the Company's Management report for 2017, which is an integral part of the Annual report for 2017 is prepared in accordance with the Accounting Act. Based on the knowledge and understanding of the Company and its environment obtained while performing the audit, except as stated in the Section Emphasis of matters, we have not found that there are material misstatements in the Company's Management report for 2017. The Management is responsible for the preparation of the annual financial statements for the year ended 31 December 2017 in a prescribed form based on the Statute of structure and content of annual financial statements (Official Gazette 95/16) and in accordance with other regulations governing the operations of the Company (“Standard annual financial statements”). Financial information presented in the Company’s standard annual financial statements are in accordance with the information presented in the Company’s annual financial statements given on pages 8 to 56 on which we expressed our opinion as stated in the section Opinion above. In Zagreb, 30 April 2018 BDO Croatia d.o.o. Trg J. F. Kennedy 6b 10000 Zagreb Ivan Čajko, Management Board member Ivan Čajko, Certified auditor 7 HRVATSKE CESTE d.o.o, Zagreb INCOME STATEMENT AND STATEMENT OF OTHER COMPREHENSIVE INCOME for the year ended 31 December 2017 POSITION Note 2016 2017 HRK HRK OPERATING INCOME 3 Sales income 23,282,416 28,840,916 Income from own consumption 215,141 246,633 Other operating income 154,900,353 143,108,423 Total operating income 178,397,910 172,195,972 OPERATING EXPENSES Material expenses 4 (13,820,255) (14,021,832) Service expenses 5 (17,967,555) (19,835,473) Employees expenses 6 (96,272,330) (97,496,650) Amortization and depreciation 7 (21,390,244) (19,614,349) Other costs 8 (6,789,507) (10,138,331) Value adjustments 9 (11,866,909) (1,476,581) Provisions 10 (109,121) (1,245,395) Other operating expenses 11 (10,227,846) (7,583,260) Total operating expenses (178,443,767) (171,411,871) PROFIT /(LOSS) FROM OPERATING ACTIVITIES (45,857) (784,110) FINANCIAL INCOME 12 2,945,654 1,043,502 FINANCIAL EXPENSES 13 (2,899,797) (1,827,603) (LOSS) / PROFIT FROM FINANCIAL ACTIVITIES 45,857 (784,101) TOTAL INCOME 181,343,564 173,239,474 TOTAL EXPENSES (181,343,564) (173,239,474) PROFIT/(LOSS) BEFORE TAXATION 0 0 Income tax 14 (287,935) (473,719) (LOSS) FOR THE PERIOD (287,935) (473,719) Other comprehensive profit/(loss) for the period 0 0 TOTAL COMPREHENSIVE (LOSS) FOR THE PERIOD (287,935) (473,719) The accompanying accounting policies and notes form an integral part of these financial statements. 8 HRVATSKE CESTE d.o.o, Zagreb STATEMENT OF FINANCIAL POSITION / BALANCE SHEET as of 31 December 2017 POSITION Note 31 Dec 2016 31 Dec 2017 HRK HRK ASSETS Long-term assets Intangible assets 15 8,263,653 13,354,429 Property, plant and equipment 16 72,895,895,962 73,277,000,775 Financial assets 17 8,780,556 7,706,037 Receivables 18 2,805,222 2,262,727 Total long-term assets 72,915,745,393 73,300,323,968 Short-term assets Inventories 19 16,235,406 15,344,487 Trade receivables 20 8,968,052 6,858,950 Receivables from employees and company’s members 21 327,909 307,658 Receivables from the state and other institutions 22 212,492,536 122,328,517 Other short-term receivables 23 3,329,421 3,615,810 Cash with banks and in hand 24 386,547,837 132,909,231 Payments for future periods and accrued income 25 33,000 82,018,320 Total short-term assets 627,934,161 363,382,973 TOTAL ASSETS 73,543,679,554 73,663,706,941 9 HRVATSKE CESTE d.o.o, Zagreb STATEMENT OF FINANCIAL POSITION / BALANCE SHEET - continued as of 31 December 2017 POSITION Note 31 Dec 2016 31 Dec 2017 HRK HRK CAPITAL AND LIABILITIES Capital 26 Subscribed (share) capital 107,384,800 107,384,800 Public capital 62,843,953,488 63,330,080,756 Total capital 62,951,338,288 63,437,465,556 Provisions 27 159,285,117 169,348,222 Long-term liabilities 28 7,915,494,169 8,834,097,580 Short-term liabilities Liabilities to related companies 29 208,164 317,102 Liabilities for loans, deposits, 30 1,561,883 5,342,006 etc. Liabilities to banks and other 31 2,014,839,166 579,487,043 financial institutions Trade accounts payable 32 291,811,779 273,493,576 Liabilities to employees 33 5,186,364 5,444,208 Liabilities for taxes, contributions and similar 34 20,142,659 17,374,352 payments Other short-term liabilities 35 43,707,779 21,556,321 Accrued expenses and deferred 36 income 140,104,186 319,780,975 Total short-term liabilities 2,517,561,980 1,222,795,583 TOTAL CAPITAL AND LIABILITIES 73,543,679,554 73,663,706,941 The accompanying accounting policies and notes form an integral part of these financial statements. 10 HRVATSKE CESTE d.o.o, Zagreb STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2017 Subscribed Public capital POSITION (share) TOTAL from the result capital HRK HRK HRK Balance at 1 January 2016 107,384,800 60,988,831,788 61,096,216,588 Capital increase - fuel reimbursement 0 1,897,618,984 1,897,618,984 Capital increase – co-financing of public goods 0 7,933,766 7,933,766 Capital increase – currency differences, interest and other 0 107,084,800 107,084,800 Capital increase – sale of salt to CRA 0 13,090,286 13,090,286 Capital increase – transfer from CRA categorisation of 0 1,315,858,806 1,315,858,806 roads Capital increase - transfer from the HAC 0 602,841,432 602,841,432 Capital increase – Decision of Ministry 0 12,521,817 12,521,817 Capital Increase – donation of stone 0 117,378 117,378 Capital decrease – transfer for costs and taxes 0 (130,779,611) (130,779,611) Capital decrease - depreciation 0 (371,237,419) (371,237,419) Capital increase- provision for court disputes 0 (16,952,493) (16,952,493) Capital decrease – investment maintenance- replaced part 0 (133,392,670) (133,392,670) Capital decrease – reconstruction of state roads- replaced 0 (97,767,503) (97,767,503) part Capital decrease. – – transfer from CRA categorisation of 0 (207,813,356) (207,813,356) roads Capital decrease. – co- financing of CRA according to 0 (48,000,000) (48,000,000) Regulation Act Capital decrease - Co-Financed NC 0 (20,000,000) (20,000,000) Capital decrease - unused investment of Pelješac Bridge 0 (189,756,669) (189,756,669) Capital decrease - currency differences, interest and other 0 (404,589,994) (404,589,994) Capital decrease – maintenance cost – regular 0 (386,074,706) (386,074,706) Capital decrease – extraordinary maintenance DC 0 (15,770,738) (15,770,738) Capital decrease – flood relief 0 (64,371,468) (64,371,468) Capital decrease – research and develop. 0 (2,375,656) (2,375,656) Capital decrease – cost value of sold salt to CRA 0 (13,090,286) (13,090,286) Balance at 31 December 2016 107,384,800 62,843,953,488 62,951,338,288 Capital increase - fuel reimbursement 0 1,942,555,598 1,942,555,598 Capital increase – co-financing of public goods 0 8,391,249 8,391,249 Capital increase – currency differences, interest and other 0 68,785,983 68,785,983 Capital increase – sale of salt to CRA 0 16,756,738 16,756,738 Capital increase – transfer from CRA categorisation of 0 65,109,124 65,109,124 roads Capital increase -Environmental Protection Fund - 0 5,067,089 5,067,089 landslides Capital increase – donation from Zagrebačke ceste 0 6,820,134 6,820,134 Capital decrease – transfer for reimbursement of income 0 (137,654,359) (137,654,359) tax and costs Capital decrease - depreciation 0 (391,698,673) (391,698,673) Capital decrease – provisions for litigation 0 (8,817,710) (8,817,710) Capital decrease – investment maintenance state roads – 0 (98,689,147) (98,689,147) replaced part Capital decrease – reconstruction of state roads – 0 (64,925,180) (64,925,180) replaced part Capital decrease. – co- financing of CRA according to 0 (78,044,000) (78,044,000) Regulation Act Capital decrease. – co- financing of NC 0 (14,495,077) (14,495,077) Capital decrease - settlement of IGH Most of Peljesac 0 (13,650,000) (13,650,000) Capital decrease - currency differences, interest and other 0 (391,052,449) (391,052,449) Capital decrease – maintenance cost – regular 0 (386,874,435) (386,874,435) Capital decrease – extraordinary maintenance 0 (3,074,453) (3,074,453) Capital decrease – flood relief 0 (16,128,869) (16,128,869) Capital decrease – research and develop. 0 (5,497,557) (5,497,557) Capital decrease – cost value of sold salt to CRA 0 (16,756,738) (16,756,738) Balance at 31 December 2017- 107,384,800 63,330,080,756 63,437,465,556 The accompanying accounting policies and notes form an integral part ofthese financial statements. 11 HRVATSKE CESTE d.o.o, Zagreb STATEMENT OF CASH FLOWS for the year ended 31 December 2017 POSITION 2016 2017 HRK HRK Cash flow from operating activities Cash inflows - customers 29,094,016 36,619,761 Cash inflows - royalties, fees, commissions and similar 1,922,388,519 2,153,660,326 Cash inflows – damage insurance 1,474,637 1,471,664 Cash inflows – tax return 64,078,143 69,707,194 Cash outflows – suppliers (537,505,719) (592,357,201) Cash outflows – employees (101,846,421) (102,555,123) Cash outflows – damage insurance (429,276) (524,995) Other cash inflows and outflows (2,011,600) (22,999,291) Cash from operating activities 1,375,242,299 1,543,022,335 Cash outflows – interest (391,679,852) (434,415,441) Cash outflows – corporate income tax (134,499) (188,871) Net cash flow from operating activities 983,427,948 1,108,418,023 Cash flow from investing activities Cash inflows from sale of long-term assets 501,993 793,452 Cash inflows from sale of financial instruments 9,572,830 1,680,324 Cash inflows from dividends 174,143 215,338 Total cash inflows from investing activities 10,248,966 2,689,114 Cash outflows for purchase of long-term assets (880,658,482) (911,873,896) Total cash outflows from investing activities (880,658,482) (911,873,896) Net cash flow from investing activities (870,409,516) (909,184,782) Cash flow from financial activities Cash inflows from loan principal 1,201,865,619 4,703,232,650 Other cash inflows from financial activities 106,282,204 68,369,561 Total cash inflows from financial activities 1,308,147,823 4,771,602,211 Cash outflows for repayment of loan principal (1,418,543,002) (5,215,470,806) Other cash outflows from financial activities (8,460,937) (9,003,252) Total cash outflows from financial activities (1,427,003,939) (5,224,474,058) Net cash flow from financial activities (118,856,116) (452,871,847) TOTAL NET CASH FLOW (5,837,684) (253,638,606) CASH AND CASH EQUIVALENTS AT 1 JANUARY 392,385,521 386,547,837 CASH AND CASH EQUIVALENTS AT 31 DECEMBER 386,547,837 132,909,231 (DECREASE) IN CASH AND CASH EQUIVALENTS (5,837,684) (253,638,606) The accompanying accounting policies and notes form an integral part of these financial statements. 12 HRVATSKE CESTE d.o.o, Zagreb Notes to the financial statements for the year ended 31 December 2017 II. NOTES TO THE FINANCIAL STATEMENTS 1. GENERAL 1.1. Legal framework, activities and employees The company Hrvatske ceste d.o.o. Zagreb, Vončnina 3 (“the Company”), was established based on the Decision on the Division and Transformation of the Croatian Road Administration into companies Hrvatske ceste, a limited liability company for management, construction and maintenance of State roads and Hrvatske autoceste, a limited liability company for management, construction and maintenance of the motorways, issued by the Government of the Republic of Croatia on 5 April 2001, Class 340-03 / 01-01 / 02, registry No. 5030116-01-5 as the sole founder of the Company. By the Solution Tt-01/2163-2 dated 11 April 2001, the Company emerged by division and transformation of an institution. As at 3 June 2004, the Croatian Government reached Decision on Amendments of division of property, rights, and liabilities, and on schedule of employees of the Croatian Road Administration (Hrvatska uprava za ceste), Decision on the decrease of stock capital of the company Hrvatske ceste d.o.o. and the Decision on Amendments of the Founder’s Statement on the Establishment of the limited liability company Hrvatske ceste wherefore stock capital is decreased for HRK 21,513,400 and is determined in the amount of HRK 107,384,800. Operating subject - activities:  conduction of operational activities of a technical-technological unity of public roads system according to Strategy, through basic spatial, traffic, technical and economic research and analysis,  programming and planning of public road development, total projection for state roads and projection with research works, drafting professional base for location permit for highways,  construction of state roads, except highways, including:  repurchase of land and objects,  cession of construction works,  organisation of expert control and construction control,  organisation of technical inspection and takeover of State roads, except highways, and parts of state roads, except highways, for usage and maintenance,  maintenance of state roads, except highways, including:  planning, maintenance and security measurements,  regular and extraordinary maintenance,  cession of regular and extraordinary maintenance activities,  planning, expert control and maintenance control,  making decisions on usage of road land and conducting accompanying activities on state roads, except highways, and other. 13 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 General data on employees: The number of staff employed by the Company and the structure by qualification level at 31 December 2016 and at 31 December 2017 is presented as follows: Qualification At 31 December 2016 At 31 December 2017 structure Number % Number % M.Sc.,Dr 22 4,97% 24 5,29% University degree 243 54,63% 253 55,73% Higher education 59 13,54% 60 13,22% Secondary school certificate 106 23,93% 107 23,57% Skilled workers 7 1,58% 4 0,88% Other 6 1,35% 6 1,32% TOTAL 443 100,00% 454 100,00% 1.2. Company Bodies The Company Bodies are Assembly, Supervisory Board and Management Board. The Republic of Croatia, as the founder, exercises its rights through the Croatian Government, represented by a competent minister. The Supervisory Board has 5 members elected by the Company’s Assembly, out of which one of them is elected by the employees according to the Labour law. Every HRK 1,000,000 of stock capital gives to the Company’s member right to one vote. The Company's Management Board has one to three members elected by the Company's Assembly by its decision, at the proposal of the Ministry of the Sea, Transport and Infrastructure. Members’ mandate is 4 years and the Company’s Assembly may dismiss the Members of the Board at any time. Supervisory Board: Bariša Kusić, President since June 9, 2016 Ante Parat, Vice president since June 9, 2016 Božo Markić, Board member since June 8, 2016 Aleksandra Licul, Board member since January 22, 2018 Management Board: Josip Škorić, President since October 2,2017 Alen Leverić, Board member since October 2, 2017 Nikša Konjevod, Board member since October 2,2017 14 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Set out below are the principal accounting policies. 2.1. Statement of compliance and basis of presentation Financial statements of the Company for 2017 are prepared in accordance with the Accounting Act (National Gazette 78/15, 134/15, 120/16), with the International Financial Reporting Standards (''IFRS'') and with the Regulations on the structure and content of the annual financial statements (Official Gazette No 95/16). 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 assumption that going concern concept is applied. On 8 July 2012, new Roads Act came to power (National Gazette 84/11) in which articles 94, 95 and 96 explicitly define the implementation of a capital approach. The capital approach includes keeping records of certain operating events in the following way:  Assets of annual compensation for the usage of public roads, users' compensation and the compensation for the financing of building and maintenance of public roads by which the Republic of Croatia finances building, maintenance and other public roads' managing activities and also public roads, represent property of the Republic of Croatia (public capital), which is led separately in business books of legal entity which manages with public road.  The legal entity which manages with the public road into operating expenses includes depreciation of public roads which are managed. Part of depreciation which is not covered from own income is accrued by charging the assets of public capital.  Public capital also represents the income on the basis of foreign exchange differences, interest and other income realized on the basis of money management which represents public capital, and public capital is decreased for interest and other compensations connected with the financing of building and maintenance of public roads and also losses on the exchange.  Difference between own income and expenses realized in the business year is compensated by charging public capital in accordance with the approved operating plan of the Company.  Compensation for the financing of building and maintenance of public roads, which is paid by producers and importers of petroleum products and also the authority of the state administration for commodity supplies, is paid to the account of the Company and represents capital by which the Republic of Croatia finances building and maintenance of public roads, return of loans by which building of public roads is financed and also additional capitalization of the Company, in accordance with program.  Public capital is increased for the profit realized by the Company while the Republic of Croatia is the Company’s only member.  Assets arising from compensation for the financing of building and maintenance of public roads, which is paid by producers and importers of petroleum products as well as the authority of state administration for commodity supplies, are used for purposes in accordance with annual plans for building and maintenance of motor- roads which in accordance with Government brings the Company. 15 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 Standards, Interpretations and amendments issued by IASB and adopted by the EU Standards and Interpretations effective in the current period The following new standards and revised existing standards issued by the International Accounting Standards Board and Interpretations issued by the International Financial Reporting Interpretations Committee and which have been adopted in the European Union and are effective for the current period: Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealized Losses Amendments became effective for annual periods beginning on or after 1 January 2017, with prior authorization being allowed. The purpose of the amendment is to clarify the application for the recognition of deferred tax assets to unrealized losses in order to address the differences in practice related to the application of the provisions of IAS 12 Income Tax. Certain issues related to differences in practice in the treatment of temporary tax differences on the basis of fair value reduction, asset sale for an amount higher than the carrying amount and probable future taxable profits and consideration of a combined or separate impact assessment. Amendments to IAS 7: Disclosure Initiative Amendments shall be effective for annual periods beginning on or after 1 January 2017 or earlier, subject to prior authorization being permitted. The purpose of the amendment is to provide disclosures that allow users of financial statements to assess the impact of changes in liabilities from financial activities, including cash and cash equivalents. Amendments state that one way of meeting disclosure requirements is to align the spreadsheet between initial and closing positions in the statement of financial position for liabilities arising from financial activities, including changes in cash flows from financing, changes that result from loss or gain control over subsidiaries or other affairs, the effect of exchange rate fluctuations, changes in fair value and other changes. The application of the above-mentioned standards had no influence on the financial statements of the Company for 2017. 16 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2.2. Standards, Interpretations and Additions issued by the IASB and adopted in the European Union and are effective Standards and Interpretations issued by the Standards Board that are not yet effective and which the Company has not previously adopted At the date of issuance of these financial statements, the following standards, amendments and interpretations issued by the International Standards Committee that have not yet become effective and which the Company has not previously adopted: IFRS 9 Financial Instruments: Classification and Measurement The Standard is effective for annual periods beginning on or after January 1, 2018, with earlier use being allowed. IFRS 9 Financial Instruments Refers to All Phases of a Financial Instruments Project and Modifies IAS 39 Financial Instruments: Recognition and Measurement as well as all prior versions of IFRS 9. The Standard introduces new classification and measurement requirements, impairment and hedge accounting. The Company's Management plans to adopt the standard after its entry into force and is currently evaluating its impact. IFRS 15 Revenue Based on Customer Agreement The Standard is effective for annual periods beginning on or after 1 January 2018. The standard introduces a 5-step model to apply to customer-based revenue (with limited exceptions), regardless of the type of revenue transaction or industry. Standard requirements will also apply to the recognition and measurement of gains and losses on the disposal of some nonfinancial assets that are not part of regular corporate 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 execution obligations; changes in amounts of contract assets and liabilities between periods and key estimates and judgments. The Company's Management is currently evaluating the impact of this standard on financial reporting. IFRS 15 Income Based on Customer Agreement (Explanation) Explanations are effective for annual periods beginning on or after 1 January 2018, or prior to the earlier application. The purpose of the clarification is to clarify the purpose of the Board when defining the requirements of IFRS 15 Revenues under contract with customers, in particular accounting treatment of identified execution obligations by supplementing the definition of a "separately recognizable" principle, consideration of the relationship between the principal and the agent including an assessment of whether the transaction a principal or agent, as well as the application of access control and licensing, providing additional guidance for the accounting treatment of intellectual property and stockholding. Explanations also provide additional practical means for companies that apply IFRS 15 using a full retroactive approach or for those who opt for the use of a modified retroactive approach. The Management Board is currently evaluating the impact of these clarifications on financial reporting. 17 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 Standards and Interpretations issued by the Standards Board that have not yet become effective and which the Company has not previously adopted (continued) IFRS 16 Leases The Standard is effective for annual periods beginning on or after January 1, 2019. IFRS 16 defines the rules for recognition, measurement, presentation and disclosure for the leases of both parties, ie the buyer (the "lessee") and the supplier (the "lessor"). In accordance with the new standard the lessees most leases should be recognized in their financial statements. A single accounting model will be applied to all rentals, with certain exceptions. Accounting treatment of leases at the lessor will not be significantly altered. The Company's Management is currently evaluating the impact of this standard on financial reporting. The Company's management anticipates that all the above interpretations and standards will be applied in the Company's financial statements for periods as of effective date and that their adoption will have no material impact on the financial statements in the period of initial application. 2.3. Key estimates and uncertainty of estimates Certain estimates are used during preparation of the financial statements that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent liabilities. Future events and their influences could not be predicted with certainty and, following to this, the real results may differ from the estimated. Estimates utilized during preparation of the financial statements are subject to changes by the occurrence of new events, by gathering of additional experience, obtaining of additional information and comprehensions and by a change of environment in which the Company operates. Key estimates used in the application of accounting policies during preparation of the financial statements relate to depreciation and amortization of long-term intangible and tangible assets, impairment of assets, impairment of inventories, impairment of receivables and provisions and the disclosure of contingent liabilities. 2.4. Reporting currency The financial statements of the Company are prepared in Croatian Kuna as a functional and reporting currency of the Company. 2.5. Policy of recognition and measuring of income a) Operating income Income from business activities and other income are stated at value of received compensation or the originated receivable. Revenue is recognized on the date of its realization, i.e. on delivery date of products and at the degree of finalization when the result is possible to estimate. Date of delivery of products and goods is the day when the buyer takes the greater part of the risks and rewards of ownership, and when there is no uncertainty regarding to collection, related costs of products and goods and complaints. 18 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2.5. Policy of recognition and measuring of income (continued) a) Operating income (continued) Income from rendering of services is recognized according to the degree of their finalization. The degree of finalization is measured by portion of costs originated in the total expected costs necessary for the performing of service. Exceptionally, in case when concluded physical examination of performed works is in particular phases of finalization, the degree of finalization of service is measured by physical finalization of stipulated service. If the final result of service is difficult to estimate (e.g. due to uncertainty of collection) income is recognized up to the amount which is to be expected to be collected, but not more than total arisen costs upon such contract. Income is recognized only when it is possible that economic utilities connected with transaction will inflow to the Company. When the result of the transaction, which includes rendering of services, cannot be reliably assessed, income will be recognized only at the level of recognized costs which can be refunded. In case of uncertainty of collection of an amount included in income, the uncollectible amount is recognized as an expense, and the amount of revenue originally recognized is not corrected. b) Financial income Within financial income is stated interest income resulted from financial property. Interest income is considered realized in the period of gaining the right to interest and is stated as accruals until the balance sheet date. Penalty interest, which is accounted to matured receivables non timely paid, is recognized in income when the collection becomes certain, which is often connected with their real collection. Foreign exchange differences are recorded separately as gains and losses in the general ledger, but due to their significance they are separately shown in the profit and loss account. Positive exchange rate differences arising from the translation of cash, receivables and liabilities denominated in foreign currency (monetary items) into their kuna equivalent are included in the income statement as part of the financial income Dividend income is recognized on the day of the adoption of the Shareholders' Assembly Decision which distributes profits from operations. 2.6. Policy of recognition and measuring of expenses a) Operating expenses Expenses are recognized based on the direct connection between occurred expenses and certain realized items of income (principle of confrontation). Based on the mentioned, operating expenses represent all expenses in relation to invoiced income from providing services. Recognition of expenses is deferred to further accounting periods if it is expected realization of revenues in the next several accounting periods. Operating expenses include the costs of material, small inventory and services, maintenance services, the costs of gross salaries and wages, depreciation of own assets, depreciation of public goods (roads) and other operating expenses covered directly by debiting operating income. 19 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2.6. Policy of recognition and measuring of expenses (continued) b) Maintenance costs Expenses for repairs or maintenance of property, plant and equipment, results due to recovery or maintenance of future economic benefits that can be expected from the originally estimated standard results of an asset. These costs are recognized as an expense when occurred. c) Gross salaries and wages Employee benefits include wages, salaries and pension contributions, contributions on salaries, fees for use of annual leave and sick leave, participation in profits and bonuses and non- monetary benefits of current employees, and benefits after termination of employment, such as severance and life insurance, and are recorded as expense in the period in which they occur, regardless of whether the current obligation is settled, in the income statement within operating expenses. All pertaining tax levies directly connected to accrued wages and compensations are included in employees’ expenses and represent their constituent part. Reimbursement to employees in accordance with collective contracts, are included in employees’ expenses and is their component part in the period of gaining rights. So far as the period of obtaining of certain right differs from the period of payment for more than one year (long-term receipts), the liability has to be discounted by the average interest rate on the state bonds with similar maturity date. d) Depreciation and Amortization Intangible assets, property, plant and equipment are amortized and depreciated. The amount of investment in long-term assets shall be compensated by the depreciation according to agreed or appropriate period of use of individual right, respectively property, plant and equipment. When estimating of depreciation amount it is determined the expected residual value at the end of the useful life. If this residual amount is of no significance in relation to the total value of assets, it is not taken into depreciation count. Expected residual value of property which relates to roads is usually nil. Useful life is estimated for each item of property individually and depends on technical characteristics of assets, quickness of its economic obsolescence as well as its intended use. The depreciation/amortization rates applied are as follows: Description 2016 2017 year year Buildings 20 20 Roads and construction objects on roads 66.6 – 142.8 66.6-142.8 Equipment 20 20 Intangible assets 4 4 20 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2.6. Policy of recognition and measuring of expenses (continued) d) Depreciation and Amortization (continued) Depreciation/amortization count is performed by method which corresponds to realization of economic uses from assets. For roads and properties is expected similar benefit during the whole year, thus it is applied a proportional depreciation method for this property. Depreciation/amortization count is performed individually for all assets. During the year depreciation/amortization is calculated on an annual temporary calculation corrected for the change during the year. Depreciation begins to accrue after the month in which it has commenced the use of assets. Depreciation of public good (roads) as well as the accompanying equipment, in part which may be covered by own income, is charged to the expenses for the period, while the difference of the uncovered part of depreciation is to be covered by debiting public capital. a) Financial expenses Within financial expenses are recorded interest expenses resulted from business relationships, and are recognized as an expense in the period in which they are incurred and stated as accrued expenses until the reporting date. Foreign exchange losses arising from the translation of cash and receivables and liabilities denominated in foreign currency (monetary items) into their Kuna equivalent are recorded in the income statement. 2.7. Policy of assets disclosure a) Inventories Inventories are measured at cost or net worth, whichever is the lower. At the end of each year, the value of the inventory is impaired due to damage or other justified reasons, at the proposal of authorized persons for inventories. Inventory of raw material and material, spare parts, small inventory, packaging and car- tires are stated at the actual value that comprises invoiced value increased by all related acquisition costs which arose by bringing the inventory to present location and the existing state (custom fees, taxes, transportation costs and all other costs that may be attributed to the procurement) by applying method of weighted average cost. Commercial discounts and similar items are deducted when determining the purchase expenses. Items are recorded as small inventory when their useful life is shorter than one year, and when their individual value does not exceed HRK 3,500. When putting small inventory, packaging and car-tires in use, they are written off at time of consumption. Surpluses and shortages determined by annual inventory list (inventory counts) are recorded in business records within other income, respectively, other expenses. Income from sale of unmarketable goods from stocks is recorded within other income. 21 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2.7. Policy of assets disclosure (continued) b) Financial assets The Company classifies its financial assets in the following categories: (a) financial assets at fair value through profit and loss together with separate presentation of (i) financial assets which is, determined as such at initial recognition and (ii) financial assets intended for trade (b) investments held to maturity (c) loans and receivables (d) financial assets available for sale The classification depends on the purpose which the financial asset is acquired for. Management determines the classification of its financial assets at initial recognition. Financial assets at fair value Financial assets at fair value through profit or loss include financial assets intended for trading. Financial assets are classified into this category if they are primarily acquired for the purpose of selling in the short-term. Assets in this category are classified as short-term assets. Financial assets at fair value through profit and loss are initially recognized at fair value, and transaction cost is stated in the income statement. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss are presented in the income statement within financial income or financial loss in the period in which they arise. Financial assets available for sale Available-for-sale financial assets include non-derivative assets stated in this category or which is not classified in other category. It is included in non-current assets unless management intends to sell the investment within 12 months from the balance sheet date. Financial assets available for sale are measured at fair value unless fair value cannot be reliably measured, then the investment is carried at acquisition cost. Gains or losses arising from changes in fair value of investments available for sale are recognized directly through other comprehensive income. Upon sale or impairment, the cumulative gain or loss - which is the difference between the acquisition cost and current fair value is removed from equity and stated in the profit and loss. All purchased investments are recognized on the transaction date, the date on which the Company commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for financial assets not carried at fair value through profit or loss. Investments are derecognised when expired or the right to receive cash flows from investments have been transferred or when the Company has transferred substantially all risks and rewards of ownership. 22 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2.7. Policy of assets disclosure (continued) Investments in associates Investments in associates in which the Company has significant influence, and has no control are reported in separate financial statements at cost less impairment losses, if any. It is considered that the Company has significant influence, if directly or indirectly has between 20% and 50% of voting rights. Except voting rights, the Company may have a significant influence when it has the power to participate in decisions about financial and operating policies of associates. The Company annually reviews the existence of possible impairment cost of investment when an event or changes in circumstances indicate that the carrying amount may not be recoverable. Investments in associates for which it is stated impairment loss are reviewed at each balance sheet date for possible elimination of impairment. Income from dividends and shares are recorded in the income statement when the Company makes a decision about their payment. c) Property, plant and equipment (long-term tangible assets) Property, plant and equipment are tangible assets: - intended for use in the production or delivery of goods or services, for renting to others or for administrative purposes, and - for which is expected to be used for more than one accounting period Under the concept of property, plant and equipment, is its considered buildings with all purposes, plant and equipment (machines) and tools, plant and office inventory, furniture and transport equipment (assets), as defined in the Accounting Act and accounting standards. Purchase of property, plant and equipment during the year is recorded at purchase cost. Purchase cost represents invoiced value of acquired assets plus any costs incurred by putting the assets into use (import duties, delivery and transmission costs, installation, fees, costs of borrowing) and by the time of use of property. Subsequent expenditure relating to the already recognized assets is added to the carrying amount of that asset when it is probable that future economic benefits will inflow into the company in a higher amount than originally agreed. Subsequent expense, which prolongs the life of the asset, increased capacity of use or increased product quality increases the value of the asset, and all other expenses are recognized in the expense of the period in which they arise. After initial recognition of long-term assets single property, plant and equipment is stated at the cost model and the cost is decreased for accumulated depreciation and accumulated impairment losses, respectively. Carrying value of particular property, plant and equipment ceases to be recognized in the moment of disposal or when the future economic benefits are not expected from the usage or disposal of this property. 23 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2.7. Policy of assets disclosure (continued) c) Property, plant and equipment (continued) Gains or losses arisen from derecognition of property, plant and equipment are included into profit or loss of the period in which they are derecognized and are classified as income/expense in the amount of the difference between the net amount of receivables from disposal and accounting value of assets and recognized separately from operating income / expenses. Internally-generated long-term tangible assets are stated at cost (actual value), if the cost doesn't exceed market value. Roads, as public good that may not become an object of ownership, and which have been given to the Company for managing, are recorded within the Company's long-term assets and they are stated as public capital. Costs of designing, expropriation, construction, supervision and other costs related to construction of new roads, as well as investment and improvement maintenance costs, which relate to renovation and replacement of part of the road of limited duration of use, are all included in the value of the public good (roads). The construction and reconstruction of the public good (road) is financed from the fee paid from the state budget per litre of excise duty on energy sources, excess of own revenues, depreciation of public goods (roads), loans and donations. Borrowing costs that can be measured and attributable to the acquisition, construction or production of a qualifying asset are assigned to assets values and capitalized as part of the cost of the acquisition until the moment of asset activation, and are then recorded as an expense. Acounting policies adopted in 2017 have defined the capitalization policy of investment maintenance in long term assets. Treatment of long-term and short-term assets is regulated and it is defined as follows; - 50% of the cost capitalizes within the assets, while 50% presents expense in the profit and loss account, i.e. public capital, - reconstruction of the road will be recorded according to the share of reconstruction in the investment project as the expense or fixed asset increase. d) Intangible assets Intangible assets meet recognition conditions if acquired separately and arises from contractual or other legal rights. Intangible assets consist of rights, which use will produce economic benefits to the company in a period longer than one year, and whose individual cost value can be reliably measured. Amortization of intangible assets is counted according to the estimated useful lives and the contractual duration of rights for the utilization of single assets, respectively. In case of intangible property with indefinite useful life special attention is to be given to the impairment test which is for all the assets performed before preparation of the annual financial statements. Long-term intangible assets are measured at cost decreased for accumulated amortization and accumulated impairment losses. 24 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2.7. Policy of assets disclosure (continued) d) Intangible assets (continued) Carrying value of intangible assets is derecognized in the moment of disposal or when the future economic benefits are not expected from the usage or disposal of this asset. Gains or losses arisen from derecognition of intangible assets are included into profit or loss of the period in which they are derecognized and are classified as income/expense in the amount of the difference between the net amount of receivables from disposal and accounting value of assets. 2.8. Policy on recognition and measuring of liabilities Liabilities of the Company are divided into: (a) financial liabilities at fair value through profit and loss, with separate statement (b) financial liabilities measured at depreciated cost. In the depreciation cost of financial liabilities are included all fees, premiums, discounts and similar expenses. Those are included into effective interest rate by which these amounts are included into profit and loss for the period. 2.9. Policy of capital disclosure a) Share capital Share capital represents a part of the total Company's capital. Share capital is registered with the competent commercial court. b) Public capital Public capital represents the value of assets of the state roads, bridges, tunnels and other facilities on the roads, which are given to the Company under management and are reported in the business ledgers of the Company, but are not registered in the stock capital of the Company. Public capital is increased for income from fees on fuel. According to Roads Act, article 91, fee for the financing of building and maintenance of public roads is to be paid by the litre of a collected excise tax on fuel to the account of the Company from the state budget. Receipts from fuel charges represent funds to finance the construction and maintenance of state roads. Public capital is increased for other income and receipts which could be directly attributable to public capital as: public donations and subventions for the building of public good, foreign exchange gains related to public good and interest on special purpose deposits formed by public capital. Public capital is reduced for accumulated depreciation (depreciation) of public goods (roads) for the difference of the amount of depreciation uncovered by own revenues of the Company. Public capital is decreased for the amounts which could be directly attributed to public capital, as costs for the maintenance of state roads, financial expenses (loan origination fees, loan fees and guarantees, foreign exchange differences, interest expense in the period of loan repayment, costs of interest till the beginning of the period of repayment, penalty interest, etc.) which are not included into cost of public good. 25 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2.9. Policy of capital disclosure (continued) c) Profit for the year Profit for the year is the amount remaining after expenses were deducted from net income calculated for corporate income tax purposes. If expenses exceed income, the remaining amount represents net loss for the year. The Company does not state operating result neither as a gain or a loss, but with capital approach is booking-off income and expense items related to a public roads, public capital, and difference between income and expenses is compensated from public capital and stated in the Income statement as income for the period. 2.10. Corporate income tax Taxable income is the profit for the period specified in accordance with tax regulations, and according to which there is a duty of paying taxes on profit. The tax loss is loss for the period determined in accordance with tax regulations, according to which there is no obligation to pay corporate income tax. Corporate income tax expense is the cumulative amount of current and deferred taxes included in the determination of net profit or loss for the period. Deferred tax liabilities are the amounts of corporate income tax payable in future periods relating to taxable temporary differences. Deferred tax assets are amounts of corporate income tax recovery in future periods, and relate to: (a) temporary deductible differences (b) unused tax losses carried forward and (c) unused tax reliefs carried forward. Current tax liability is measured by actual tax rate, according to Income tax return. Deferred tax assets and liabilities are measured at income tax rate which is expected to be applied in the period of cancellation of difference. 2.11. Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risk and rewards of ownership to the lessee. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Finance leases are recognized at the beginning of the lease period by an amount equal to the fair value of the leased property, plant or equipment, or the present value of minimum payments, determined at the beginning of the lease, whichever value is lower. All initial direct costs of lessee are added to the amount that is recognized as an asset. The assets under finance leases are depreciated in the same manner as defined for intangible assets, respectively for property, plant and equipment. 26 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2.11. Leases (continued) However, if there is uncertainty as to the lessee to acquire ownership at the end of the lease, the assets are fully depreciated in a period shorter than the lease period. Operating leases are expensed on straight-line basis over the lease period. Vehicles that are used to control construction site, and which are provided for the duration of construction by contractors in the preparatory work are recognized in the amount of the market value as the assets of the Company on the completion date and after taking over the assets. The total value of the lease is equal to the difference between the purchase value of the vehicle by the contractor and the estimated value of the vehicle at takeover date. Lease value is recognized as the Company's asset in the accounting period in which this value has become measurable, i.e. takeover date. 2.12. Government grants and disclosure of government assistance Due to the specific role of the Company, and the specific methods of evaluation, billing and finance the core activities of the company Hrvatske ceste d.o.o., established under the Roads Act with the aim of construction and maintaining public roads, some of the inflows needed to finance the activities, is provided from the proceeds of fees from fuels from which it finances primarily construction of public goods, and the return of borrowed funds. Road as a public good over which one cannot acquire ownership rights, which are given to the management of the Company, are recorded within the long-term assets of the Company and stated as public capital. Construction and reconstruction of the public good (road) is financed from the oil derivative, excess of own revenues, depreciation of the public good (road), loans and donations. Public capital is increased by the proceeds of fees from petroleum products. According to the Roads Act, paragraph 91, receipts from fees from petroleum products are paid per litre delivered of collected cost to the Company’s account. Proceeds from the fees for petroleum products are used to cover part or the total depreciation of public goods (roads), if the Company's own resources are not sufficient for their coverage, and to finance road construction in a broader sense. Public capital is increased by other income and receipts that are directly attributable to public capital, such as special purpose donations and grants for the construction of public goods, foreign exchange gains related to public goods and interest on special purpose deposits formed by public capital funds. Public capital is decreased for impairment (depreciation) of public good (road) and by amounts that are directly attributable to public capital, such as financial expenses (loan origination fees, loan fees and guarantees, foreign exchange differences, interest expense in the period of repayment, the interest expense up to the beginning of the repayment period, default interest, etc.), which are not included in the purchase value of the public good. 27 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2.13. Provisions A provision is recognized only when the Company has a present obligation as a result of a past event and if it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and if a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Provisions are determined for costs of legal proceedings, costs of jubilee awards to employees and retirement costs (regular jubilee awards and severance pays) and also for the costs of stimulating severance pays based on a staff restructuring plan of the Company. Provisions for costs which relate to receipts of employees are based on expected receipts according to Collective contract and the Regulation on work in force. Provision of costs of jubilee awards to employees and retirement costs (regular jubilee awards and severance pays) is determined as a net book value of the future pay-offs using a discount rate equal to the average indebtedness interest rate of the Company. 2.14. Contingent liabilities and assets Contingent liabilities are not recognized in the financial statements but are disclosed in notes to the financial statements. A contingent asset is not recognized in the financial statements but is disclosed in the moment when an inflow of economic benefits is probable. 2.15. Events after the statement of financial position date / (balance sheet) date Events after the statement of financial position date / (balance sheet) date that provide additional information about the Company’s position at the statement of financial position date / (balance sheet) date (adjusting events) are stated in the financial statements before the approval for issuance of the financial statements by the Company’s Management Board. Those events which as a result have no adjustments are disclosed in notes to the financial statements if they are of material significance as the additional explanations on circumstances which have arisen during after expiration of business year. 2.16. The fair value of financial instruments Management of the Company is certain that the fair value of assets and liabilities stated in the statement of financial position / (balance sheet) does not differ significantly from their carrying amounts. 2.17. Information about operating segments The Company is not organized by production segments, but the Company uses the capital approach, which means the existence of the two parallel records of public good and own income and expenses, as also the assets, liabilities and capital arisen from these changes. Note III. to the financial statements include the Company's financial statements and financial statements of the public good. Individual positions of the financial statements are reclassified in relation to the financial statements presented on pages 7 to 9. 28 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 3. OPERATING INCOME 2016 2017 DESCRIPTION HRK HRK Income from issued licences and consents 18,659,013 24,745,392 Income from fees for the use of land and ancillary service 4,025,685 3,524,248 activities Income from services, tenders, trainings 597,718 571,276 Domestic sales 23,282,416 28,840,916 Income from own consumption 215,141 246,633 Other operating income 154,900,353 143,108,423 TOTAL 178,397,910 172,195,972 Income from issued licenses and consents disclosed in for the year 2017 in the amount of HRK 24,745,392 (2016: HRK 18,659,013) represents the Company's own revenue as defined in Art. 86 of the Roads Act and was generated from the fees for extraordinary transport and excessive use of public roads according to Regulation on the criteria for calculation of fees for special transport (National Gazette No 68/10) and the Decision of the Company on the amount and method of payment of the costs of issuing permits for special transport and cost of control of axle load, total weight and dimensions of vehicles. An increase of 33% in 2017 mainly refers to the significantly increased traffic of Zagrebtransa carriers related to economic activity on the construction of wind power plants. Income from fees for the use of land and ancillary service activities stated for the year 2017 in the amount of HRK 3,524,248 (2016: HRK 4,025,685) arose on the assignment of the rights to use the land along public roads. The terms and conditions for the use of the road land as well as conditions and procedure of assignment of usage of road land and the rights and obligations in performing ancillary services on the road land are determined in the Ordinance on the use of road land and performance of ancillary activities (National Gazette 78/14) and the Decision on level of fee for the establishment of right of easement and right of construction on a public road (National gazette No 87/14). Other operating income 2016 2017 DESCRIPTION HRK HRK Collected indemnities from insurance 1,474,637 1,471,664 Income from cash payment discounts 546,890 22,123 Income from damages and penalties collected 363,297 155,954 Recovery of amounts previously written off 1,394,567 1,731,951 Recovery of prior-period revenues 1,735,969 1,805,397 Income from sale of non-current assets 19,191 261,132 Write off of liabilities to suppliers 35,556 2,510 Other income not specified 506,725 221,998 Income from the refund of the cost of building a refugee camp 1,488,254 0 Rental income 285,900 255,054 Income from elimination of long-term provisions 16,557,691 0 Part of public capital for covering difference between income and expenses 130,491,676 137,180,640 TOTAL 154,900,353 143,108,423 4. MATERIAL EXPENSES 29 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 2016 2017 DESCRIPTION HRK HRK Energy 12,398,144 12,491,086 Raw material and supplies 1,237,247 1,176,917 Written -off small inventory and car-tires 184,864 353,829 TOTAL 13,820,255 14,021,832 5. SERVICE EXPENSES 2016 2017 DESCRIPTION HRK HRK Maintenance of buildings and equipment 5,428,680 6,790,757 Postage and telecommunication charges 2,726,718 2,679,892 Rental costs 3,007,185 3,141,397 Advertising 482,080 491,417 Intellectual services 695,247 1,009,680 Municipal utility services 1,311,985 1,409,349 Transportation 757,363 713,585 Property insurance premiums 429,276 524,995 Medical services 745,820 660,332 Student service expenses and other expenses 600,789 576,523 Bank and payment operation charges 235,562 220,529 Road and vehicle inspection fees 170,819 167,479 Advertising and promotion 153,835 425,273 Employee insurance premiums 151,154 105,205 Other services 1,071,042 919,060 TOTAL 17,967,555 19,835,473 6. EMPLOYEES EXPENSES 2016 2017 DESCRIPTION HRK HRK Net wages and salaries 54,330,609 56,388,878 Taxes and contributions from salaries 27,812,818 26,799,267 Contributions on salaries 14,128,903 14,308,505 TOTAL 96,272,330 97,496,650 7. DEPRECIATION AND AMORTIZATION 2016 2017 DESCRIPTION HRK HRK Depreciation and amortization of tangible and intangible assets 392,627,663 411,313,022 Transferred to equity (371,237,419) (391,698,673) TOTAL 21,390,244 19,614,349 30 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 7. DEPRECIATION AND AMORTIZATION (continued) The depreciation charge on public goods for the year 2017 charged to public capital amounts to HRK 391,698,673, in accordance with Art. 96 of the Roads Act. Depreciation of public roads (civil engineering structures with roadbed) is provided using the depreciation rates ranging from 0.70% to 1.50%. Since the Company is not the owner of the public roads, the depreciation of public roads was presented using the equity approach. Under the equity approach, depreciation of public roads is recognised as an expense in the income statement and covered out from own revenues to the possible extent. If own revenue is not sufficient to cover the total depreciation charge, the uncovered balance is recovered by charging it to public capital i.e. transferring the depreciation expense to the public capital. 8. OTHER COSTS 2016 2017 DESCRIPTION HRK HRK Cost of transportation to and from workplace 1,978,578 2,054,561 Other benefits 165,340 1,300,369 Per diems and business travel costs 420,749 440,455 Litigation costs and fees 321,420 2,005,929 Transport and accommodation costs - business travels 354,440 476,122 Fees to the members of the Supervisory Board 313,021 263,635 Professional training costs 375,313 692,447 Entertainment 127,406 113,416 Gifts and awards 333,700 307,200 Fieldwork allowances 289,288 360,452 Fund of voluntary pension insurance 1,553,100 1,572,900 Taxes independent of the operating result 194,986 134,619 Professional literature and press costs 92,828 115,183 Severance payments 48,000 72,000 Membership fees 158,765 176,340 Forest levies 45,063 45,273 Costs of environment protection 790 4,390 Trainee fees and scholarships 16,720 3,040 TOTAL 6,789,507 10,138,331 31 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 9. VALUE ADJUSTMENTS 2016 2017 DESCRIPTION HRK HRK Value adjustment of trade receivables 633,711 513,823 Value adjustment of other receivables 11,233,198 962,758 TOTAL 11,866,909 1,476,581 Value adjustment of other receivables for the year 2017 in the amount of HRK 879,816 was related to the write off receivables from the cities and counties for the co-financing works on state roads (in 2016 this amount was HRK 9.516.110, from which HRK 8.584.617 was related to the investment cycle of the county and local roads). 10. PROVISIONS 2016 2017 DESCRIPTION HRK HRK Provisions for retirement and long-service benefits 109,121 244,083 Litigation provision 0 1,001,312 TOTAL 109,121 1,245,395 Provisions based on ongoing lawsuits are charged to the income statement for those disputes relating to the Company, (disputes regarding ownership, management costs, labour disputes, etc.), and for all disputes caused by the construction or maintenance of state roads, provisions are debited to the public capital (failures to maintain state roads, compensation for damages due to accidents due to road construction, disputes over land for the construction of roads and similar expenses). In 2017 additional provision was made for retirement benefits (tax-recognized amount) in the amount of HRK 89,344 and for jubilee awards of HRK 154,739, and provisions for court proceedings initiated at the expense of the Company increased in the amount of HRK 1,001,312. 11. OTHER OPERATING EXPENSES 2016 2017 DESCRIPTION HRK HRK Penalties and damages 9,859,130 7,354,194 Subsequently determined expenditure 5,589 44,396 Non-written-off value of disposed assets and shortages 5,120 9,670 Other non-specified expenses 358,007 175,000 TOTAL 10,227,846 7,583,260 32 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 12. FINANCIAL INCOME 2016 2017 DESCRIPTION HRK HRK Income from investment in shares / stakes of related companies 400,000 450,000 Interest income 230,682 66,100 Sale of financial assets (net) 1,947,830 156,947 Dividends and other financial income 367,142 370,455 TOTAL 2,945,654 1,043,502 Financial income from investing in shares / stakes of related company in the amount of HRK 450,000 relates to the increase in the share capital of the company Via Tel d.o.o. from the profit for 2016. Revenues from sale of financial assets in the amount of HRK 156,947 are the difference between income and expenses from the sale of shares / stakes of the following companies: Pevec d.d., IKB Umag, PBZ i Istarske ceste d.o.o. Total income amounted to HRK 1,680,324, and expenditures amounted to HRK 1,524,518, and the brokerage fee was HRK 1,142. 13. FINANCIAL EXPENSES 2016 2017 DESCRIPTION HRK HRK Interest expenses – unrelated companies 2,899,797 1,827,603 TOTAL 2,899,797 1,827,603 33 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 14. CORPORATE INCOME TAX Set out below is the reconciliation between taxable profit and the accounting profit: Tax balance sheet Tax balance sheet POSITION 2016 2017 HRK HRK Total income 181,343,564 173,239,474 Total expenses (181,343,564) (173,239,474) Profit /(loss) for the year 0 0 Profit increase / loss decrease Depreciation and amortisation 89,184 0 70%/50% of entertainment expenses/30% of expenses for 565,715 753,190 the use of personal cars Shortages and fines 20,240 0 Expenditures determined in the supervisory process 0 1,742,360 Value adjustment and write off of receivables 1,725,931 1,250,226 Value adjustment of financial assets 0 0 Provision cost 0 91,027 Total profit increase/loss decrease 2,401,070 3,836,803 Profit decrease/loss increase Dividend income (574,143) (665,338) Proceeds from collection of receivables (118,748) (79,797) written off Government grants for training and education (268,502) (459,895) Total profit decrease/loss increase (961,393) (1,205,030) Tax base 1,439,677 2,631,773 Corporate income tax rate 20% 18% Tax liability 287,935 473,719 Paid advances (519,611) (373,329) Difference for payment/refund (231,676) 100,390 Advances for the following tax period 25,623 39,477 The corporate income tax rate effective in the Republic of Croatia for the year 2016 was 20% and for the year 2017 was 18%. The Company prepares its financial statements and declares profit in accordance with International Financial Reporting Standards, with some exceptions determined by the Roads Act (National Gazette 84/11, 22/13, 54/13, 148/13, 92/14). The departures in the presentation of the Company's profit were due to the application of the Roads Act. According to the noted Act, the loss for the period is charged to public capital. Otherwise, the loss for the year 2017 would amount to HRK 137,654,359 and for 2016 would amount to HRK 130,097,647. 34 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) For the year ended 31 December 2017 15. INTANGIBLE ASSETS Concessions, patents, licences, trade and Intangible assets DESCRIPTION service marks, software under development and other rights HRK HRK COST Balance at 1 January 2016 48,770,859 0 Additions 2016 0 6,358,182 Transfer to use 2016 6,358,182 (6,358,182) Balance at 31 December 2016 55,129,041 0 Additions 2016 0 10,574,727 Transfer to use 2016 10,574,727 (10,574,727) Disposal, alienation and deficiencies (4,613,777) 0 Balance at 31 December 2017 61,089,991 0 IMPAIRMENT Balance at 1 January 2016 38,099,322 0 Amortization 2016 8,766,067 0 Balance at 31 December 2016 46,865,389 0 Amortization 2017 5,483,950 0 Disposal, alienation and deficiencies 2017 (4,613,777) 0 Balance at 31 December 2016 47,735,562 0 NET CARRYING VALUE Balance at 1 January 2016 10,671,537 0 Balance at 31 December 2016 8,263,652 0 Balance at 31 December 2017 13,354,429 0 35 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 16. PROPERTY, PLANT AND EQUIPMENT Plant and DESCRIPTION equipment, tools, furniture, transport Prepayments for Tangible assets under Other tangible Total property, plant Land Buildings vehicles tangible assets construction assets and equipment COST HRK HRK HRK HRK HRK HRK HRK Balance at 1 January 2016 28,278,454 75,239,482,296 91,262,331 49,361,385 3,550,361,623 66,079 78,958,563,994 Addition 0 0 0 51,922,709 937,211,441 0 989,134,150 Transfer to use 1,633,774 1,479,013,822 6,948,130 0 (1,491,872,749) 31,050 (4,245,973) Changes on prepayments 0 0 0 (65,842,923) 0 0 (65,842,923) Transfer to CRA – investment cycle 0 (229,988,405) 0 0 0 0 (229,988,405) Transfer from CRA – categorisation 0 2,094,625,309 0 0 0 0 2,094,625,309 Peljesac Bridge - transfer to JK 0 0 0 0 (189,756,669) 0 (189,756,669) Transfer from HAC (DC 10) Reconstruction - transfer to JK 0 602,841,431 0 0 0 0 602,841,431 Reconstruction - transfer to JK 0 (97,767,503) 0 0 0 0 (97,767,503) Disposals, retirements, shortages 0 0 (3,780,352) 0 (133,392,671) 0 (137,173,023) Balance at 31 December 2016 29,664,074 79,088,206,950 98,210,441 35,441,171 2,805,943,646 97,129 81,920,390,388 Addition 0 0 0 51,818,861 885,892,579 0 937,711,440 Transfer to use 51,401 1,162,782,437 3,394,985 0 (1,173,199,805) 5,790 (6,965,192) Changes on prepayments 0 0 0 (45,297,488) 0 0 (45,297,488) Transfer from CRA – categorisation 0 175,491,664 0 0 0 0 175,491,664 Reconstruction - transfer to public capital 0 (64,925,180) 0 0 0 0 (64,925,180) Disposals, retirements, shortages 0 (123,605) (3,236,380) 0 (98,689,147) 0 (102,049,133) Balance at 31 December 2017 29,715,475 80,361,432,265 98,369,046 41,962,544 2,419,949,273 102,919 82,814,356,499 36 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 16. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) IMPAIRMENT Balance at 1 January 2016 0 7,805,271,120 82,545,488 0 0 0 7,887,816,608 Depreciation 0 379,533,456 4,328,140 0 0 0 383,861,596 Transfer of roads to CRA and cities 0 (22,175,049) 0 0 0 0 (22,175,049) Transfer of roads from CRA and cities 0 778,766,503 0 0 0 0 778,766,503 Disposals, retirements, shortages 0 0 (3,775,232) 0 0 0 (3,775,232) Balance at 31 December 2016 0 8,941,396,030 83,098,396 0 0 0 9,024,494,426 Depreciation 0 400,318,409 5,510,662 0 0 0 405,829,071 Transfer of roads to CRA and cities 0 110,382,542 0 0 0 0 110,382,542 Disposals, retirements, 0 (123,605) (3,226,710) 0 0 0 (3,350,315) shortages Balance at 31 December 2017 0 9,451,973,377 85,382,349 0 0 0 9,537,355,724 NET CARRYING VALUE Balance at 31 December 2016 29,664,074 70,146,810,920 11,331,693 35,441,171 2,672,550,975 97,129 72,895,895,962 Balance at 31 December 2017 29,715,475 70,909,458,889 9,206,346 41,962,544 2,286,554,602 102,919 73,277,000,775 37 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 16. PROPERTY, PLANT AND EQUIPMENT (continued) The Company's title to properties is not fully resolved. Therefore, the Company has no registered title to all the properties. Resolving the issues and registering the title are in progress. Movements in tangible assets under construction during 2017: Disposals and 31 Dec 2016 Additions 31 Dec 2017 DESCRIPTION retirements HRK HRK HRK HRK Administrative and assembly buildings and other facilities Total 5,202,556 5,967,684 1,315,806 9,854,434 JK - reconstruction SR land 3,936,568 18,654,813 5,312,397 17,278,984 JK - reconstruction SR projects 3,841,707 11,664,757 850,580 14,655,884 JK - reconstruction SR works 4,220,148 173,224,979 19,573,979 157,871,148 JK – reconstruction SR supervis. 113,400 9,988,536 1,261,136 8,840,800 JK - reconstruction DC - cofinancing (gra i pro) 0 0 3,870,482 (3,870,482) JK - reconstruction SR other 320 912,063 3,700 908,683 Reconstruction DC Total 12,112,143 214,445,148 30,872,274 195,685,017 JK - invest. maint. DC - land 27,419 4,090,047 4,117,466 0 JK - invest. maint. DC - projects 0 8,096,118 7,908,518 187,600 JK - invest. maint. DC - works 0 173,942,415 173,942,415 0 JK - invest. maint. DC - supervision 0 8,993,892 8,993,892 0 JK - invest. maint. DC – other 0 1,883,303 1,883,303 0 Investment maintenance SR Total 27,419 197,005,775 196,845,594 187,600 JK - DC – purchase of land 651,486,879 48,179,030 387,687,897 311,978,012 JK - DC - studies and projects 318,333,180 30,715,386 36,913,696 312,134,870 JK - DC - construction 1,286,785,963 307,162,074 556,984,686 1,036,963,351 JK - DC - cofinancing (578,257) 0 1,551,124 (2,129,381) JK - DC – other costs 37,478,537 18,226,375 31,680,893 24,024,019 JK - DC – consulting services 8,581,563 1,610,778 7,079,998 3,112,343 State roads – Total 2,302,087,865 405,893,643 1,021,898,294 1,686,083,214 JK - Bridges - purchase of land 78,479,379 17,830,014 573,546 95,735,847 JK - Bridges - studies and projects 71,852,850 3,720,171 603,116 74,969,905 JK - Bridges - construction 188,505,585 19,647,526 7,829,722 200,323,389 JK - Bridges – consulting services 0 920,290 0 920,290 Bridges - Total 338,837,814 42,118,001 9,006,384 371,949,431 JK - Tunnels - construction 0 14,496 14,496 0 Tunnels - Total 0 14,496 14,496 0 JK Betterment II – land 0 712,596 712,596 0 JK Betterment II – construction 0 4,943,847 4,943,847 0 JK Betterment II – studies and costs 0 2,483,366 2,483,366 0 JK Betterment II – supervision 0 395,932 395,932 0 Betterment II Total 0 8,535,741 8,535,741 0 Repair of landslides 14,283,178 7,992,628 0 22,275,806 Plant and equipment 0 3,680,096 3,160,996 519,100 Tools, fittings and vehicles 0 239,368 239,368 0 TOTAL 2,672,550,975 885,892,580 1,271,888,953 2,286,554,602 38 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 17. LONG-TERM FINANCIAL ASSETS 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Corporate shares 8,135,818 7,061,300 Investment in shares 8,135,818 7,061,300 Investment in long-term securities - frozen FX savings 644,738 644,737 Investments in securities 644,738 644,737 TOTAL 8,780,556 7,706,037 Investment in shares and stakes: 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK PBZ d.d. 70,818 0 Istarska kreditna banka d.d. Umag 225,900 0 Pevec d.d. 2,800 0 Industrogradnja d.d. 1,000 1,000 a) Total shares in companies 300,518 1,000 Via tel d.o.o. Zagreb 4,372,300 5,222,300 Istarske ceste d.o.o. Pula 1,225,000 0 Ceste Zadarske županije d.o.o. Zadar 676,000 676,000 Ceste Sisak d.o.o. 1,162,000 1,162,000 b) Total stakes in companies 7,835,300 7,060,300 TOTAL 8,135,818 7,061,300 The Company is sole founder and Member of the company Via Tel d.o.o., Zagreb. 18. LONG-TERM RECEIVABLES 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Receivables for flats with tenancy rights 2,805,222 2,262,727 TOTAL 2,805,222 2,262,727 39 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 19. INVENTORIES 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Inventories of raw material and supplies 16,218,645 15,326,117 Inventories of food in the restaurant 16,761 18,370 Small inventory in use 372,973 337,624 Value adjustment of small inventory in use (372,973) (337,624) Car tyres in use 465,828 494,951 Value adjustment of car tyres in use (465,828) (494,951) TOTAL 16,235,406 15,344,487 20. TRADE RECEIVABLES 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Domestic trade receivables 8,968,052 6,858,950 Bad and doubtful receivables 9,490,836 8,879,215 Value adjustment of bad and doubtful receivables (9,490,836) (8,879,215) TOTAL 8,968,052 6,858,950 The age structure of customer receivables is presented below 31 Dec 2016 31 Dec 2017 Overdue maturity date: HRK HRK Undue 5,282,532 6,257,551 Up to 60 days 654,867 420,396 From 61 to 180 days 276,773 0 Drom 181 to 360 days 1,264,382 70,235 Over 360 days 1,489,498 110,768 TOTAL 8,968,052 6,858,950 21. RECEIVABLES FROM EMPLOYEES AND COMPANY’S MEMBERS 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Receivables for shortages 180,673 91,226 Receivables for advances 500 500 Other amounts due from employees 146,736 215,932 TOTAL 327,909 307,658 40 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 22. RECEIVABLES FROM THE STATE AND OTHER INSTITUTIONS DESCRIPTION 31 Dec 2016 31 Dec 2017 HRK HRK Receivables from the Ministry of Finance (fuel fee) 175,912,322 94,485,715 Receivables for value added tax 36,487,120 27,723,070 Receivables from the Croatian State Health Insurance Fund 16,047 47,538 Other receivables (calc. interests on deposits) 77,047 72,194 TOTAL 212,492,536 122,328,517 23. OTHER RECEIVABLES 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Other receivables Hrvatske vode 3,387,738 3,387,738 Other receivables Municipality Brtonigla 613,432 500,000 Other receivables City Novi Vinodolski 804,573 804,573 Other receivables CRA Primorsko-gor. 87,497 87,497 Other receivables City Zagreb 0 435,556 Other receivables Municipality Vrpolje 386,833 0 Other receivables City Dubrovnik 33,938 33,939 Other receivables City Varaždin 1,339,001 1,339,001 Other receivables City Kutina 792,319 792,319 Other receivables City Karlovac 0 38,170 Other receivables - HEP ODS d.o.o. Elektra Zabok 0 925,000 Other receivables Vodovod d.o.o. Sl.Brod 318,062 318,062 Other receivables - HEP ODS d.o.o. Elektroistra Pula 0 344,766 Other receivables Ivanić Grad 378,087 378,087 Other receivables City Sisak 344,151 0 Other receivables City Čakovec 0 12,000 Other receivables - DUZS (refugee camp) 1,860,318 1,860,318 Other receivables – investm. cycle (CRA) 8,584,616 8,584,616 Other receivables City Belišće 95,135 0 Other receivables Elektroistra Pula 150,000 0 Value adjustment of other receivables (15,846,279) (16,225,832) TOTAL 3,329,421 3,615,810 24. CASH WITH BANKS AND IN HAND 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Foreign currency account 218,153,151 55,665,546 Gyro account balance 138,507,837 40,948,855 Specific-purpose funds and letters of credit 29,827,816 36,235,342 Cash in hand 59,033 59,488 TOTAL 386,547,837 132,909,231 41 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 25. PREPAID EXPENSES 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Prepaid expenses 33,000 82,018,320 TOTAL 33,000 82,018,320 On 23 November 2017, the Republic of Croatia was entrusted with the issuance of Eurobonds in the amount of EUR 1.275 million at a price of 97.883% of the nominal amount with a fixed interest rate coupon of 2.75% per annum and with maturity date on 27 January 2030. In the Fund Transfer Agreement concluded with the Ministry of Finance, the Company has approved the transfer of funds from the issue of bonds in the amount of 506,312,858 EUR. The financing cost of EUR 10,950,464 was derecognised over the term of the contract (145 months) and the cost recognition will be recorded quarterly. 26. CAPITAL The subscribed capital, as disclosed in the statement of financial position (balance sheet) at 31 December 2017 in the amount of HRK 107,384,800 (31 December 2016 in the same amount), represents own permanent sources of funding the operations of the Company and comprises the share capital registered at the Commercial Court in Zagreb. Public capital derived from the result, as reported in the statement of financial position (balance sheet) at 31 December 2017 in the amount of HRK 63,330,080,756 (31 December 2016: HRK 62,843,953,488), represents the net book value of public goods - public roads managed by the Company upon the establishment and the difference between proceeds (revenue) and expenditure (expenses and investments) on the public goods in the period subsequent to the establishment of the Company.  Receipts or increase of the public capital The component of public capital from other sources of funding includes proceeds such as net foreign exchange differences on the loans raised for the construction of state roads and other liabilities in connection therewith, interest on term deposit from the public capital and other. Amounts credited to public capital in 2017 were as follows: DESCRIPTION 31 Dec 2017 % portion HRK Capital increase - fuel reimbursement 1,942,555,598 91,91 Capital increase – co-financing of public goods 8,391,249 0,40 Capital increase – currency differences, interest and other 68,785,983 3,25 Capital increase – sale of salt to CRA 16,756,738 0,79 Capital increase – transfer from CRA categorisation of roads 65,109,124 3,08 Capital increase – Environmental Protection Fund - landslides 5,067,089 0,24 Capital increase – Zgb. Roads - donations of asphalt restoration 6,820,134 0,33 TOTAL 2,113,485,915 100,00 42 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 26. CAPITAL ( continued) Pursuant to Art. 86 and 91 of the Roads Act, fee for the financing of building and maintenance of public roads is to be paid for the litre of a collected excise tax on fuel in the amount of HRK 0.80 per litre to the account of the Company from the state budget. (see Note 2.9.b).  Expenditures or decrease of the public capital The component of public capital from other sources of funding includes expenditures such as interest on long-term loans, bank loan charges, fees for issued government guarantees, costs of co-financing other public goods and depreciation of state roads (to the extent not covered out by the Company's own revenue) that are treated as deductions from public capital. Amounts debited to public capital in 2017 were as follows: DESCRIPTON 31.12.2017 % portion HRK Capital decrease – transfer for costs and corporate income tax (137,654,359) 8,46 Capital decrease - depreciation (391,698,673) 24,07 Capital decrease – provisions for litigations (8,817,710) 0,54 Capital decrease – maintenance cost, investment, replaced part (98,689,147) 6,06 Capital decrease – reconstruction – replaced parts (64,925,180) 3,99 Capital decrease – co- financing of CRA according to Regulation Act (78,044,000) 4,80 Capital decrease – co- financing of NA (14,495,077) 0,89 Capital decrease – unutilized investment – Pelješac bridge (13,650,000) 0,84 Capital decrease - currency differences, interest and other (391,052,449) 24,03 Capital decrease – maintenance cost – regular (386,874,435) 23,77 Capital decrease – extraordinary maintenance DC (3,074,453) 0,19 Capital decrease – flood relief (16,128,869) 0,99 Capital decrease – research and develop. (5,497,557) 0,34 Capital decrease – cost value of sold salt to CRA (16,756,738) 1,03 TOTAL (1,627,358,647) 100,00 Profit for the year, stated in the statement of financial position (balance sheet) at 31 December 2017 in the amount of HRK nil (31 December 2016: HRK nil), represents the operating result based on the application of the equity approach described in Notes 2.9.c) and 14 to the financial statements. 43 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 27. PROVISIONS Movements in provisions in 2017 are shown as follows: 31 Dec 2016 New provisions 31 Dec 2017 DESCRIPTION HRK HRK HRK Long-term provisions for severance payments 786,145 89,344 875,489 Long-term provisions for jubilee awards 1,036,554 154,739 1,191,293 Long-term litigation provisions 157,462,418 9,819,022 167,281,440 TOTAL 159,285,117 10,063,105 169,348,222 As stated in point 10, the provisions on the commencement of court proceedings shall be charged to the income statement for disputes relating to the Company (disputes concerning ownership, management costs, labor disputes and the like) and for all disputes that are the cause of construction or maintenance of state roads (failure to maintain state roads, compensation for damage caused by traffic accidents due to road construction, land dispute over road construction and the like). In 2017, pursuant to the Decision of the Management Board, a provision was made for litigation initiated in the amount of HRK 9,819,022 as a result of the difference between the new lawsuits for the extraordinary rendition, Auto Zagreb Zagreb-Macelj 1.406.616,00 kuna, PBZ's lawsuit on the basis of the cessation with the Viadukt due to the termination of the bridge construction contract on the mainland of the island of Čiovo 27,012,282 kn and settled disputes during 2017. 28. LONG-TERM LIABILITIES 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Liabilities to banks in Croatia 8,217,028,633 7,859,343,225 Liabilities to banks abroad 1,592,153,402 1,520,186,408 Current portion of long-term debt (see Note 29) (1,893,687,866) (545,432,053) TOTAL 7,915,494,169 8,834,097,580 Banks in Croatia Interest 31 Dec 2017 Current portion Long-term portion rate HRK HRK HRK < 2% 0 0 0 2%-4% 7,087,497,749 (357,962,046) 6,729,535,704 4%-6% 771,845,476 (66,120,102) 705,725,373 TOTAL 7,859,343,225 (424,082,148) 7,435,261,077 Banks abroad Interest 31 Dec 2017 Current portion Long-term portion rate HRK HRK HRK < 2% 193,213,352 (40,383,167) 152,830,185 2%-4% 706,809,942 (24,599,160) 682,210,782 4%-6% 620,163,114 (56,367,578) 563,795,536 TOTAL 1,520,186,408 (121,349,905) 1,398,836,503 44 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 28. LONG-TERM LIABILITIES (continued) Movements in amounts due to banks and other financial institutions are presented as follows: 2016 2017 DESCRIPTION HRK HRK At l January 10,025,859,418 9,809,182,035 Loans paid (1,418,543,002) (5,215,470,806) New loans 1,300,628,874 4,703,232,650 Exchange differences (98,763,255) 82,585,754 At 31 December 9,809,182,035 9,379,529,632 Current portion of the principal (1,893,687,866) (545,432,053) At 31 December 7,915,494,169 8,834,097,579 Long-term liabilities to banks and other financial institutions are due as follows: Amount Maturity year HRK 2019 702,845,778 2020 760,217,353 2021 739,379,132 After 2021 6,631,655,316 TOTAL 8,834,097,579 45 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 28. LONG-TERM LIABILITIES (continued) An overview of amounts due to banks in Croatia is presented below: Agreed amount in Intere Long-term Domestic banks Year due Currency the original Payment 31 Dec 2017 Current portion st rate portion currency HRK HRK HRK ZABA d.d., PBZ d.d. i SG - Splitska Banka d.d., Semi annual. Split 2019. KN 524,000,000 2-4% 99,809,524 (49,904,762) 49,904,762 ZABA d.d. EUR Semi annual. 2023. 85,000,000 2-4% 305,446,125 (55,535,659) 249,910,465 PBZ d.d. i SG-Splitska banka d.d. EUR Semi annual. 2021. 53,000,000 2-4% 214,427,954 (61,265,130) 153,162,824 ERSTE & STEIERMAERKISCHE BANK d.d. EUR Semi annual. 2023. 66,000,000 4-6% 363,660,563 (66,120,102) 297,540,461 ERSTE BANK d.d., PBZ d.d., SG-SPLITSKA Semi annual. BANKA, ZABA d.d. 2022. EUR 140,000,000 2-4% 860,654,225 (191,256,495) 669,397,731 EUR Quartarly HBOR 2033. 95,194,088 4-6% 408,184,912 0,00 408,184,912 ERSTE BANK d.d., PBZ d.d., SGE-SPLITSKA Semi annual. BANKA, ZABA d.d. 2027. EUR 89,000,000 2-4% 668,714,672 0,00 668,714,672 ERSTE BANK d.d., HPB d.d., PBZ d.d., SG- Semi annual. SPLITSKA BANKA, ZABA d.d. 2027. EUR 80,000,000 2-4% 601,091,840 0,00 601,091,840 ERSTE BANK d.d., HPB d.d., PBZ d.d., SG- Semi annual. SPLITSKA BANKA, ZABA d.d. 2027. EUR 60,000,000 2-4% 450,818,880 0,00 450,818,880 MINISTARSTVO FINANCIJA 2030. EUR 517,263,323 Annual. 2-4% 3,886,534,530 0,00 3,886,534,530 TOTAL amounts due to banks in Croatia 7,859,343,226 (424,082,148) 7,435,261,077 46 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 28. LONG-TERM LIABILITIES (continued) An overview of amounts due to banks abroad is presented below: Year Agreed amount in Interest Banks abroad Currency Payment 31 Dec 2017 Current portion Long-term portion due the original currency rate HRK HRK HRK European Investment Bank Semi I ("EIB") 2027. EUR 60,000,000 annual. 4-6% 267,149,030 (30,160,317) 236,988,713 International Bank for Semi Reconstruction and annual. Development (IBRD) 2018. EUR 76,200,000 < 2% 28,626,999 (28,626,999) 0 European Investment Bank Semi II (betterment II/A) 2030. EUR 60,000,000 annual. 4-6% 353,014,084 (26,207,261) 326,806,823 European Investment Bank Semi III (Splitska bypass) 2036. EUR 42,900,000 annual. 2-4% 267,510,838 (12,703,506) 254,807,332 European Bank for Semi Reconstruction and annual. Development (EBRD) 2031. EUR 33,347,054 < 2% 164,586,353 (11,756,168) 152,830,185 Europska Investicijska Semi Banka IV (betterment ll/B) 2034. EUR 60,000,000 annual. 2-4% 439,299,104 (11,895,654) 427,403,450 TOTAL amounts due to 332,447,054 banks abroad 1,520,186,408 (121,349,905) 1,398,836,503 / i / The loan agreement concluded on 12 December 2006 with the European Bank for Reconstruction and Development (EBRD) includes contractual provisions based on business indicators. In case of non-fulfillment of these contractual provisions by the Company, the loan obligation becomes due. Under the contract, the Company's obligation is to meet the contractual ratios at each reporting date. As of 31 December 2017, the company did not meet the contractual requirements, however, a written statement by the bank on 21 December 2017 was received that it would not use the right of early payment of loans irrespective of unfulfilled contractual provisions. 47 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 29. LIABILITIES TO RELATED COMPANIES 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Liabilities to Via tel d.o.o. 208,164 317,102 TOTAL 208,164 317,102 30. LIABILITIES FOR LOANS, DEPOSITS ETC. 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Liabilities for received deposits 1,113,531 4,399,988 Liabilities for bail and subscriptions 448,352 942,018 TOTAL 1,561,883 5,342,006 31. LIABILITIES TO BANKS AND OTHER FINANCIAL INSTITUTIONS 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Interest payable on loans 121,151,300 34,054,990 Current portion of long-term loans (see Note 27) 1,893,687,866 545,432,053 TOTAL 2,014,839,166 579,487,043 32. TRADE PAYABLES 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Trade accounts payables – investments 165,073,060 146,172,164 Trade accounts payable - goods and services 106,844,296 106,551,967 Liabilities under cession arrangements 15,150,127 17,150,299 Liabilities under factoring arrangements 4,744,296 3,619,146 TOTAL 291,811,779 273,493,576 The aging structure of trade payables is presented below: 31 Dec 2016 31 Dec 2017 HRK HRK Undue 270,780,806 234,665,167 Up to 60 days 9,210,636 24,230,814 From 61 to 180 days 657,683 696,390 Drom 181 to 360 days 1,459,682 4,725,566 Over 360 days 9,702,972 9,175,639 TOTAL 291,811,779 273,493,576 48 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 33. LIABILITIES TO EMPLOYEES 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Net salaries and wages 4,966,473 5,213,902 Other liabilities to employees 219,891 230,306 TOTAL 5,186,364 5,444,208 34. LIABILITIES FOR TAXES, CONTRIBUTIONS AND SIMILAR PAYMENTS 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Value added tax 14,732,333 11,609,176 Contribution from salaries 1,498,611 1,602,371 Liabilities in respect of purchase of socially- 1,773,060 1,470,772 owned flats - 65% Contribution on salaries 1,288,810 1,378,040 Taxes and surtaxes out of salaries 1,027,972 1,195,359 Corporate income tax payable (184,457) 100,390 Contributions independent of the operating result 6,330 18,244 TOTAL 20,142,659 17,374,352 35. OTHER SHORT-TERM LIABILITIES 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Liabilities to CRA 18,088,061 21,556,321 Liabilities for collected guarantees 25,619,718 0 TOTAL 43,707,779 21,556,321 36. ACCRUED EXPENSES AND DEFERRED INCOME 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Accrued expenses for co-financing CRA 17,284,392 23,153,180 Accrued expenses for co-financing NC 20,000,000 20,000,000 Deferred income from use of road land 923,605 686,429 Deferred income -collected guarantees 6,567,201 48,473,455 Deferred income -EU funds 95.328.988 225,007,108 Deferred income -collected guarantees- guarantee period 0 2,460,803 TOTAL 140.104.186 319.780.975 Accrued expenses and deferred income at 31 December 2017 in the amount of HRK 319,780,975 (31 December 2016: HRK 140,104,186) relate to accrued expenses in the amount of HRK 43,153,180 (31 December 2016 in the amount of HRK 37,284,392), the obligation for repayment guarantees for bail in the amount of HRK 2,460,803, deferred revenue in the amount of HRK 274,166,992 (31 December 2016 amounting to HRK 102,819,794). 49 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 36. ACCRUED EXPENSES AND DEFERRED INCOME (continued) Accrued expenses are related to the funds that are arranged by the Ordinance on the allocation of funds for the construction and maintenance of public roads, county administrations for roads in the 2017 (National Gazette 28/17 and amendments thereof, National Gazette 52/17 and 121/17) and the Approval by the competent minister to allocate funds for the winter maintenance costs on non-classified roads, allocated to cover the costs of maintaining public roads, i.e. county and local roads and unclassified roads, for which, by 31 December 2017, managers did not submit documents on completed works, respectively the costs of winter service. Deferred income in the amount of HRK 274,166,992 relates to road land fees in the amount of HRK 686,429, collected guaranties in the amount of HRK 48,473,455 (31 December 2016 in the amount of HRK 6,567,201) which is awaiting a resolution of disputes over compensation for damage due to termination of contract by the perpetrator of the works, and the funds received on the base of requirements for reimbursement of funds for the projects financed by EU funds in the amount of HRK 225,007,108 (31 December 2016 in the amount of HRK 95,328,988) The overview of projects funded from EU funds is given below: DESCRIPTION 31 Dec 2017 HRK Most kopno - otok Čiovo 89,909,066 Južna obilaznica Osijeka 46,394,260 Obilaznica Vodica (studija i gradnja) 37,560,830 Plano - Split 30,032,535 Most Pelješac i pristupne ceste, stud.povezanosti teritorija RH 17,086,255 Sp.cesta čvor Škurinje-Luka Rijeka 758,250 Dubrovnik-zračna luka-gr.Crne Gore 627,742 Obilaznica Dicma 534,075 Južni dio obilaznice Poreča 512,943 Obilaznica Nedelišća i Pušćina 451,819 Istočna vezna cesta u Sl.Brodu 449,732 Obilaznica Petrijevaca 400,529 Ostali projekti - EU fondovi-Program sanacije opasnih mjesta na državnim cestama HR 286,450 Crocodile II 2,622 TOTALo 225,007,108 50 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 37. RELATED PARTY TRANSACTIONS Naziv povezane stranke Rceivables Liabilities Income Expense HRK HRK HRK HRK 2017. Via tel d.o.o. 0 317,102 0 1,370,861 Hrvatska elektroprivreda 1,273,889 3,584,000 1,040,114 10,942,376 Hrvatske šume 2,624 0 576,226 26,750 Hrvatske vode 0 56,486 0 6,175,713 Hrvatska pošta 0 69,206 0 477,723 Narodne novine 0 60,692 0 461,544 Hrvatska radio televizija 0 0 0 132,000 Hrvatske telekomunikacije 67,376 629,568 371,111 2,508,777 INA Matica 0 388,302 44,660 1,751,206 1,343,889 5,105,356 2,032,111 23,846,950 2016. Via tel d.o.o. 208,164 1,230,502 Hrvatska elektroprivreda 156,406 1,725,289 154,296 11,013,124 Hrvatske šume 12,920 0 483,410 0 Hrvatske vode 650 0 1,120 5,861,086 Hrvatska pošta 0 87,958 0 493,458 Narodne novine 0 18,506 0 449,977 Hrvatska radio televizija 0 0 0 144,960 Hrvatske telekomunikacije 63,338 504,221 453,315 2,238,345 INA Matica 750 357,899 0 1,551,145 234,064 2,902,037 1,092,141 22,982,597 38. MANAGEMENT REMUNERATION Management remuneration is presented as follows: 2016 2017 DESCRIPTION HRK HRK Gross salaries 500,776 544,297 TOTAL 500,776 544,297 51 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 39. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Capital risk management The Management Board of the Company manages its capital to ensure that it will be able to continue as a going concern, while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Company consists of cash and cash equivalents, and equity attributable to the equity holders of the Company, which consists of the share capital and public capital. Gearing ratio The Management Board of the Company reviews the capital structure. As a part of this review, the Management Board considers the cost of capital and the risks associated with each class of capital. The gearing ratio for the year ended 31 December 2017 was 14.58 (year ended 31 December 2016: 14.97%). 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Long-term and short-term loan debt 9,809,182,035 9,379,529,632 Financial liabilities 9,809,182,035 9,379,529,632 Less: Cash with banks and in hand (386,547,837) (132,909,231) Net debt 9,422,634,198 9,246,620,401 Equity 62,951,338,288 63,437,465,556 Net debt-to-equity ratio 14,97% 14,58% Categories of financial instruments 31 Dec 2016 31 Dec 2017 DESCRIPTION HRK HRK Non-current financial assets 644,737 644,737 Long-term receivables 2,805,222 2,262,727 Short-term receivables 225,117,919 133,110,935 Cash with banks and in hand 386,547,837 132,909,231 Financial assets 615,115,715 268,927,630 Loan liabilities 9,809,182,035 9,379,529,632 Other liabilities 413,171,243 307,865,667 Financial liabilities 10,222,353,278 9,687,395,299 Financial risk management objectives The Management Board of the Company monitors and manages financial risks arising from the Company's operations using internal reports analysing the exposures by degree and magnitude of risks. These risks include market risk (including currency risk and price risk), credit risk, liquidity risk and cash flow interest rate risk. The Company seeks to minimize the effects of these risks. The Company does not enter into, or trade with financial instruments, including derivative financial instruments, for speculative purposes. 52 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 39. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT(continued) Foreign currency risk management The official currency of the Company is Croatian Kuna ("HRK"). However, certain foreign-currency denominated transactions are translated to Croatian Kuna using exchange rates in effect at the reporting date. Hence, the Company is potentially exposed to the risk of fluctuations in foreign exchange rates. Since a significant number of loans are subject to a currency protection clause (mainly Euro), the Company's exposure to this risk is significant. The net carrying value of the Company's cash assets and liabilities denominated in foreign currency at the reporting date is as follows: Liabilities Assets DESCRIPTION 31 Dec 2016 31 Dec 2017 31 Dec 2016 31 Dec 2017 HRK HRK HRK HRK EUR 9,659,467,749 9,279,720,108 218,153,151 55,665,546 Foreign currency sensitivity analysis The following table details the Company’s sensitivity to a 1% increase and decrease in the Croatian Kuna against the relevant currency. The sensitivity analysis includes foreign currency denominated receivables and liabilities and adjustments of their translation at the period end for a 1% change in foreign currency rates. The sensitivity analysis includes external loans where the denomination of the loan is in a currency other than the currency of the lender or the borrower. A positive number below indicates an increase in profit and other equity components where HRK strengthens 1% against the relevant currency. For a 1% weakening of the HRK against the relevant currency, there would be an equal effect, but the balance would be negative. 2016 2017 DESCRIPTION HRK HRK EUR change effect 96,594,677 93,795,296 TOTAL 96,594,677 93,795,296 Price risk management The Company provides its services on the market of the Republic of Croatia. The Management Board of the Company determines the prices for its services with consent of the Croatian Government. 53 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 39. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT(continued) Interest rate risk Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates relative to the interest rate, which applies to the financial instrument. Interest rate cash flow risk is the risk that the interest cost of an instrument will fluctuate over time. The Company is exposed to the interest rate risk on its variable rate borrowings. Interest rate sensitivity analysis The sensitivity analysis has been determined only for financial instruments with floating interest rate, based on the Company’s exposure at the end of the reporting period. For floating interest rates, the analysis is prepared assuming that the amount of outstanding liability at the date of the statement of financial position, was outstanding for the whole year. A 50 basis-point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents Management’s assessment of the reasonably possible change in interest rates. In the event of an increase in interest rates for 50 base units, the balance of credit indebtedness as at 31 December 2017 would result in an interest expense increase of HRK 17,823,119 on the basis of interest rate risk exposure (2016: in the amount of HRK 49,045,910). This can mainly be attributed to the Company's exposure to interest rate risk due to floating interest rate loans. Credit risk management Credit risk refers to the risk that counterparty will fail to meet its contractual obligations resulting in financial loss to the Company. The credit risk arising from collecting of short-term receivables is relatively low, as receivables from the State are recovered within the periods defined by applicable laws. Trade receivables are impaired for bad and doubtful receivables. Liquidity risk management Liquidity risk is the risk that the Company will not be able to meet its financial liabilities to the counterparty. Ultimate responsibility for liquidity risk management rests with the Management Board, which has built an appropriate liquidity risk management framework for the management of the Company's short, medium and long-term funding and liquidity management requirements. During the reporting period, the Company was settling the amounts it owes to its creditors, suppliers and the State within the legally defined deadlines. As disclosed in Note 28 to the financial statements, the most significant portion of financial liabilities is due after 2018. The Company manages its liquidity by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. 54 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 39. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT(continued) Analysis of liquidity risk The following table analyses the remaining period until the contractual maturities of the Company's financial liabilities. The table is composed of undiscounted cash outflows on financial liabilities at the earliest date on which the Company may request the payment. The table includes cash flows of principal and interest. The remaining period up to the contractual maturity of the Company's financial liabilities is as follows: 6 months – 1 LIABILITIES 1-6 months year 1 - 5 years Over 5 years Total HRK HRK HRK HRK HRK 2017 Interest free 132,909,231 - - - 132,909,231 Interest bearing 893,838,969 9,175,639 2,371,790,485 6,951,436,291 10,226,241,384 2016 Interest free 386,547,837 - - - 386,547,837 Interest bearing 1,077,142,035 1,063,520,034 6,731,442,729 3,636,571,272 12,508,676,070 The following table analyses the remaining period until the contractual maturities of the Company's financial assets. The table is composed of undiscounted cash inflows on financial assets at the earliest date on which the Company may request the payment. The remaining period up to the contractual maturity of the Company's financial assets is as follows: 6 months – 1 ASSETS 1-6 months year 1 - 5 years Over 5 years Total HRK HRK HRK HRK HRK 2017 Interest free 133,110,935 - 2,262,727 - 135,373,662 2016 Interest free 225,117,919 - 2,805,222 - 227,923,141 40. LEGAL DISPUTES AND CONTINGENT LIABILITIES The Company maintains systematic records of legal disputes against and initiated by the Company. The Legal, HR and General Affairs Unit is assisted by external attorneys. However, the records of legal actions managed by external attorneys are kept at the Company. At 31 December 2017, there were 1,171 legal disputes outstanding against the Company, with the total claims amounting to approximately HRK 226,232,393 (31 December 2016: 1,221 legal disputes, with the total claims of approximately HRK 221,273,430). Legal disputes and other contingent assets and liabilities are not included in the statement of financial position because the ultimate outcome and the eventual cash outflows and inflows on the basis of those actions are uncertain. When the outcome of contingencies becomes certain, the related amounts are presented as extraordinary income, where the outcome results in inflows, or provisions where the outcome results in losses. 55 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements For the year ended 31 December 2017 (continued) 40. LEGAL DISPUTES AND CONTINGENT LIABILITIES (continued) As described in Note 26 to the financial statements, at 31 December 2017 the Company recognised litigation provisions based on the professional legal advice. 41. EVENTS AFTER THE STATEMENT OF FINANCIAL POSITION DATE / BALANCE SHEET DATE After the end of the business year, and following the completion of this Report on the Project for the Modernization and Restructuring of the Road Sector, as part of Phase II of the Financial Restructuring, on 10 April 2018, reprogrammed the eight loans of commercial banks, the closure of which resulted in a new syndicated loan with the same banks but under changed lending conditions that will enable sustainable operations and balance of debt servicing assets in relation to long-term projections of income and expense from the Company's financial plan. On 23 April 2018, representatives of the Company and the Chinese consortium China Road and Bridge Corporation signed a contract for the construction of the South Dalmatia Transport Connection Project, phase I - Construction of the mainland bridge - Pelješac with access roads worth HRK 2 billion. 42. PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS The financial statements set out on the pages above were prepared and authorised for issuance by the Management Board of the Company on 30 March 2018. Signed on behalf of the Board of Hrvatske ceste d.o.o., Zagreb Josip Škorić, Chairman of the Board Alen Leverić, Board Member Nikša Konjevod, Board Member 56 HRVATSKE CESTE d.o.o., Zagreb III. FINANCIAL STATEMENTS OF THE PUBLIC GOOD As the equity approach implies keeping simultaneously two sets of accounts, one for public goods and one for own revenue and expenses, as well as assets, liabilities and equity arising from those changes, set out below are the financial statements of the Company and the financial statements of the public good. Certain items of the financial statements are reclassified compared to the financial statements set out on pages 7 to 9. 57 HRVATSKE CESTE d.o.o., Zagreb BALANCE SHEET AS OF 31 DECEMBER 2017 POSITION Company Public good Total HRK HRK HRK ASSETS LONG TERM ASSETS Tangible and intangible assets 163,897,156 73,126,458,049 73,290,355,205 Financial assets 7,706,037 0 7,706,037 Receivables 2,262,727 0 2,262,727 Total long-term assets 173,865,920 73,126,458,049 73,300,323,969 SHORT TERM ASSETS Inventories 18,370 15,326,117 15,344,487 Receivables Trade receivables 6,858,950 0 6,858,950 Receivables for prepayments 0 0 0 Other receivables 14,283,519 111,968,465 126,251,984 TOTAL receivables 21,142,469 111,968,465 133,110,934 Cash 76,820,293 56,088,938 132,909,231 SHORT TERM ASSETS 97,981,132 183,383,520 281,364,652 PREPAYMENTS AND ACCRUED INCOME 0 82,018,320 82,018,320 TOTAL ASSETS 271,847,052 73,391,859,889 73,663,706,941 EQUITY AND LIABILITIES CAPITAL AND RESERVES Subscribed capital 107,384,800 0 107,384,800 Public capital from the result 0 62,729,800,708 62,729,800,708 Profit / (loss) for the year (137,654,359) 737,934,407 600,280,048 Total capital and reserves (30,269,559) 63,467,735,115 63,437,465,556 PROVISIONS 26,159,641 143,188,581 169,348,222 LONG TERM LIABILITIES 198,450,248 8,635,647,332 8,834,097,580 SHORT TERM LIABILITIES Trade payables 14,604,737 259,205,940 273,810,677 Taxes and contributions payable 17,374,352 0 17,374,352 Liabilities to employees 5,444,208 0 5,444,208 Short-term loan liabilities 34,054,990 545,432,053 579,487,043 Other liabilities 5,342,006 21,556,322 26,898,328 Total short-term liabilities 76,820,293 826,194,315 903,014,608 ACCRUED EXPENSES AND DEFERRED INCOME 686,429 319,094,546 319,780,975 TOTAL EQUITY AND LIABILITIES 271,847,052 73,391,859,889 73,663,706,941 58 HRVATSKE CESTE d.o.o., Zagreb INCOME STATEMENT for the period from 1 January to 31 December 2017 Budgeted 2017 Budget Deviation POSITION 2017 Company Public good Total realization from budget HRK HRK HRK HRK % HRK OPERAATING INCOME Fuel income 2,012,000,000 0 1,942,555,598 1,942,555,598 -3,45% (69,444,402) Income from co-financing (cities and munic.) 6,000,000 0 8,391,249 8,391,249 39,85% 2,391,249 Income from Enviroment protection fond- lendslides 10,000,000 0 5,067,089 5,067,089 -49,33% (4,932,911) Sales income 21,160,000 28,840,916 0 28,840,916 36,30% 7,680,916 Sales income (salt) 0 0 16,756,738 16,756,738 0% 16,756,738 Income from usage of own cars 200,000 246,633 0 246,633 23,32% 46,633 Other income (rental) 200,000 255,054 255,054 27,53% 55,054 Provisions 0 0 0 Total operating income 2,049,560,000 29,342,603 1,972,770,675 2,002,113,278 -2,31% (47,446,722) OPERATING EXPENSES Raw material and material (40) 14,809,000 14,021,832 0 14,021,832 -5,32% (787,168) Sold goods (salt) 0 16,756,738 16,756,738 0% 16,756,738 Transfer of funds to CRA and NC 98,000,000 0 92,539,077 92,539,077 -5,57% (5,460,923) Regular maintenance 371,000,000 0 373,115,782 373,115,782 0,57% 2,115,782 Extraordinary maintenance 19,000,000 0 3,074,453 3,074,453 -83,82% (15,925,547) Repair of damage on the flooded areas 14,000,000 0 16,128,869 16,128,869 15,21% 2,128,869 Studies and developm. preparation 6,000,000 0 5,497,557 5,497,557 -8,37% (502,443) Other costs of services (41 and 42) 36,736,300 19,835,473 13,758,653 33,594,126 -8,55% (3,142,174) Staff costs 100,890,400 97,496,650 0 97,496,650 -3,36% (3,393,750) Depreciation and amortisation 410,000,000 19,614,349 391,698,673 411,313,022 0,32% 1,313,022 Other operating costs (44 and 46) 9,650,600 10,138,331 0 10,138,331 5,05% 487,731 Provisions 1,245,395 0 1,245,395 0% 1,245,395 Total operating expenses 1,080,086,300 162,352,030 912,569,802 1,074,921,833 -0,48% (5,164,467) FINANCIAL INCOME 18,860,000 1,043,502 68,785,983 69,829,485 270,25% 50,969,485 FINANCIAL EXPENSES 394,000,000 1,827,603 391,052,449 392,880,052 -0,28% (1,119,948) EXTRAORDINARY INCOME 6,347,600 5,672,729 0 5,672,729 -10,63% (674,871) EXTRAORDINARY EXPENSES 9,505,000 9,059,841 0 9,059,841 -4,68% (445,159) TOTAL INCOME (without EU funds) 2,074,767,600 36,058,834 2,041,556,658 2,077,615,492 0,14% 2,847,892 TOTAL EXPENSES 1,483,591,300 173,239,474 1,303,622,251 1,476,861,726 -0,45% (6,729,574) Profit / (loss) before taxation 591,176,300 (137,180,640) 737,934,406 600,753,766 1,62% 9,577,466 Income tax 0 (473,719) (473,719) - (473,719) PROFIT / (LOSS) FOR THE YEAR 591,176,300 (137,654,359) 737,934,406 600,280,047 1,54% 9,103,747 59