MUNICIPAL DEVELOPMENT FUND OF GEORGIA Financial Statements and Independent Auditor's Report For the Year Ended 31 December 2018 MUNICIPAL DEVELOPMENT FUND OF GEORGIA TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 1 INDEPENDENT AUDITOR'S REPORT 2-3 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018: Statement of profit or loss and other comprehensive income 4 Statement of financial position 5 Statement of changes in reserves 6 Statement of cash flows 7 Notes to the financial statements 8-35 1. General information 8 2. Statement of compliance 8 3. Application of new and revised international financial reporting standards (IFRSs) 13 4. Critical accounting judgements and key sources of estimation uncertainty 16 5. Finance income 17 6. Income from loans to municipalities 17 7. Administrative expenses 19 8. Income tax expense 19 9. Property and equipment 20 10. Loans to municipalities 21 11. Other loans disbursed 23 12. Receivables and advances 25 13. Other current assets 25 14. Cash and cash equivalents 26 15. Deposits in bank 26 16. Grants related to assets 26 17. Long-term debt 26 18. Trade and other payables 27 19. Source of financing 28 20. Loan revolving fund 28 21. Related parties transaction and outstanding balances 28 22. Financial risk management 30 23. Commitments and contingencies 34 24. Events after the reporting period 35 25. Approval of the financial statements 35 MUNICIPAL DEVELOPMENT FUND OF GEORGIA STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER, 2018 Management is responsible for the preparation of the financial statements that present fairly the financial position of Municipal Development Fund of Georgia (the "Fund") as at 31 December 2018, and the results of its operations, changes in reserves and cash flows for the year ended 31 December 2018, in compliance with International Financial Reporting Standards ("IFRSs"). In preparing the financial statements, management is responsible for: * Properly selecting and applying accounting policies; * Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; * Providing additional disclosures when compliance with the specific requirements in International Financial Reporting Standards ("IFRSs") are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the fund's financial position and financial performance; and * Making an assessment of the Fund's ability to continue as a going concern. Management is also responsible for: * Designing, implementing and maintaining an effective and sound system of internal controls, throughout the fund; * Maintaining adequate accounting records that are sufficient to show and explain the fund's transactions and disclose with reasonable accuracy at any time the financial position of the fund, and which enable them to ensure that the financial statements of the fund comply with IFRSs; * Maintaining statutory accounting records in compliance with local legislation and accounting standards; * Taking such steps as are reasonably available to them to safeguard the assets of the fund; and o Detecting and preventing fraud and other irregularities. The financial statements of the fund for the year ended 31 December 2018 were approved by management on 28 June 2019. On behalf of the Management: G6orge Shdgei Levan Sharvadze Executi;e birct6r7- Deputy Director - Chief Fina c1aI Officer 28 June 2019 28 June 2019 1 Deloitte & Touche LLC King David Business Center 12 Merab Aleksidze Street Tbilisi, 0171, Georgia Tel: +995 (32) 224 45 66 Fax: +995 (32} 224 45 69 delo itte.ge INDEPENDENT AUDITOR'S REPORT To the management of the Municipal Development Fund of Georgia Opinion We have audited the financial statements of Municipal Development Fund of Georgia (the "Fund"), which comprise the statement of financial position as at 31 December 2018, and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Fund as at 31 December 2018, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards ("IFRSs"). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Fund in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (the "IESBA Code") together with the ethical requirements that are relevant to our audit of the financial statements in Georgia, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Fund's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Fund or to cease operations, or has no realistic alternative but to do so. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTTL"), its network of member firms, and their related entities. DTTL and each of Its member firms are legally separate and idependeot entities. DTTL (also referred to as "Deloitte Global") does not provide services to clients. Please see tor a more detailed description of DTTL and ts member firms. © 2019 Delotte & Touche LLC, All rights reserved. 2 Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. " Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Fund's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Fund to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 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. Stuart Lei tdn On behalf of Deloitte and Touche LLC 28 June 2019 Tbilisi, Georgia 3 MUNICIPAL DEVELOPMENT FUND OF OEORGIA STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018 (in GEL) Year ended Year ended 31 December 31 December Notes 2018 2017 Finance income 5 10,765,785 4,408,606 Income from loans to municipalities 6 3,991,316 5,294,578 Other finance income 1,113,668 1,721,996 Administrative expenses 7 (8,186,376) (6,106,756) Finance costs (1,924,745) (1,909,238) Other expense, net (97,813) (1,760,356) Gain/(loss) from exchange rate differences 528,269 (2,267,087) Profit/(loss) before income tax 6,190,104 (618,257) Income tax expense 8 (856,848) (426,575) Net profit/(loss) for the year 5,333,256 (1,044,832) Other comprehensive income - Total comprehensive profit/(loss) for the year 5,333,256 (1,044,832) On behalf of the Management: Ge(ore gh nde I! Levan Sharvadze Executive Diretto - Deputy Director - Chief Fj ancial Officer 28 June 2019 28 June 2019 The notes on pages 8-35 form an integral part of these financial statements. 4 MUNICIPAL DEVELOPMENT FUND OF GEORGIA STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018 (in GEL) 31 December 31 December Notes 2018 2017 ASSETS NON-CURRENT ASSETS Property and equipment 9 1,947,678 2,277,570 Intangible assets 265,558 313,417 Loans to municipalities 10 46,719,419 47,777,823 Other loans disbursed 11 4,548,973 11,969,704 Deferred income tax asset - 86,487 TOTAL NON-CURRENT ASSETS 53,481,628 62,425,001 CURRENT ASSETS Loans to municipalities 10 8,596,327 8,775,885 Other loans disbursed 11 25,857,342 5,197,808 Other current assets 13 3,303,383 3,630,230 Current income tax asset 272,329 - Receivables and advances 12 53,911,494 99,896,827 Deposits in banks 15 58,000,000 36,000,000 Cash and cash equivalents 14 185,645,343 230,865,327 TOTAL CURRENT ASSETS 335,586,218 384,366,077 TOTAL ASSETS 389,067,846 446,791,078 RESERVES AND LIABILITIES RESTRICTED RESERVES Sources of financing 19 231,361,903 303,662,490 Loan revolving fund 20 26,310,162 27,446,276 UNRESTRICTED RESERVES Retained earnings 62,838,673 57,505,415 TOTAL RESERVES 320,510,738 388,614,181 LIABILITIES NON-CURRENT LIABILITIES Grants related to assets 16 1,707,654 2,038,490 Long-term debt 17 25,927,993 27,397,811 TOTAL NON-CURRENT LIABILITIES 27,635,647 29,436,301 CURRENT LIABILITIES Current portion of long-term debt 17 2,329,695 2,113,759 Trade and other payables 18 38,591,766 26,570,306 Current income tax liability - 56,531 TOTAL CURRENT LIABILITIES 40,921,461 28,740,596 TOTAL RESERVES AND LIABILITIES 389,067,846 446,791,078 On behalf of the Management: Gelg ShS eI, Levan Sharvadze Exec live irector Deputy Director - Chief FinanWal Officer 28 June 2019 28 June 2019 The notes on pages 8-35 form an integral part of these financial statements. 5 MUNICIPAL DEVELOPMENT IFUND OF GEORGIA STATEMENT OF CHANGES IN RESERVES FOR THE YEAR ENDED 31 DECEMBER 2018 (in GEL) Sources of Loan revolving Retained Total Note financing fund Earnings reserves 1 January 2017 211,878,375 31,013,647 58,550,247 301,442,269 Total comprehensive loss for the year - - (1,044,832) (1,044,832) Decrease in loan revolving fund 20 - (3,567,371) - (3,567,371) Net financing of implemented projects 19 91,784,115 - 91,784,115 31 December 2017 303,662,490 27,445,276 57,505,415 388,614,181 Total comprehensive profit for the year - - 5,333,258 5,333,258 Decrease in loan revolving fund 20 (1,136,114) - (1,136,114) Net financing of implemented projects 19 (72,300,587) - - - (72,300,587) 31 December 2018 231,361,903 26,310,162 62,838,673 320,510E738 On behalf of the Management: Ge rg S I Levan Sharvadz Executive Difettar Deputy Director - Chief inancial Officer 28 June 2019 28 June 2019 The notes on pages 8-35 form an integral part of these financial statements. 6 MUNICIPAL. DEVELOPMENT FUND OF GEORGIA STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2018 (in GEL) 31 December 31 December Note 2018 2017 Cash flow from operating activities: Profit/(Loss) after income tax 5,333,256 (1,044,832) Adjustments for: Depreciation and amortisation expense 7 557,145 557,919 Loss on disposal 65,789 - Finance costs 1,924,745 1,909,238 Provision for receivables and advances 12 2,565,097 - Provision for issued loans 10,11 320,978 Provision for other current assets 13 15,933 Income from grants related to assets 16 (330,836) (276,119) Finance income 5,6 (15,870,769) (11,425,180) Income tax expense 8 856,848 426,575 Foreign exchange (gain)/ loss (528,269) 2,267,087 Operating loss before working capital changes (5,090,083) (7,585,312) Change in receivables and advances 12 43,420,236 (5,684,676) Change in other current assets 13 310,914 (184,282) Change in deposits in banks 15 (22,000,000) (6,000,000) Change in payables 18 12,814,867 3,386,379 Cash used in operations 29,455,934 (16,067,891) Income tax paid (1,185,708) (764,284) Interest paid (3,696,069)_ Net cash used in operating activities 24,574,157 (16,832,175) Cash flows from investing activities Purchase of equipment and intangible assets 9 (245,183) (129,843) Receipts from disposal of equipment and intangible assets 9 65,466 - Interest received from municipalities and banks 5,6 15,870,769 9,409,812 Net cash flows generated from investing activities 15,691,052 9,279,969 Cash flows from financing activities Projects financing, net 19 (73,436,701) 88,216,744 Repayment/(issuance) of loans to municipalities, net 10 975,226 (23,055,162) (Issuance)/ repayment of other loans, net 11 (13,297,045) 20,108,377 Receipt of long-term debt 17 517,442 12,374,786 Net cash from financing activities (85,241,078) 97,644,745 NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (44,975,869) 90,092,539 Effect of foreign exchange rate changes on cash and cash equivalents (244,115) 1,164,472 CASH AND CASH EQUIVALENTS, at beginning of the period 14 230,865,327 139,608,316 CASH AND CASH EQUIVALENTS, at end of the period 14 185,645,343 230,865,327 On behalf of the Management: Gore riag l i Levan Sharvadze Executiv Director Deputy Director - Chi, Financial Officer 28 June 2019 28 June 2019 The notes on pages 8-35 form an integral part of these financial statements. 7 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in GEL) 1. GENERAL INFORMATION Municipal Development Fund of Georgia (the "Fund' or "MDF") was established on 7 June 1997 by the Presidential Decree NO 294 "On management of funds for the development of municipal sector in Georgia". The Fund is a legal Fund of public law, the objective of which is to support strengthening institutional and financial capacity of local government units, investing financial resources in local infrastructure and services, improving on sustainable basis the primary economic and social services for the local population and the provision of low-interest loans to legal entities and physical persons of Georgia in the framework of the Government Program. The founder and governing body of the fund is the Government of Georgia. The Fund is cooperating with majority of large investment banks and financial institutions operating in Georgia. 2. STATEMENT OF COMPLIANCE These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRSs"). Basis of preparation. These financial statements have been prepared on the assumption that the Fund is a going concern and will continue in operation for the foreseeable future. These financial statements are presented in GEL ("GEL"), unless otherwise indicated. The financial statements are prepared on a historical cost basis. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that prices are directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Fund takes into account the characteristics of the asset and liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/ or disclosure purposes in these financial statements is determined on such a basis. In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: * Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Fund can access at the measurement date; " Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and . Level 3 inputs are unobservable inputs for the asset or liability. Functional currency. Items included in the financial statements are measured using the currency of the primary of the economic environment in which the Fund operates ("the functional currency"). The functional currency of the Fund is the Georgian Lari ("GEL"). The presentational currency of the financial statements of the Fund is the GEL. Offsetting. Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expense is not offset in the statement of profit or loss unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Fund. The principal accounting policies are set out below. 8 MUNICIPAL DEVELOPMEN T FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) Foreign Currencies. In preparing the financial statements of the Fund, transactions in currencies other than the Fund's functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognised in profit or loss in the period in which they arise except for: " Exchange differences on foreign currency borrowings relating to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings; * Exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income and reclassified from equity to profit or loss on repayment of the monetary items. Below are exchange rates as at year end which were used by the Fund for the purpose of these financial statements: 31/12/2018 31/12/2017 01/01/2017 GEL/USD 2.6766 2.5922 2.6468 GEL/EUR 3.0701 3.1044 2,7940 Finance income. Finance income from a financial asset is recognised when it is probable that the economic benefits will flow to the Fund and the amount of income can be measured reliably. Finance income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition. Borrowing costs. Borrowing costs are recognised in profit or loss in the period in which they are incurred. Financial instruments. Financial assets and financial liabilities are recognised when a Fund becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. Financial assets. All recognised financial assets are measured subsequently in their entirety at either amortised cost or fair value, depending on the classification of the financial assets. Classification of financial assets. Financial assets are classified, at initial recognition, as subsequently measured at amortised cost. The classification of financial assets at initial recognition depends on the financial asset's contractual cash flow characteristics and the Fund's business model for managing them. The Fund measures financial assets at amortised cost if both of the following conditions are met: The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows, And 9 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) o The contractual terms of the financial asset give rise on specified dates to cash flows that are 'solely payments of principal and interest (SPPI)' on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. Debt instruments that meet the following conditions are measured subsequently at fair value through other comprehensive income (FVTOCI): " the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets; and " the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. By default, all other financial assets are measured subsequently at fair value through profit or loss (FVTPL). Despite the foregoing, the Fund may make the following irrevocable election/designation at initial recognition of a financial asset: * the Fund may irrevocably elect to present subsequent changes in fair value of an equity investment in other comprehensive income if certain criteria are met; and * the Fund may irrevocably designate a debt investment that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. Based on the past experience all financial assets are held in order to collect contractual cash flows and are classified into first business model - Held to collect (H2C). Effective interest method. The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. For financial assets other than purchased or originated credit-impaired financial assets (i.e. assets that are credit-impaired on initial recognition), the effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) excluding expected credit losses, through the expected life of the debt instrument, or, where appropriate, a shorter period, to the gross carrying amount of the debt instrument on initial recognition. For purchased or originated credit-impaired financial assets, a credit-adjusted effective interest rate is calculated by discounting the estimated future cash flows, including expected credit losses, to the amortised cost of the debt instrument on initial recognition. The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any loss allowance. The gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any loss allowance. Interest income is recognised using the effective interest method for debt instruments measured subsequently at amortised cost and at FVTOCI. For financial assets other than purchased or originated credit-impaired financial assets, interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset, except for financial assets that have subsequently become credit-impaired (see below), For financial assets that have subsequently become credit-impaired, interest income is recognised by applying the effective interest rate to the amortised cost of the financial asset. If, in subsequent reporting periods, the credit risk on the credit-impaired financial instrument improves so that the financial asset is no longer credit-impaired, interest income is recognised by applying the effective interest rate to the gross carrying amount of the financial asset. For purchased or originated credit-impaired financial assets, the Fund recognises interest income by applying the credit-adjusted effective interest rate to the amortised cost of the financial asset from initial recognition. The calculation does not revert to the gross basis even if the credit risk of the financial asset subsequently improves so that the financial asset is no longer credit-impaired. 10 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) Impairment of financial assets. The Fund applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all receivables and contract assets. Therefore, for cash and cash equivalents, loans disbursed and other receivables the Fund does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Fund has established a provision approach that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. With its impairment model the Fund also uses the credit rating for the debtors available from the external sources. The Fund considers a financial asset in default when contractual payment are 90 days past due. Ilowever, in certain cases, the Fund may also consider a financial asset to be in default when internal or external information indicates that the Fund is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Fund. Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account within the profit or loss for the year. Derecognition of financial assets. The Fund derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another Fund. If the Fund neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Fund recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Fund retains substantially all the risks and rewards of ownership of a transferred financial asset, the Fund continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset measured at amortised cost, the difference between the asset's carrying amount and the sum of the consideration received and receivable is recognised in profit or loss. In addition, on derecognition of an investment in a debt instrument classified as at FVTOCI, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss. Cash and cash equivalents. Cash and cash equivalents consist of cash on hand, unrestricted balances on corresponded and term deposits with the commercial banks and state treasury with original maturity of less or equal to 90 days and amounts due from credit institutions with original maturity of less or equal to 90 days and are free from contractual encumbrances. Grants related to assets. Grants related to assets are recognised as deferred income when they are received. Recognition in the statement of profit or loss is done on systematic basis over the periods in which the Fund recognises expenses for the related costs for which grants are intended to compensate. Financial liabilities. Financial liabilities are measured subsequently 'at FVTPL' or 'at amortised cost using the effective interest method'. Other financial liabilities. Other financial liabilities (including borrowings and trade and other payables) are initially recognised at fair value less transaction costs. Subsequently they are measured at amortised cost using the effective interest method. Borrowings are classified as current liabilities unless the Fund has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Derecognition of financial liabilities. The Fund derecognises financial liabilities when, and only when, the Fund's obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. Corporate Income tax. Corporate Income tax includes current and deferred taxes. Current Corporate Income tax is applied at the rate of 15% on taxable income generated by the Fund during the taxation period. 11 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) Lin GEL) Deferred Corporate Income tax arising from temporary differences in the timing of the recognition of items in the tax returns and these financial statements is calculated using the liability method. The Deferred Corporate Income tax asset and liability are determined on the basis of the tax rates that are expected to apply when the timing differences reverse. The principal temporary timing differences arise from differing rates of accounting and tax amortization and depreciation on the Fund's non-current assets, the treatment of temporary provisions and accruals. Property and Equipment. Property, plant and equipment are stated at cost, less accumulated depreciation and provision for impairment, where required. Costs of minor repairs and maintenance are expensed when incurred. Cost of replacing major parts or components of property, plant and equipment items are capitalised and the replaced part is retired. At each end of the reporting period management assesses whether there is any indication of impairment of property, plant and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset's fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profit or loss for the year. An impairment loss recognised for an asset in prior years is reversed where appropriate if there has been a change in the estimates used to determine the asset's value in use or fair value less costs to sell. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are recognised in profit or loss for the year within other income or costs. Depreciation. Land is not depreciated. Depreciation on other items of property, plant and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. Depreciation is calculated based on the following annual rates: Equipment and machinery 5 years Motor vehicles - 5 -10 years Furniture and other fixtures - 5 -10 years Buildings and Leasehold improvement - 20 years The residual value of an asset is the estimated amount that the Fund would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. Intangible assets acquired separately. Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. Advances paid. Advances paid are carried at cost less provision for impairment. A Advances paid is classified as non-current when the goods or services relating to the prepayment are expected to be obtained after one year, or when the Advances paid relates to an asset which will itself be classified as non-current upon initial recognition. Advances paid to acquire assets are transferred to the carrying amount of the asset once the Fund has obtained control of the asset and it is probable that future economic benefits associated with the asset will flow to the Fund. Other prepayments are written off to profit or loss when the goods or services relating to 12 MUNICIPAL DEVELOPMENT FUND OF GEO1\RA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) the prepayments are received. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognised in profit or loss for the year, Reserves. Reserves are restricted if the related funds are restricted by the donors for implementation of specific projects. In the statement of changes in reserves the restricted reserves are composed of the sources of financing and the loan revolving fund. Sources of financing, Sources of financing represent the net cumulative financing received and the respective expenditures incurred for the implementation of the projects. Project financing is recognised as sources of funds in the period when the cash inflow can be reasonably estimated and they become available and measurable. Expenditure is recognised on an accruals basis as a use of project funds when liabilities are incurred. Loan revolving fund. Loan revolving fund represents donor financing received for the purposes of providing loan financing to municipalities. In the statement of changes in reserves increases or decreases of the loan revolving fund are presented net. 3. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSS) In 2018, the following new and revised standards and interpretations have been adopted: * IFRS 9 Financial Instruments; * IFRS 15 Revenue from Contracts with Customers (and the related Clarifications); The Fund applied IFRS 15 and IFRS 9 for the first time. The nature and effect of the changes as a result of adoption of these new accounting standards are described below. IFRS 9 Financial Instruments IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting. The Fund applied IFRS 9 prospectively using modified retrospective approach, with an initial application date of 1 January 2018. The Fund has not restated the comparative information, which continues to be reported under IAS 39. Differences arising from the adoption of IFRS 9 have been recognised directly in retained earnings. The adoption of IFRS 9 changed the Fund's accounting for impairment losses for financial assets by replacing IAS 39's incurred loss approach with a forward-looking expected credit loss (ECL) approach. IFRS 9 requires the Fund to recognise an allowance for ECLs for all financial assets not held at fair value through profit or loss and contract assets. Considering the simple nature of it's financial assets, the Fund applies the simplified approach for impairment calculation by applying lifetime ECL to the gross carrying amount. All bank and other financial asset balances are assessed to have low credit risk at each reporting date as they are held with reputable international banking institutions or state treasury (bank balances). Also loans are disbursed to different municipalities which also represent the Government of Georgia. IFRS 15 Revenue from Contracts with Customers IFRS 15 supersedes lAS 18 Revenue and related Interpretations and it applies, with limited exceptions, to all revenue arising from contracts with its customers. IFRS 15 establishes a five- step model to account for revenue arising from contracts with customers and requires that revenue be recognised at an amount that reflects the consideration to which an Fund expects to be entitled in exchange for transferring goods or services to a customer. 13 MUNICIPAL DEVFLIPM1ENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) IFRS 15 requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. In addition, the standard requires extensive disclosures. The core principle of IFRS 15 is that an Fund should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Fund expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition: " Identify the contract with the customer; * Identify the performance obligations in the contract; " Determine the transaction price; " Allocate the transaction price to the performance obligations in the contracts; * Recognise revenue when (or as) the Fund satisfies a performance obligation. Under IFRS 15, a Fund recognises revenue when or as a performance obligation is satisfied, i.e. when 'control' of the goods or services underlying the particular performance obligation is transferred to the customer. The Fund has adopted IFRS 15 effective from 1 January 2018. As a result of assessment of each revenue stream and contracts of the Fund, it has been identified, that the standard does not have any affect on the Fund's financial statements. New and revised IFRS Standards in issue but not yet effective The Fund has not applied the following new and revised IFRSs that have been issued but are not yet effective: * IFRS 16 Leases'; * IFRS 17 Insurance Contracts2; * Amendments to IFRS 9 Prepayment Features with Negative Compensation'; * Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures3; * Annual Improvements to IFRS Standards 2015-2017 Cycle'; * Amendments to IAS 19 Employee Benefits3; * IFRIC 23 Uncertainty over Income Tax TreatmentS4; * IFRS 10 Consolidated Financial Statements and IAS 28 (amendments) 5. 'Effective for annual periods beginning on or after 1 January 2019, with earlier application permitted. 2 Effective for annual reporting periods beginning on or after 1 January 2021, with early application permitted. 3 Effective for annual reporting periods beginning on or after 1 January 2019 retrospectively. Earlier application is permitted. 4 Effective for annual periods beginning on or after 1 January 2019 with either full retrospective application or modified retrospective application without restatement of comparatives retrospectively or prospectively. s The effective date of the amendments has yet to be set by the IASB; however, earlier application of the amendments is permitted. IFRS 16 Leases IFRS 16 provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements for both lessors and lessees. IFRS 16 will supersede the current lease guidance including IAS 17 Leases and the related Interpretations when it becomes effective for accounting periods beginning on or after 1 January 2019. The date of initial application of IFRS 16 for the Fund will be 1 January 2019. 14 MUNIXC14IPAZ L DEVELOPMENTi FUN O , i F GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) The Fund has chosen the modified retrospective application of IFRS 16 in accordance with IFRS 16:C5(b), which means that at the commencement date right-of-use assets including land, buildings and transmission lines equal to lease liability. For assets with variable consideration and assets with contract term less than 12 month, the Fund used practical expedient and does not recognize a lease. Term for right-of-use assets is 2-5 years. Consequently, the Fund will not restate the comparative information. The Fund will make use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease. IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and is replaced by a model where a right- of-use asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of low value assets. The right-of-use asset is initially measured at present value of the future lease payments; and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Furthermore, the classification of cash flows will also be affected as operating lease payments under IAS 17 are presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively. In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, and continues to require a lessor to classify a lease either as an operating lease or a finance lease. Furthermore, extensive disclosures are required by IFRS 16. The management has completed an initial assessment of the potential impact on its financial statements but has not yet completed its detailed assessment. Based on the initial assessment the Fund does not anticipate that the application of IFRS 16 will have a significant impact on the amounts recognised in the Fund's financial statements. Amendments to IFRS 9 Prepayment Features with Negative Compensation The amendments to IFRS 9 clarify that for the purpose of assessing whether a prepayment feature meets the SPPI condition, the party exercising the option may pay or receive reasonable compensation for the prepayment irrespective of the reason for prepayment. In other words, prepayment features with negative compensation do not automatically fail SPPI. The management of the Fund does not anticipate that the application of the amendments to IFRS 9 will have a significant impact on the Fund's financial statements. Annual Improvements to IFRS Standards 2015-2017 Cycle The Annual Improvements include amendments to four Standards: Amendments to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs. The amendments to IAS 12 clarify that an Fund should recognise the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the Fund originally recognised the transactions that generated the distributable profits. This is the case irrespective of whether different tax rates apply to distributed and undistributed profits. The amendments to IAS 23 clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an Fund borrows generally when calculating the capitalisation rate on general borrowings. 15 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) The amendments to IFRS 3 clarify that when an Fund obtains control of a business that is a joint operation, the Fund applies the requirements for a business combination achieved in stages, including remeasuring its previously held interest (PHI) in the joint operation at fair value. The PHI to be remeasured includes any unrecognised assets, liabilities and goodwill relating to the joint operation. The amendments to IFRS 11 clarify that when a party that participates in, but does not have joint control of, a joint operation that is a business obtains joint control of such a joint operation, the Fund does not remeasure its PHI in the joint operation. All the amendments are effective for annual periods beginning on or after 1 January 2019 and generally require prospective application. Earlier application is permitted. The management of the Fund does not anticipate that the application of these amendments will have a significant impact on the Fund's financial statements. IFRIC 23 Uncertainty over Income Tax Treatments IFRIC 23 sets out how to determine the accounting tax position when there is uncertainty over income tax treatments. The Interpretation requires an Fund to: * determine whether uncertain tax positions are assessed separately or as a group; and * assess whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used, by an Fund in its income tax filings: - If yes, the Fund should determine its accounting tax position consistently with the tax treatment used or planned to be used in its income tax filings. - If no, the Fund should reflect the effect of uncertainty in determining its accounting tax position. The management of the Fund does not anticipate that the application of the amendments will have a significant impact on the Fund's financial statements. 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Fund's accounting policies, which are described in note 3, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Useful lives of property, plant and equipment. The estimation of the useful lives of items of property and equipment is a matter of judgment based on the experience with similar assets. The future economic benefits embodied in the assets are consumed principally through use. However, other factors, such as technical or commercial obsolescence and wear and tear, often result in the diminution of the economic benefits embodied in the assets. Management assesses the remaining useful lives in accordance with the current technical conditions of the assets and estimated period during which the assets are expected to earn benefits for the Company. The following primary factors are considered: (a) expected usage of the assets; (b) expected physical wear and tear, which depends on operational factors and maintenance programme; and (c) technical or commercial obsolescence arising from changes in market conditions. 16 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) Impairment of financial assets (loans disbursed and other receivables). An impairment analysis of financial assets (loans disbursed and other receivables) is performed at each reporting date. If the Fund determines that no objective evidence exists that impairment was incurred for an individually assessed accounts, whether significant or not, it includes the other receivables and loans disbursed in in a group of similar assets with similar credit risk characteristics and collectively assesses them for impairment. Large number of minor receivables and loans are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors' ability to pay all amounts due according to the contractual terms of the assets being evaluated. Financial assets that are assessed not to be impaired individually are assessed collectively for impairment with provision matrix by reference to the Counerparties's credit ratings and historical collection experience. Significant receivables or loans (based on circumstances, such as, unusual overdue days, news about financial difficulties of the subscriber, etc.) are considered more risky and are assessed individually. Taxation. Georgian tax legislation in particular may give rise to varying interpretations and amendments. In addition, as management's interpretation of tax legislation may differ from that of the tax authorities, transactions may be challenged by the tax authorities, and as a result the Fund may be assessed additional taxes, penalties and interest. The Fund believes that it has already made all tax payments, and therefore no allowance has been made in the financial statements. Tax years remain open to review by the tax authorities for six years. 5. FINANCE INCOME 2018 2017 Bank of Georgia 3,274,628 Terrabank 2,733,045 965,503 Liberty Bank 1,478,959 2,265,205 TBC Bank 1,394,305 1,177,898 Finca Banks 1,024,068 - Basisbank 482,699 VTB Bank 378,081 - Total 10,765,785 4,408,606 6. INCOME FROM LOANS TO MUNICIPALITIES 2018 2017 Interest income 3,950,624 5,277,487 Penalty income 40,692 17,091 Total 3,991,316 5,294,578 17 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) The breakdown of interest income from loans to municipalities is as follows: Municipality 2018 2017 Zugdidi 318,031 337,480 Kabuleti 289,252 280,665 Rustavi 216,799 348,662 Gorl 201,431 266,311 Kutaisi 198,506 467,596 Telavi 142,709 192,441 Gurjaani 128,671 187,601 Sighnaghi 119,848 176,306 Akmeta 115,570 70,028 Mtskheta 104,060 160,479 Tsalenjikha 10?,222 151,999 Bolnisi 99,465 137,424 Tetritskaro 98,211 147,723 Martvili 83,959 122,728 Dusheti 81,396 119,179 Akhalkalaki 76,339 96,201 Zestaponi 73,541 217,515 Marneuli 72,517 96,031 Lagodekhi 72,001 90,556 Mestia 66,591 184,129 Ozurgeti 61,628 53,697 Akhaltsikhe 61,037 61,129 Khobi 59,763 80,342 Kaspi 57,356 163,046 Gardabani 56,697 68,950 Ambrolauri 54,931 54,196 Khashuri 46,849 27,410 Lentekhi 44,209 29,283 Borjomi 40,766 49,183 Chiatura 39,783 37,406 Kvareli 39,403 37,406 Samtredia 38,252 35,266 Chokhatauri 34,068 40,485 Lanchkhuti 31,564 27,963 Bagdati 30,607 26,787 Tkibuli 30,328 27,963 Tedola 30,316 27,963 Adigeni 28,987 27,963 Tskaltubo 28,987 27,963 Sachkhere 28,951 37,406 Tsageri 28,626 27,963 Vani 28,455 27,963 Batumi 28,410 56,281 Tsalka 28,380 27,963 Dmanisi 28,361 27,963 Oni 28,323 28,838 Dedoplistskaro 27,858 25,822 Sagarejo 27,719 26,839 Kharagaull 27,640 24,883 Abasha 27,047 25,822 Ninotsminda 26,502 24,884 Khoni 26,295 25,822 Senaki 26,155 25,822 Aspindza 25,204 24,884 Kareli 25,204 24,884 Chkhorotsku 24,591 25,822 Tianeti 20,610 20,348 Kazbegi 16,587 15,440 Keda 13,748 13,474 Total 3,991,316 5,294,578 18 MUNICIPAL DEVELOPMENT FUND OF 6GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) 7. ADMINISTRATIVE EXPENSES 2018 2017 Employee benefits 3,628,463 3,640,496 Tax expenses other than income tax 2,055,979 1,067,592 Impairment of doubtful receivables 1,223,169 - Depreciation and amortization 557,145 557,919 Insurance expenses 287,719 289,768 Trips, transportation, advertising and representation expenses 159,428 179,272 Office expenses 154,217 129,200 Audit and consulting 28,847 28,405 Communication expenses 9,440 6,939 Other 81,969 207,165 Total 8,186,376 6,106,756 8. INCOME TAX EXPENSE According to changes in Georgian Tax Code from 1 January 2019 non-profit organisations are obliged to pay income tax for free of charge supplies, non-economical expenses and representative expenses not related to organization's activities. Consequently, there is an expectation that temporary differences will disappear beginning from the effective date. The management of the Fund is confident that the valuation allowance against deferred tax asset at the reporting date is necessary, because it is likely that the deferred tax asset will be not realized till 1 January 2019. Consequently, the valuation allowance in the amount of GEL 86,487 is recorded as at 31 December 2018. The carrying value of deferred tax asset amounted to nil and GEL 86,487 as at 31 December 2018 and 2017, respectively. The previous profit tax regime, under which companies were subject to tax on their annual taxable profits, is now changed to a system where tax will have to be paid only if the non-profit organisation has free of charge supplies, non-economical expenses and representative expenses not related to organization's activities. The change has had an impact on deferred tax of the non-profit organisaitons as it abolishes temporary differences between a carrying value of certain assets and liabilities for financial reporting purposes and their tax bases. 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Q'� �1' 9 и N и и� �� а ш 41 Q N 9�! � ®1 ,S � G С � � 1П � W � ы •°- ° ® ° о ® � � °rn � � rn с � � рр '�• а � Н +`-� � Ш � � й ro � ,� [а � � � ц га � � rц ,`а •� � ь. н ы .а сэ и-о L и v`� и е и�•- м s•- и т о пs о ОС � ���� t3i �Q ��'Q `к �� �i� иш � V шд �N l7N MUNICIPAL DEVELOPMENT FUND OF NOTES TO THE FINANCIAL STATI FNTS FOR THE YEAR ENDED 31 2018 (CONTXNUED) an GEL) 10. LOANS TO MUNICIPALITIES 31 December 31 December 2018 2017 Current portion 8,596,327 8,775,885 Long.-term portion 46r982,155 47,777 55576482 56,5S3,708 Provision for doubtful loans to municipalities (262,736) Total 55315746 56,SS3708 Current portion of loans to municipalities include the following: 31 December 31 December 2018 2017 Principal receivable 7,754,473 6,290,986 Interest receivable 793,588 2,463,193 Penalties receivable 48,266 21,706 8,596,327 8,775,885 Provision for doubtful loans to municipalities (40,637) - Total 8555690 8,77S885 The breakdown of loans to municipalities as of 31 December 2018 is as follows: Non-current Municipality Current Portion k2r Total 2018 Zugdidi 866,341 4,283,807 5,150,148 Kutaisl 377,229 3,478,295 3,855,524 Poti -74,278 2,619,874 3,194,152 Gori 257,093 2,556,059 2,813,152 Kobuleti 684,647 1,963,123 2,647,770 Rustavi 810,792 1,197,097 2,007,889 Zestaponi 232,182 1,569,343 1,801,525 Mestia 158,756 1,447,907 1,606,663 Signagi 156,093 1,354,698 1,510,791 Kasp! 144,259 1,218,848 1,363,107 Telavi 377,913 1,043,740 1 ' 421,653 Akrneta 177,669 1,206,226 1,383,895 Tsalenjikha 129,724 1,194,116 1,323,840 Tetritskaro 123,828 1,178,340 1,302,168 Mtskheta 318,238 862,761 1,180,999 Martvili 106,579 1,010,971 1,117,550 Gur I aani 484,198 625,699 1,109,897 Akhaltsikhe 42,672 804,315 846,987 Khashuri 52,647 741,489 794,136 Ozurgetj 40,934 775,827 816,761 Bolnisi 334,133 466,600 800,733 Akhalkalald 186,465 584,626 771,091 Ambrolauri 38,376 723,370 761,746 Lagodekhi 197,595 541,809 739,404 Marneull 191,186 505,774 696,960 Dushed 280,048 400,263 680,311 Chokhatauri 29,526 547,681 577,207 Khobi 171,792 405,866 577,658 Gardabani 145,491 429,180 574,671 Chiatura 27,345 516,540 543,885 Kvareli 27,174 513,085 540,259 Ninotsmincla 18,919 511,063 529,982 Sachkhere 26,488 490,330 516,818 Samtredia 24,972 470,695 495,667 Borloml 83,231 373,020 456,251 21 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) Non-current Municipality Current Portion portion Total 2018 Lentekhi 80,729 373,227 453,956 Chkhorotsku 66,721 338,487 405,208 Terjola 20,659 390,501 411,160 Lanchkhuti 20,659 390,501 411,160 Tkibuli 20,659 390,501 411,160 Bagdati 19,826 374,799 394,625 Oni 19,801 373,227 393,028 Adigeni 19,800 373,227 393,027 Omanisi 19,800 373,227 393,027 Vani 19,800 373,227 393,027 Tsageri 19,800 373,227 393,027 Tsalka 19,800 373,227 393,027 Tskaltubo 19,800 373,227 393,027 Sagarejo 18,972 358,474 377,446 Dedoplistskaro 18,972 358,474 377,446 Abasha 18,284 344,656 362,940 Senaki 18,284 344,656 362,940 Khoni 18,284 344,656 362,940 Kharagauli 18,135 342,491 360,626 Aspindza 17,620 332,127 349,747 Kareli 17,620 332,127 349,747 Tianeti 14,409 271,590 285,999 Batumi 148,176 75,304 223,480 Kazbegi 11,363 214,724 226,087 Keda 9,541 179,834 189,375 8,596,327 46,982,155 55,578,482 Provision for doubtful issued loans to municipalities (40,637) (222,099) (262,736) Total 8,555,690 46,760,056 55,315,746 The breakdown of loans to municipalities as of 31 December 2017 is as follows: Non-current Municipality Current Portion portion Total 2017 Batumi 158,083 233,560 391,643 Rustavi 844,654 2,027,452 2,872,106 Poti 424,527 584,911 1,009,438 Telavi 427,442 1,387,207 1,814,649 Kazbegi 15,440 214,904 230,344 Dusheti 357,487 669,391 1,026,878 Borjomi 104,100 452,625 556,725 Akhalkalaki 216,144 766,158 982,302 Lagodekhi 194,462 722,658 917,120 Marneuli 215,533 694,981 910,514 Mtskheta 397,977 1,191,892 1,589,869 Khobi 184,647 577,162 761,809 Gurjaani 488,431 1,100,422 1,588,853 Bolnisi 371,326 796,560 1,167,886 Kobuleti 507,941 1,680,866 2,188,807 Gardabani 139,786 570,857 710,643 Signagi 149,623 1,537,201 1,686,824 Oni 27,965 389,194 417,159 Lentekhi 53,689 389,194 442,883 Tsalenjikha 164,540 1,364,465 1,529,005 Ambrolauri 54,196 754,317 808,513 Akhaltsikhe 60,261 838,726 898,987 Kaspi 139,857 1,453,412 1,593,269 Sagarejo 25,823 359,400 385,223 Zugdidi 759,220 2,199,066 2,958,286 Gori 243,653 2,898,367 3,142,020 Ozurgeti 53,106 739,146 792,252 22 MUNICIPAL DEVELOPMENT FUND OF GEORukGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) Non-current Municipality Current Portion portion Total 2017 Mestia 156,274 1,694,754 1,851,028 Martvili 105,282 1,135,212 1,240,494 Tetritskaro 119,062 1,338,657 1,457,719 Akmeta 37,406 520,625 558,031 Khashuri 27,410 359,400 386,810 Abasha 25,822 359,400 385,222 Adigeni 27,963 389,194 417,157 Aspindza 24,884 346,336 371,220 Bagdati 26,787 372,820 399,607 Dedoplistskaro 25,822 359,400 385,222 Samtredia 35,266 490,832 526,098 Dmanisi 27,963 389,194 417,157 Vani 27,963 389,194 417,157 Terjola 27,963 389,194 417,157 Tianeti 20,348 283,209 303,557 Lanchkhuti 27,963 389,194 417,157 Ninotsminda 24,884 346,336 371,220 Sachkhere 37,406 520,626 558,032 Senaki 25,822 359,398 385,220 Tkibuli 27,963 389,194 417,157 Kareli 24,884 346,336 371,220 Keda 13,474 187,528 201,002 Kvareli 37,406 520,626 558,032 Chokhatauri 40,485 563,482 603,967 Tsageri 27,963 389,194 417,157 Tsalka 27,964 389,194 417,158 Tskaltubo 27,963 389,194 417,157 Chiatura 37,406 520,626 558,032 Kharagauli 24,884 346,336 371,220 Khoni 25,822 359,400 385,222 Zestaponi 466,810 1,913,855 2,380,665 Chkhorotsku 25,822 359,400 385,222 Kutaisi 354,836 4,076,389 4,431,225 Total 8,775,885 47,777,823 56,553,708 Loans to municipalities represent loans disbursed by MDF to local self-governments within the scope of different projects financed by international financial institutions through MDF's Loan revolving fund account (Note 21) and Solid Waste Management Project (SWMP) which is financed through long-term debt (Note 18). Loans are disbursed to municipalities for implementing the sub-projects for the rehabilitation and expansion of priority municipal services and infrastructure needs. Loans carry an interest rate of 11-12% and refinancing rate+0.5% (for loans under SWMP) and are disbursed for an average period of 10 years. Loans issued to municipalities are unsecured. 11. OTHER LOANS DISBURSED 31 December 31 December 2018 2017 Current portion 25,906,871 5,197,808 Long-term portion 4,557,686 11,969,704 Provision for doubtful other loans disbursed (58,242) - Total 30,406,315 17,167,512 23 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) Current portion of other loans disbursed include the following: 31 December 31 December 2018 2017 Principal receivable 25,759,537 5,179,111 Interest receivable 97,805 18,697 25,906,871 5,197,808 Provision for doubtful other loans disbursed (49,529) - Total 25,857,342 5,197808 31 December 31 December Interest 2018 2017 Mountain Resorts Development Company A 0% 18,199,185 - Tbilisi City hall B 10.5% 6,497,444 9,702,083 United Water Supply Company of Georgia C 2% 3,293,876 2,143,361 Commercial banks D 3% .2,474,052 5,322,068 30,464,557 17,167,512 Provision for doubtful other loans disbursed (58,242) - Total 30,406,315 17,167,512 A: In September 2018 based on government decree MDF issued loans to Mountain Resorts Development Company (Sister Company). The aim of the financing was to improve infrastructure on winter ski resort Gudauri-Kobi Section, for season 2018-2019. The loan repayment date is January 10, 2019. B: In 2015 MDF disbursed loan to Tbilisi City Hall based on the Government decree. The loans proceeds should be used by the City Hall for capital investments, specifically, for rehabilitation and development of city roads. C: During the previous years MDF had disbursed loans to the Poti Municipality for the infrastructure projects. The right of use of the related assets, together with the respective liability for the loan disbursed by MDF, was transferred from the municipality to the United Water Supply Company of Georgia by the Government decree. D: MDF disbursed loans to the commercial banks from the proceeds of the grant received from KfW, a German government-owned development bank. The loans were disbursed to the commercial banks for the purpose of providing financial resources to private and municipal operators of existing small scale hydro power plants and geothermal facilities. 24 MUNICIPAL iDEVELOPMENT FUND OF EORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) 12. RECEIVABLES AND ADVANCES 31 December 31 December 2018 2017 Financial assets Receivables from municipalities 1,407,466 3,628,786 Receivables from terminated contracts 1,598,995 3,537,072 Other receivables 444,033 1,777789 3,450,494 8,943,647 Non-financial assets Advances to suppliers 51,918,017 92,632,182 Tax advances 1,108,080 - 53,026,097 92,632,182 Provision for doubtful receivables and advances (2,565,097) (1,679,002) Total 53,911,494 99,896,827 Advances to contractors are paid within the scope of projects signed between the Government of Georgia and Donor Organizations for which the implementing agency is MDF. Advances to contractors include payments to construction companies in the amount of GEL 51,918,017 for the year ended 2018 (GEL 92,632,182 for the year ended 2017) for the construction, rehabilitation of the infrastructure, acquisition of goods, supervision of construction works and for other services in different regions. Advances are redeemed step-by-step on every certificate of works done presented by contractor and residual amount is fully redeemed when the performance of works and services is 80-90% complete. Contractors are obliged to provide bank guarantees for full amount of advances and a performance guarantee for 10% of total contract amount. Receivables from terminated contracts represent outstanding receivables from completed projects implemented by MDF. Receivables from municipalities represent the share of municipalities co-financing for the municipal projects implemented by MDF. As at 31 December 2018 and 2017, movement in the provision for doubtful receivable was as follows: 31 December 31 December 2018 2017 Provision for doubtful receivables and advances at the 1,679,002 1,679,002 begining of the period Additional provision recognised during the year 886,095 - Provision for doubtfull receivable and advances at the end of the period 2,565,097 1,679,002 13. OTHER CURRENT ASSETS 31 December 31 December 2018 2017 Prepaid compensation for land 2,449,784 2,225,403 Bank guarantee receivable 669,150 1,296,100 Other 200,382 108,727 3,319,316 3,630,230 Provision for doubtful other current assets (15,933) - Total 3,303,383 3,630,230 25 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) Prepaid compensation for land represents funds reserved for payments to the owners of expropriated by the State land plots required for road construction project that are held on State Notary account, as determined by the legislation. Bank guarantee receivable represents amounts when supplier has defaulted on its performance obligations, which was secured by the bank guarantee. MDF claimed for the guarantee and recognized sum as other current asset and on the other hand liabilities to the budget hence received amounts from guarantees should be returned to budget. 14. CASH AND CASH EQUIVALENTS 31 December 31 December 2018 2017 Commercial bank accounts 61,012,000 5,000,001 State treasury accounts 124,633,343 225,865,326 Total 185,645,343 230,865,327 15. DEPOSITS IN BANK 31 December 31 December 2018 2017 Time deposits 28,000,000 19,500,000 Deposit certificates 30,000,000 16,500,000 Total 58,000,000 36,000,000 16. GRANTS RELATED TO ASSETS 31 December 31 December 2018 2017 Balance at the begining of the period 2,038,490 2,072,538 Received during the year 46,409 242,071 Credited to profit and loss (377,245) (276,119) Balance at the end of the period 1,707,654 2,038,490 Grants related to assets represent administrative land and building received from the Ministry of Economy of Georgia in 2007. For additional information please refer to Note 9. 17. LONG-TERM DEBT Interest 31 December 31 December Currency rate 2018 2017 Unsecured long-term borrowings: Loan from Ministry of Finance (under Refinancing EBRD project) GEL rate 28,257,688 29,511,570 Total long-term debt 28,257,688 29,511,570 As described in note 12 above, during the years 2018 and 2017 the Government of Georgia (GoG) received (date of first tranche being 30 September, 2016) long-term loan from the European Bank for Reconstruction and Development (EBRD) for the execution of Solid Waste 26 MUNi\CIPAL DEVELOPMENT FUND OF GEORGXA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) Management project. Under the subsidiary loan agreement between GoG and MDF, the loan proceeds were received by MDF, which in its turn transferred the loan to the ultimate beneficiary municipalities. Original currency of the loan from EBRD is in Euro and with annual interest rate equal to refinancing rate determined by the National Bank of Georgia. Maturity date of loan is determined to be 28 April 2026. Loan is repayable in local currency using exchange rate determined when the whole amount was disbursed. Financing Other Foreign cash flows changes exchange 01-3an-18 i) (ii) Loss 31-Dec-2018 Long-term debt 29,511,570 517,442 (1,771,324) - 28,257,688 29,511,570 517,442 (1,771,24 - 28,257,688 Financing Other Foreign cash flows changes exchange 01-Jan-17 i (ii) Loss 31-Dec-2017 Long-term debt 14,693,589 12,374,786 2,443,195 - 29,511,570 14,693,589 12,374,786 2,443,195 - 29,511,570 i. The cash flows make up the net amount of proceeds and repayments from borrowings in the statement of cash flows. ii. Other changes include interest accruals. 31 December 31 December 2018 2017 Current 2,329,695 2,113,759 Non-current 25,927,993 27,397,811 Total long-term debt 28,257,688 29,511,570 18. TRADE AND OTHER PAYABLES 31 December 31 December 2018 2017 Financial liabilities Retentions payable to contractors 20,994,367 15,822,101 Payables to the Government 7,783,746 2,214,082 Trade accounts payable 6,084,005 7,063,734 Other payables 1,985,447 539,570 36,847,565 25,639,487 Non-financial liabilities Advances received from municipalities 1,744,201 930,704 Taxes other than income tax - 115 1,744,201 930,819 Total 38,591,766 26,570,306 MDF retains 5-10% of the invoice amounts for the construction works in the framework of implemented project expenditures for possible future losses. The retained amount are presented 27 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) under retentions payable to contractors. These amounts are subject to payment to constructors one year after the construction works are completed. Payables to the Government includes overdraft balance of treasury account and guaratenees received from counterparties refundable to the state Budget. For trade payables the average credit period on purchases of certain goods and services is 1-4 months. No interest is charged on the trade payables. The Fund has financial risk management policies in place to ensure that all payables are paid within the pre-agreed credit terms. 19. SOURCE OF FINANCING 2018 2017 Source of financing as at 1 January 303,662,490 211,878,375 Government of Georgia (32,439,209) 111,230,495 Asian Development Bank 3,582,574 17,726,573 Municipalities (2,786,654) 3,768,454 KfW 80,250 Swedish International Development Agency (2,011,631) (879,338) Government of France (2,051,362) (3,405,913) European Union (3,670,658) European Bank for Reconstruction and Development (722,774) (4,156,646) MDF (2,249,773) (4,274,017) World Bank (6,232,467) (7,314,130) Government of Netherlands - (8,258,974) European Investment Bank (27,389,291) (9,061,981) Net financing of implemented projects during the year (72,300,587) 91,784,115 Source of financing as at 31 December 231,361,903 303,662,490 Source of financing balance represents net amount of financing received and expenditures incurred under projects financed by various donor organisations. When funds received from certain donor organization exceeds spendings for implementation of determined projects during accounting year, net amount of financing will be positive at the end of reporting period, and vice versa. 20. LOAN REVOLVING FUND Loan revolving fund includes donor financing received from various financial institutions and provided as loan financing to municipalities for implementing the sub-projects for the rehabilitation and expansion of priority municipal services and infrastructure needs (Note 10). 21. RELATED PARTIES TRANSACTION AND OUTSTANDING BALANCES Related parties may enter into transactions, which unrelated parties might not, and transactions between related parties may not be effected on the same terms and conditions as transactions between unrelated parties. The Fund is owned by State of Georgia. It has transactions with entities owned by the state of Georgia, referred as government related entities below. These transactions are conducted in the ordinary course of the fund's business on terms comparable to those with other entities that are non-government related entities. 28 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. The Fund had the following balances and transactions with related parties: December 31, 2018 December 31, 2017 Total category Total category as per the as per the financial financial Related party statements Related party statements balances caption balances caption NON-CURRENT ASSETS Other loans disbursed 4,988,141 4,548,973 9,468,008 11,969,704 Loans to municipalities 46,719,419 46,719,419 47,777,823 47,777,823 CURRENT ASSETS Other loans disbursed 23,846,125 25,857,342 4,519,385 5,197,808 Loans to municipalities 8,596,327 8,596,327 8,775,885 8,775,885 Receivables and advances 160,983 53,911,494 4,288,024 99,896,827 Cash and cash equivalents 124,633,343 185,645,343 225,865,326 230,865,327 CURRENT LIABILITIES Trade and other payables 8,190,048 38,591,766 803,280 26,570,306 The remuneration of directors and other members of key management, it total 6 staff members were as follows: 31 December 2018 31 December 2017 Total Total category as category as per the per the financial Related financial Related party statements party statements transactions caption transactions caption Key management personnel compensation 249,241 3,628,463 307,580 3,640,496 Included in the statement of profit or loss for the years ended December 31, 2018 and 2017 are the following amounts which were recognized in transactions with related parties: 2018 2017 Total category Total category as per the as per the financial financial Related party statements Related party statements transactions caption transactions caption Source of financing (37,475,636) (72,300,587) 114,998,949 91,784,115 Interest income from loans to 3,991,316 3,991,316 5,294,578 5,294,578 municipalities Other interest income 553,663 1,113,668 1,548,733 1,721,996 29 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) 22. FINANCIAL RISK MANAGEMENT The Fund's principal financial instruments comprise loans to municipalities, bank balances, accounts payables and long-term debt. The main purpose of these financial instruments is to ensure financing for the fund's operations. Financial risks The main financial risks arising from the Fund's financial instruments are foreign currency risk, interest rate risk, liquidity risk, and credit risk. Foreign currency risk The currency risk is defined as the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Fund is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Fund undertakes certain transactions denominated in foreign currencies, including the receipt of financing from International financial institutions for the implementation of projects. The financing is, in most cases, received in USD and EUR. The funds received are converted in GEL on periodic basis and the fluctuation in exchange rates between the date of funds received and converted results in foreign exchange gain/losses. The Fund does not use any derivatives to manage foreign currency risk exposure. The Fund's exposure to foreign currency exchange rate risk is presented in the tables below: USD EUR 31 December USD 1 EUR 1 2018 GEL GEL 2.6766 GEL 3.0701 Total FINANCIAL ASSETS Cash and cash equivalents 63,141,608 85,776,352 36,727,383 185,645,343 Deposits in banks 58,000,000 - - 58,000,000 Receivables and advances 2,690,984 669,150 - 3,360,134 Loans to municipalities 55,315,746 - - 55,315,746 Other loans disbursed 27,932,263 - 2,474,052 30,406,315 TOTAL FINANCIAL ASSETS 207,080,601 86,445,502 39,201,435 332,727,538 FINANCIAL LIABILITIES Trade and other payables 34,907,578 1,464,282 475,705 36,847,565 Long-term debt 28,257,688 - - 28,257,688 TOTAL FINANCIAL LIABILITIES 63,165,266 1,464,282 475,705 65,105,253 OPEN POSITION 143,915,335 84,981,220 38,725,730 30 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) USD EUR 31 December USD 1= EUR 1 2017 GEL GEL 2.5922 GEL 3.1044 Total FINANCIAL ASSETS Cash and cash equivalents 186,413,931 829,585 43,621,811 230,865,327 Deposits in banks 36,000,000 - 36,000,000 Receivables and advances 7,647,547 1,296,100 - 8,943,647 Loans to municipalities 56,553,708 - 56,553,708 Other loans disbursed 12,587,445 - 4,580,067 17,167,512 TOTAL FINANCIAL 299,202,531 2,125,685 48,201,878 349,530,194 ASSETS FINANCIAL LIABILITIES Trade and other payables 25,639,487 - 25,639,487 Long-term debt 29,511,570 - - 29,511,570 TOTAL FINANCIAL LIABILITIES 55,151,057 - - 55,151,057 OPEN POSITION 244,050,979 2,125,685 48,201,878 The table below details the Fund's sensitivity to strengthening/weakening of functional currency against foreign currencies by 15 per cent as at 31 December 2018 and 31 December 2017. The analysis was applied to monetary items at the balance sheet date denominated in EUR. As at 31 December 2018 As at 31 December 2018 USD/GEL USD/GEL EUR/GEL EUR/GEL + 150/a - 15/0 +150/ - 15% Profit/(loss) before tax 12,747,183 (12,747,183) 5,808,860 (5,808,860) As at 31 December 2017 As at 31 December 2017 USD/GEL USD/GEL EUR/GEL EUR/GEL + 15%/o - 15% +15% - 15% Profit/(loss) before tax 318,853 (318,853) 7,230,282 (7,230,282) Interest rate risk Interest-bearing financial assets and liabilities of the Fund have fixed interest rate. Therefore, Fund is not exposed to any interest rate risk. Liquidity risk Liquidity risk refers to the availability of sufficient funds to enable repayment of borrowings and other financial commitments as they actually fall due. 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FN �� atS 'г3 У. м� и W ,�,' ++ � � � +1 F+1 � й ® � т j � � � � J � п7 f{ r�Ц i� � � И � � � i � � � г �1 Uг � � с ш� т � rn о }� 7 � � Z�'� � i о�°ой� � ы�¢ � 'r� й MUNP- alltIL DEVEr-0F'1P4i -ATi` LUND :1R i1A NOTES TO THE FINANCIAL STATLMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) Credit risk Credit risk is the risk that a customer may default or not meet its obligations to the Fund on a tirnely basis, leading to financial losses to the Fund. The Fund is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities, including accounts with banks and related parties, foreign exchange transactions and other financial instruments. The credit risk on cash and cash equivalents is limited because the counterparties are banks with positive credit ratings. For collectivelly assessed exposures the Fund measures the loss allowance for its financial assets at an amount equal to lifetime ECL. The expected credit losses on financial assets are estimated by reference to past default experience of the counterparty, an analysis of the counterparty's maturity days and bank guarantees against the outstanding balance, The expected credit loss on financial assets assessed collectivelly are estimated by multiplying probability of default by loss given default and by exposure at default. For approach of PD estimations the Fund uses the research produced by the rating agencies. The Fund has estimated the expected credit loss, which has no significant impact. Therefore the Fund did not recognise a loss allowance against receivables. Fair value Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgement in categorizing financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety. None of te Entity's financial assets and liabilities measured at fair value. Based on the Managements assessment using level 3 inputs, fair value of the financial assets and liabilities approximates to their carrying values. Financial assets carried at amortised cost The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on credit risk of the counterparty. Liabilities carried at amortised cost The estimated fair value of fixed interest rate instruments with stated maturity was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Management of the Fund considers that the carrying amounts of financial liabilities recorded in the financial statements approximate to their fair values. 23. COMMITMENTS AND CONTINGENCIES Commitments - The Fund receives financing from donors for the completion of different projects. The fund is committed to use the proceeds received for the purposes defined in loan, credit or grant agreements. Total amount of the commitment for the year ended 2018 amounts to the balance of Source of Financing in Fund's financial statements. 34 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in GEL) Taxes - The taxation system in Georgia is relatively new and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are often unclear, contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of government bodies, which have the authority to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the four subsequent calendar years, however, under certain circumstances a tax year may remain open longer. These circumstances may create tax risks in Georgia that are substantially more significant than in many other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Georgian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and if the authorities were successful in enforcing their own interpretations, the effect on these financial statements could be significant. On 21 February 2017 the Audit Department of the Revenue Service of the Ministry of Finance of Georgia issued order #4187 to the Fund and tax audit of the Fund's financial information has been performed covering the period 1 January 2014 to 1 January 2017. As of the date of issuing these financial statements these periods are closed for the future review. Operating environment - The Fund's principal business activities are within Georgia. Georgia displays certain characteristics of an emerging market, including relatively high inflation and high interest rates. Tax, currency and customs legislation is subject to varying interpretations and contributes to the challenges faced by Entities operating in the Georgia. The future economic direction of Georgia is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory and political developments. The international sovereign debt crisis, stock market volatility and other risks could have a negative effect on the Georgian financial and corporate sectors. For the last two years Georgia has experienced a number of legislative changes, which have been largely related to the European Union Association Agreement. Whilst the legislative changes implemented during 2016 and 2017 paved the way, more can be expected as Georgia's action plan for achieving accession to the European Union continues to develop. Management determined impairment provisions by considering the economic situation and outlook at the end of the reporting period. Provisions for trade receivables are determined using the 'incurred loss' model required by the applicable accounting standards. These standards require recognition of impairment losses for receivables that arose from past events and prohibit recognition of impairment losses that could arise from future events, no matter how likely those future events are. Management is unable to predict all developments which could have an impact on the Georgian economy and consequently what effect, if any, they could have on the future financial position of the Fundy. Management believes it is taking all the necessary measures to support the sustainability and development of the Fund's business. 24. EVENTS AFTER THE REPORTING PERIOD Subsequent to the year end, no events have occurred that requires disclosure in the financial statements or adjustments to the reporting figures. 25. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved by the Board of Directors and authorised for issue on 28 June 2019. 35