HRVATSKE CESTE d.o.o. Vončinina 3, Zagreb The Annual Financial Statements and Independent Auditor's Report for the year ended 31 December 2018 Content 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 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 2018, which comprise the Statement of financial position (Balance Sheet) as at 31 December 2018, 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 2018, and of its financial performance and cash flows of the Company for the year that ended in accordance with the Accounting Act, the International Financial Reporting Standards (the “IFRS") as adopted by European Committee and published in Official Journal of the European Union and by 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 International Ethics Standards Board of 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 explains 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 most 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 In the audit, we focused on: of real estate, plants and equipment • verifying whether the transactions were recorded in 2018 in accordance with the In the 2018 annual financial statements, the accounting policies of the Company, i Company realized real estate, plant and • check whether for all road reconstructions equipment enhancements and decreases in an estimate of the share of reconstruction in 2018 as set out in Note 16. the investment project has been made and Investment maintenance and reconstruction of whether this estimate is reasonable, real estate, plant and equipment is defined as a key audit matter because it involves Additionally, we have considered whether the significant estimates. accounting policies are in accordance with International Financial Reporting Standards and whether changes in accounting policies Related Disclosures in Related Annual are disclosed in the notes to the financial Financial Statements statements. Please see Notes 2.7 (c) (Accounting Policies) and Note 16. 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, in February 2019, 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. Statement was obtained in February 2019, so after December 31, 2018, the loan agreement which was obtained from the EBRD on December 31, 2018, was classified as a short term loan. 3 BDO Croatia d.o.o. Other Information in the Annual Report The Management Board 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 Board and Those Charged with Governance for the annual financial statements The Management Board 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 the Management Board determines is necessary to enable the preparation of annual financial statements that are free from material misstatement, whether due to fraud or error. In preparing the annual financial statements, the Management Board is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Management Board either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s Responsibilities for 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. 5 BDO Croatia d.o.o. Report on other legal requirements Report based on the requirements of Regulation (EU) No. 537/2014 On 26 September 2018, we were appointed by the General Assembly of the Company, based on the proposal of the Company's Management Board to audit the annual financial statements for 2018. 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 2018, a total of 6 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 2018 we are able to detect irregularities, including fraud under Section 225, Response to Non-Compliance with the IESBA Code and the Rules of the IESBA Code that requires us to audit our engagement to see if the Company 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 2018, we determined the significance for the financial statements as a whole in the amount of HRK 33,300 thousands, which represents approximately 1,5% of total costs and investments as at 31 December 2018. 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 report for the Company’s Board of Auditors comprised in line with Article 11 of the EU Regulation No 537/2014. We have not provided to the Company prohibited non-audit services during the period between the initial date of the Company's audited annual financial statements for the year 2018 and the date of this report. In addition, we have not provided services for the design and implementation of internal control procedures or risk management related to the preparation and / or control of financial information or the design and implementation of technological systems for financial information in the preceding year. Therefore, we have remained independent of the Company in the performance of the audit. 6 HRVATSKE CESTE d.o.o, Zagreb INCOME STATEMENT AND STATEMENT OF OTHER COMPREHENSIVE INCOME for the year ended 31 December 2018 POSITION Note 2017 2018 HRK HRK OPERATING INCOME 3 Sales income 28,840,916 22,679,671 Income from own consumption 246,633 262,472 Other operating income 143,108,423 160,708,449 Total operating income 172,195,972 183,650,592 OPERATING EXPENSES Material expenses 4 (14,021,832) (15,691,975) Service expenses 5 (19,835,473) (21,336,721) Employees expenses 6 (97,496,650) (104,368,025) Amortization and depreciation 7 (19,614,349) (21,104,925) Other costs 8 (10,138,331) (9,518,901) Value adjustments 9 (1,476,581) (2,092,805) Provisions 10 (1,245,395) (465,870) Other operating expenses 11 (7,583,260) (6,151,833) Total operating expenses (171,411,871) (180,731,055) PROFIT FROM OPERATING ACTIVITIES 784,101 2,919,537 FINANCIAL INCOME 12 1,043,502 206,086 FINANCIAL EXPENSES 13 (1,827,603) (3,125,623) LOSS FROM FINANCIAL ACTIVITIES (784,101) (2,919,537) TOTAL INCOME 173,239,474 183,856,678 TOTAL EXPENSES (173,239,474) (183,856,678) PROFIT/(LOSS) BEFORE TAXATION 0 0 Income tax 14 (473,719) (308,690) LOSS FOR THE PERIOD (0) (0) 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 2018 POSITION Note 31 Dec 2017 31 Dec 2018 HRK HRK ASSETS Long-term assets Intangible assets 15 13,354,429 18,307,869 Property, plant and equipment 16 73,277,000,775 74,994,758,950 Financial assets 17 7,706,037 7,706,037 Receivables 18 2,262,727 1,805,201 Total long-term assets 73,300,323,968 75,022,578,057 Short-term assets Inventories 19 15,344,487 15,506,514 Trade receivables 20 6,858,950 12,492,587 Receivables from employees and company’s members 21 307,658 290,526 Receivables from the state and other institutions 22 122,328,517 194,309,205 Other short-term receivables 23 3,615,810 2,786,722 Cash with banks and in hand 24 132,909,231 340,038,967 Payments for future periods and accrued income 25 82,018,320 98,340,642 Total short-term assets 363,382,973 663,765,163 TOTAL ASSETS 73,663,706,941 75,686,343,220 OFF – BALANCE SHEET NOTES 1,955,794 15,602,810 9 HRVATSKE CESTE d.o.o, Zagreb STATEMENT OF FINANCIAL POSITION / BALANCE SHEET - continued as of 31 December 2018 POSITION Note 31 Dec 2017 31 Dec 2018 HRK HRK CAPITAL AND LIABILITIES Capital 26 Subscribed (share) capital 107,384,800 107,384,800 Public capital 63,330,080,756 64,989,583,752 Profit for the year 0 0 Total capital 63,437,465,556 65,096,968,552 Provisions 27 169,348,222 160,901,864 Long-term liabilities 28 8,834,097,580 9,006,024,954 Short-term liabilities Liabilities to related companies 29 317,102 306,876 Liabilities for loans, deposits, etc. 30 5,342,006 5,984,643 Liabilities to banks and other financial institutions 31 579,487,043 408,960,019 Trade accounts payable 32 273,493,576 262,422,224 Liabilities to employees 33 5,444,208 6,915,267 Liabilities for taxes, contributions and similar payments 34 17,374,352 29,701,945 Other short-term liabilities 35 21,556,321 19,356,128 Accrued expenses and deferred income 36 319,780,975 688,800,748 Total short-term liabilities 1,222,795,583 1,422,447,850 TOTAL CAPITAL AND LIABILITIES 73,663,706,941 75,686,343,220 OFF – BALANCE SHEET NOTES 1,955,794 15,602,810 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 2018 Subscribed Public capital (share) from the result TOTAL POSITION capital HRK HRK HRK Balance at 1 January 2017 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 0 68,369,561 68,369,561 Capital increase – interest 0 416,422 416,422 Capital increase – sale of salt to CRA 0 16,756,738 16,756,738 Capital increase - transfer from CRA categorisation of roads 0 65,109,124 65,109,124 Capital increase - Environmental Protection Fund - landslides 0 5,067,089 5,067,089 Capital increase – Zagreb roads - donation for asphalt reconstruction 0 6,820,134 6,820,134 Capital decrease – transfer for costs and taxes 0 (137,654,359) (137,654,359) Capital decrease - depreciation 0 (391,698,673) (391,698,673) Capital decrease - provision for court disputes 0 (8,817,710) (8,817,710) Capital decrease – investment maintenance replaced part 0 (98,689,147) (98,689,147) Capital decrease – reconstruction of state road – replaced part 0 (64,925,180) (64,925,180) Capital decrease – co- financing of CRA according to Regulation Act 0 (78,044,000) (78,044,000) Capital decrease - co-financing unclassified roads 0 (14,495,077) (14,495,077) Capital decrease - settlement of IGH-Pelješac Bridge 0 (13,650,000) (13,650,000) Capital decrease - currency differences 0 (9,003,252) (9,003,252) Capital decrease – interest and reimbursement 0 (382,049,197) (382,049,197) Capital decrease – maintenance cost – regular 0 (386,874,435) (386,874,435) Capital decrease –maintenance cost - extraordinary 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 Capital increase - fuel reimbursement 0 2,067,740,730 2,067,740,730 Capital increase – co-financing of public goods 0 5,833,781 5,833,781 Capital increase – currency differences 0 117,997,183 117,997,183 Capital increase –interest 0 187,448 187,448 Capital increase – sale of salt to CRA 0 22,486,800 22,486,800 Capital increase – transfer from CRA categorisation of roads 0 222,760,261 222,760,261 Capital increase - transfer from HAC (tunnel St. Ilija) 0 1,312,798,130 1,312,798,130 Capital increase – recognition of EU accrued income for depreciation 0 15,665,440 15,665,440 Capital increase - provision for court disputes 0 8,912,228 8,912,228 Capital decrease – transfer for costs 0 (150,071,493) (150,071,493) Capital decrease – transfer for corporate income tax 0 (308,690) (308,690) Capital decrease - depreciation 0 (436,106,544) (436,106,544) Capital decrease – investment maintenance replaced part 0 (115,211,563) (115,211,563) Capital decrease – reconstruction of state road – replaced part 0 (227,974,804) (227,974,804) Capital decrease – transfer to CRA according to categorisation (318,067,536) (318,067,536) of roads 0 Capital decrease – co-financing of CRA according to Regulation Act 0 (106,944,673) (106,944,673) Capital decrease - co-financing of unclassified roads 0 (25,504,923) (25,504,923) Capital decrease - currency differences 0 (1,031,558) (1,031,558) Capital decrease – interest and reimbursement 0 (260,482,317) (260,482,317) Capital decrease – maintenance cost – regular 0 (420,971,838) (420,971,838) Capital decrease – maintenance cost - extraordinary 0 (12,572,604) (12,572,604) Capital decrease – flood relief 0 (8,331,491) (8,331,491) Capital decrease – research and develop. 0 (8,812,171) (8,812,171) Capital decrease – cost value of sold salt to CRA 0 (22,486,800) (22,486,800) Balance at 31 December 2018 107,384,800 64,989,583,752 65,096,968,552 The accompanying accounting policies and notes form an integral part of these financial statements. HRVATSKE CESTE d.o.o, Zagreb STATEMENT OF CASH FLOWS for the year ended 31 December 2018 POSITION 2017 2018 HRK HRK Cash flow from operating activities Cash inflows - customers 36,619,761 28,604,385 Cash inflows - royalties, fees, commissions and similar 2,153,660,326 2,401,186,546 Cash inflows – damage insurance 1,471,664 1,582,493 Cash inflows – tax return 69,707,194 73,828,267 Cash outflows – suppliers (592,357,201) (687,963,016) Cash outflows – employees (102,555,123) (107,868,056) Cash outflows – damage insurance (524,995) (406,773) Other cash inflows and outflows (22,999,291) (21,252,909) Cash from operating activities 1,543,022,335 1,687,710,937 Cash outflows – interest (434,415,441) (151,416,592) Cash outflows – corporate income tax (188,871) (491,072) Net cash flow from operating activities 1,108,418,023 1,535,803,273 Cash flow from investing activities Cash inflows from sale of long-term assets 793,452 1,048,488 Cash inflows from sale of financial instruments 1,680,324 0 Cash inflows from dividends 215,338 0 Total cash inflows from investing activities 2,689,114 1,048,488 Cash outflows for purchase of long-term assets (911,873,896) (1,350,422,889) Total cash outflows from investing activities (911,873,896) (1,350,422,889) Net cash flow from investing activities (909,184,782) (1,349,374,401) Cash flow from financial activities Cash inflows from loan principal 4,703,232,650 3.773,440,039 Other cash inflows from financial activities 68,369,561 118,001,082 Total cash inflows from financial activities 4,771,602,211 3,891,441,121 Cash outflows for repayment of loan principal (5,215,470,806) (3,869,708,699) Other cash outflows from financial activities (9,003,252) (1,031,558) Total cash outflows from financial activities (5,224,474,058) (3,870,740,257) Net cash flow from financial activities (452,871,847) 20,700,864 TOTAL NET CASH FLOW (253,638,606) 207,129,736 CASH AND CASH EQUIVALENTS AT 1 JANUARY 386,547,837 132,909,231 CASH AND CASH EQUIVALENTS AT 31 DECEMBER 132,909,231 340,038,967 (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS (253,638,606) 207,129,736 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 2018 1. GENERAL 1.1. Legal framework, activities and employees The company Hrvatske ceste d.o.o. Zagreb, Vončinina 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 2018 1. GENERAL (continued) General data on employees: The number of staff employed by the Company and the structure by qualification level at 31 December 2017 and at 31 December 2018 is presented as follows: Qualification At 31 December 2017 At 31 December 2018 structure Number % Number % M.Sc.,Dr 24 5.29% 24 5.35% University degree 253 55.73% 255 56.79% Higher education 60 13.22% 62 13.81% Secondary school certificate 107 23.57% 101 22.49% Skilled workers 4 0.88% 3 0.67% Other 6 1.32% 4 0.89% TOTAL 454 100.00% 449 100.00% 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 4 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 four 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 Senko Bošnjak, Board member since January 7, 2019 14 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 2. BASIS OF PREPARATION 2.1. Statement of compliance and basis of presentation Financial statements of the Company for 2018 are prepared in accordance with the Accounting Act (National Gazette 78/15, 134/15, 120/16, 116/18), 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 2018 2.1. Adoption of new accounting policies The Company first applied the following standards and appendix for annual reporting period beginning on 1 January 2018:  IFRS 9 Financial Instruments  IFRS 15 Revenue from Contracts with Customers  Classification and measurement of payment transactions based on shares – Appendix IFRS 2  Annual improvements for reporting cycle from 2014 to 2016  Transfer to investment property – Appendix IAS 40  Interpretation 22 Transactions in foreign currency and advances The Company had to change its accounting policies after adoption of IFRS 9 and IFRS 15. Application of the above standards did not have significant impact on the financial statements of the Company. Furthermore, in addition to the above, the most of other above – mentioned appendix did not have impact on the amounts recognized in prior period and is not expected that will have significant impact on the current or future periods. Adoption of IFRS 9: Financial Instruments At the date of initial application of January 1, 2018, financial instruments were as follows: Measurement category Carrying amount Original New Original New IFRS 9 (in thousands of HRK) (IAS 39) (IFRS 9) (IAS 39) (IFRS 9) effect 39) Long-term assets Receivables from sales of Amortized Amortized - flats cost cost 2,262,727 2,262,727 Short-term assets - Amortized Amortized Trade and other cost cost receivables 10,782,418 10,782,418 Amortized Amortized - Cash and cash equivalent cost cost 132,909,231 132,909,231 Total - 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 management of the Company has adopted the standard with the effective date and its application did not have any significant impact on the financial statements. 16 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 2.2. Adoption of new accounting policies (continued) Adoption of IFRS 15: Revenue from Contracts with Customers The standard is effective for annual periods beginning on or after 1 January 2018. IFRS 15 establishes a five-step model that will apply to revenue earned from a contract with a customer (with limited exceptions), regardless of the type of revenue transaction or the industry. The standard’s requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the entity’s ordinary activities (e.g., sales of property, plant and equipment or intangibles). Application of this standard did not have significant impact on the Financial Statements of the Company. Standards and interpretations adopted by the Board, which are not yet in effect and which had not been already adopted by the Company  IFRS 16: Leases The Standard is 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 management of the Company has decided not to apply new standard for leases retroactively completely but to use directive on exemption for lessee. During the transition to the new standard, the obligation to pay on the basis of existing operating leases will be discounted using appropriate incremental borrowing rate and will be recognized as a liability for rent. The property with right of use will display the amount of the lease obligation adjusted for the amount prepaid or accrued payment for rent. The management of the Company estimated that the application of IFRS 16 will not have significant impact on the Financial Statements of the Company. 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. 17 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 2.3. Key estimates and uncertainty of estimates (continued) 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. Expected loss model With IFRS 9, the expected loss model is introduced (ECL). The measurement of the expected loss is based on reasonable and supporting information that is available without excessive expense and effort and which includes information on past events, current and foreseeable future conditions and circumstances. When estimating expected future impairment requirements, historical probabilities of non-fulfilment and future parameters relevant to credit risk are used. The most important part of the financial assets are trade receivables and cash. Trade receivables are stated at invoiced amount. Impairment of bad and doubtful receivables is based on the best estimate of the Management Board of bad debt. All receivables in bankruptcy and sued receivables are fully written off. Management of the Company is carried out impairment of bad and doubtful receivables based on the aging of all receivables and a specific review of significant individual amounts included in receivables. During the reporting period there were no changes in the methods of initial assessment or significant assumptions which were used. During the reporting period there were no significant changes in the carrying value of financial instruments, and therefore were no significant impact on the amount of value adjustments. 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 In accordance with the new IFRS 15, relating to the recognition of contracts with customers, the Company applies the model of five steps:  Identify the contract(s) with the customer,  Identify the performance obligations in the contract,  Determine the transaction price,  Allocate the transaction price to each performance obligation,  Recognize revenue when a subject fulfils the obligation of delivery. The Company records income from the following areas:  Income from issued licences and consents,  Income from fees for the use of land. 18 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 2.5. Policy of recognition and measuring of income (continued) Revenue is recognized for each separate contractual obligation in the transaction price amount. The transaction price is the amount of contractual remuneration that the Company expects to be entitled to in return for the delivery of the promised goods or services. Revenues are stated in amounts deducted for value added tax, estimated returns, rebates and discounts. Application of this standard did not have significant impact on the accounting policies of the Company, and revenue recognition takes place at the same time as when IAS 18 - Revenue was effective and no significant impact of IFRS 15 is determined. a) Revenues from the sale of services Provided that the amount of revenue can be measured reliably and if the Company is likely to receive a fee, the service revenues are recognized in the period in which they are provided. b) Interest income Interest income is accrued on a time basis, based on outstanding principal and at the applicable effective interest rate that exactly discounts the estimated future cash receipts through the expected life of the financial instrument or to the net carrying amount of the financial asset. Interest income is recognized as a financial income in the statement of profit or loss. c) Dividend income Income from dividend and share in the profit is recognised as income when the Annual General Meeting of the investee’s company has established the right to their receipt, i.e. after adoption of decision on dividend pay-out. d) Revenue from leases Income from business leases is accounted on a flat basis during the period of lease. 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 2018 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: 2017 2018 Description 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 2018 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. e) 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 2018 2.7. Policy of assets disclosure (continued) b) Financial assets The Company has adopted IFRS 9 Financial Instruments as at 1 January 2018 and its implementation did not have a significant impact on the financial statements. The Company recognizes financial assets in its financial statements when it becomes party to the contractual provisions of the instrument. Depending on the business model for asset management and contractual features cash flows for the said asset, the Company measures financial assets at amortized cost, fair value through other comprehensive income or fair value through statement of profit and loss. Asset items are classified and measured as follows: Classification and measurement Non-curent asset Long-term receivables Hold to collect / amortized cost Current asset Cash and cash equivalents Hold to collect / amortized cost Trade and other receivables Hold to collect / amortized cost The Company's business models reflect the way in which the Company manages assets in order to realize cash flows. i) Trade receivables Trade receivables that do not have a significant financial component at initial recognition have been measured in accordance with IFRS 15 at their transaction price. ii) Impairment The Company on the basis of expected credit losses, recognizes impairment of financial assets. At each reporting date, the Company measures the expected credit losses and recognizes the same in the financial statements. Expected credit losses from financial instruments are measured in a manner that reflects: - Impartial and weighted amount of probability which is determined by assessing the range of possible outcomes, - The time value of money, - Reasonable and acceptable data about past events, current conditions and predictions of future economic conditions. For trade receivables, the Company applies a simplified approach of IFRS 9 measurement of expected credit losses using the expected provision for credit losses of account receivables. 22 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 2.7. Policy of assets disclosure (continued) iii) Derecognition of financial assets The Company derecognises financial assets when; - Contractual rights to cash flows from financial assets expire, - Financial assets are transferred and the transfer fulfils conditions for termination of derecognition. The Company transfers financial assets if, and only if, either: (a) Transfers contractual rights to receive cash flows from financial assets, or (b) Retains contractual rights to receive cash flows from a financial asset but assumes a contractual obligation to pay cash flows to one or more recipients in the arrangement. When the Company transfers financial assets, it is required to estimate the extent to which it retains the risks and rewards of ownership of the financial asset. In this case, when all risks and rewards of ownership are transferred, the Company ceases to recognize financial assets and recognizes separately, as assets or liabilities, all rights and obligations that have arisen or are retained in the transfer. If almost all the risks and rewards of ownership of financial assets are retained, the Company continues to recognize financial assets. If the Company neither transfers nor retains almost all the risks and rewards of ownership of financial assets, the Company determines whether it has retained control of the financial asset. If no control over financial assets is retained, the Company derecognises financial assets and recognizes separately as assets or liabilities and all rights and obligations that have arisen or are retained in the transfer. If control is retained, the Company continues to recognize financial assets to the extent that it continues to participate in that financial asset. iv) 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. 23 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 2.7. Policy of assets disclosure (continued) c) Property, plant and equipment 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. 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). 24 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 2.7. Policy of assets disclosure (continued) c) Property, plant and equipment (continued) 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. Accounting 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. 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. 25 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 2.8. Policy on recognition and measuring of liabilities Initial recognition and measurement Financial liabilities are classified as financial liabilities that are measured at amortised cost. All financial liabilities are initially recognised at fair value plus associated transaction costs. Financial liabilities include trade and other payables, bank overdrafts and loans and borrowings. Subsequent measurement After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Derecognition The Company ceases to recognize the liability in the financial statements when, and only when, the obligation has been settled. When the existing financial liability is replaced by another by the same creditor under substantially different terms or the terms of existing liabilities have changed significantly, such change or modification is treated as termination of the original liability and recognition of the new liability, and the difference in the corresponding carrying amounts is recognized in the statement of profit or loss. 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. 26 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 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 The Company classifies each own lease as operating or financial lease. Leases are classified as financial leases if all the risks and economic benefits associated with ownership are transferred from the lessor to the lessee. Financial lease is recognized in the Balance sheet of the lessee as an asset and liability for financial lease. Leases are classified as business leases if there is a contract on which the lessor transfers the right to the lessee to use a property (lease) in the agreed period in exchange for countervailing. 27 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 2.11. Leases (continued) The new standard which is in effect on 1 January 2019 established the obligation to recognize a business lease in the financial statements as a property with the right of use under the lease. The Company is defined exception of application of this standard on: • Short-term leases (up to one year) • Leases whose object of lease is low value. In that case, business / operating lease is recognized as an expense in the lessee's profit and loss account on a straight- line basis over the lease term. Initial measurement From the first day of the lease, the Company is measured asset with the right of use at cost, whereas the obligation on the basis of this lease is measured at the current value of all payments in connection with leases which have not been made on that day. The payments are discounted at an interest rate which is contained in the lease or per incremental borrowing rate in cases when this rate can not be determined. Subsequent measurement After initial recognition, the Company is measured asset with the right of use by cost model. The company increases lease liability for the amount of interest on the basis of lease and reduces for payments made. Also, the Company remeasured the established obligation for lease for all possible changes. 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. 28 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 2.12. Government grants and disclosure of government assistance (continued) 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. 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. 29 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 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 The Management Board 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 8 to 10. 30 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 3. OPERATING INCOME 2017 2018 DESCRIPTION HRK HRK Income from issued licences and consents 24,745,392 18,652,820 Income from fees for the use of land and ancillary service activities 3,524,248 3,430,975 Income from services, tenders, trainings 571,276 595,876 Domestic sales 28,840,916 22,679,671 Income from own consumption 246,633 262,472 Other operating income 143,108,423 160,708,449 TOTAL 172,195,972 183,650,592 Income from issued licences and consents disclosed in for the year 2018 in the amount of HRK 18,652,820 (2017: HRK 24,745,392) 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 special transport (National Gazette No 119/07, 52/08) and Regulation on the criteria for calculation of fees for special transport (National Gazette No 68/10), and from October 25, 2018, according to the new Regulation on special transport (National Gazette No 92/18). An decrease of 24% in 2018 mainly refers to the significantly decreased 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 2018 in the amount of HRK 3,430,975 (2017: HRK 3,524,248) 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 2017 2018 DESCRIPTION HRK HRK Recovery of prior-period revenues by court judgments 1,805,397 3,068,993 Income from guarantees 0 2,922,737 Recovery of amounts previously written off 1,731,951 1,740,493 Collected indemnities from insurance 1,471,664 1,582,493 Income from sale of non-current assets 261,132 505,555 Write off of liabilities to suppliers 2,510 307,794 Other income not specified 221,998 206,734 Income from damages and penalties collected 155,954 27,969 Income from cash payment discounts 22,123 0 Rental income 255,054 274,188 Part of public capital for covering difference between income and expenses 137,180,640 150,071,493 TOTAL 143,108,423 160,708,449 31 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 4. MATERIAL EXPENSES 2017 2018 DESCRIPTION HRK HRK Energy 12,491,086 14,555,843 Raw material and supplies 1,176,917 711,227 Written -off small inventory and car-tires 353,829 424,905 TOTAL 14,021,832 15,691,975 5. SERVICE EXPENSES 2017 2018 DESCRIPTION HRK HRK Maintenance of buildings and equipment 6,790,757 6,355,442 Rental services 3,141,397 3,798,122 Postage and telecommunication charges 2,679,892 2,794,915 Municipal utility services 1,409,349 1,559,372 Student service expenses and other expenses 576,523 1,099,990 Medical services 660,332 732,088 Transportation 713,585 656,967 Lawyer services 231,797 591,775 Cleaning, washing and ironing services 418,657 494,104 Advertising 491,417 490,682 Intellectual and consulting services 511,444 453,430 Property insurance premiums 524,995 406,773 Archiving services 318,815 370,736 Commercial and media monitoring 343,467 251,000 Bank and payment operation charges 220,529 224,110 Auditing services 143,500 184,000 Legal services and costs of hiring expert witnesses 122,939 169,760 Arrangement of WEB page and Internet 81,806 165,335 Software maintenance 0 164,700 Road and vehicle inspection fees 167,479 140,712 Security and fire protection services 160,674 120,540 Employee insurance premiums 105,205 95,933 Graphic, photographic and photocopying services 20,914 16,235 TOTAL 19,835,473 21,336,721 6. EMPLOYEES EXPENSES 2017 2018 DESCRIPTION HRK HRK Net wages and salaries 56,388,878 59,702,244 Taxes and contributions from salaries 26,799,267 29,578,857 Contributions on salaries 14,308,505 15,086,924 TOTAL 97,496,650 104,368,025 32 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 7. DEPRECIATION AND AMORTIZATION 2017 2018 DESCRIPTION HRK HRK Depreciation and amortization of tangible and intangible assets 411,313,022 457,211,469 Transferred to equity (391,698,673) (436,106,544) TOTAL 19,614,349 21,104,925 The depreciation charge on public goods for the year 2018 charged to public capital amounts to HRK 436,106,544 (2017: 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 2017 2018 DESCRIPTION HRK HRK Fund of voluntary pension insurance 1,572,900 2,271,780 Cost of transportation to and from workplace 2,054,561 2,133,110 Other fees 1,300,369 1,364,512 Transport and accommodation costs - business travels 476,122 640,382 Per diems and business travel costs 440,455 447,549 Professional training costs 692,447 438,297 Litigation costs and fees 2,005,929 336,160 Aid for workers 177,912 282,785 Entertainment 113,416 247,998 Field addition and separate life 182,540 236,435 Fees to the members of the Supervisory Board 263,635 236,015 Appropriate awards - gift for children of employees 160,200 183,900 Membership fees 176,340 173,427 Appropriate awards – jubilee awards 147,000 149,500 Professional literature and press costs 115,183 131,795 Severance payments 72,000 112,000 Taxes independent of the operating result 134,619 84,995 Forest fees 45,273 48,261 Trainee fees and scholarships 3,040 0 Costs of environment protection 4,390 0 TOTAL 10,138,331 9,518,901 33 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 9. VALUE ADJUSTMENTS 2017 2018 DESCRIPTION HRK HRK Value adjustment of trade receivables 513,823 232,487 Value adjustment of other receivables 962,758 1,860,318 TOTAL 1,476,581 2,092,805 The amount of HRK 1,860,318 in 2018 refers to write off of receivables to DUZS works in refugee camps while in 2017 a large part of value adjustment of other receivables was written off to cities and counties (HRK 879, 816). 10. PROVISIONS 2017 2018 DESCRIPTION HRK HRK Provisions for retirement and long - service benefits 244,083 465.870 Litigation provision 1,001,312 0 TOTAL 1,245,395 465.870 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 2018 additional provision was made for retirement benefits (tax-recognized amount) in the amount of HRK 171,677 and for jubilee awards of HRK 294,193 while provisions for court proceedings initiated at the expense of the Company stayed at the same level. 11. OTHER OPERATING EXPENSES 2017 2018 DESCRIPTION HRK HRK Penalties and damages 7,354,194 5,854,013 Subsequently determined expenditure 44,396 9,195 Non-written-off value of disposed assets and shortages 9,670 1,125 Other non-specified expenses 175,000 287,500 TOTAL 7,583,260 6,151,833 Penalties and damages in the amount of HRK 5,854,013 (2017: HRK 7,354,194) refer to the payment of legal and physical entities for damages that are caused by traffic accidents on the state roads. 34 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 12. FINANCIAL INCOME 2017 2018 OPIS HRK HRK Income from penalty interest 4 60,197 Income from call rate 66,096 41,183 Income from interest of borrowings 0 6,781 Income from investment in shares / stakes of related companies 450,000 0 Sale of financial assets (net) 156,947 0 Dividend income and share in profit of unrelated companies 215,338 0 Foreign exchange gains for liabilities and receivables 0 3,900 Other financial income (suing) 155,117 94,025 TOTAL 1,043,502 206,086 Other financial incomes (suing) in the amount of HRK 94,025 (in 2017 the amount was HRK 155,117) are occurred by payment of litigation costs and lawyer's services of sued customers, for which we are trusted law office for suing proceeding. After payment of lawyer's services of sued customers, law offices charge the same to the Company that is booked to expenses for lawyer's services (with lawyers are agreed that they will be paid only for the amount of lawyers’ costs which the Company get from sued customers). 13. FINANCIAL EXPENSES 2017 2018 DESCRIPTION HRK HRK Interest expenses – unrelated companies by court judgments 1,827,603 3,118,679 Expenses from penalty interest 0 6,944 TOTAL 1,827,603 3,125,623 Interest expenses by court judgments in the amount of HRK 3,118,679 (2017: HRK 1,827,603) mostly refer to accrued interests on payments of legal and physical entities for damages that are caused by traffic accidents on the state roads. 35 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 14. CORPORATE INCOME TAX Set out below is the reconciliation between taxable profit and the accounting profit: Tax balance sheet Tax balance sheet POSITION 2017 2018 HRK HRK Total income 173,239474 183,856,678 Total expenses (173,239,474) (183,856,678) Profit / (loss) for the year 0 0 Profit increase / loss decrease Depreciation and amortisation 0 0 70%/50% of entertainment expenses, /30% of expenses for the use of personal cars 753,190 1,473,431 Expenditures determined in the supervisory process 1,742,360 0 Value adjustment and write off of receivables 1,250,226 388,437 Provision cost 91,027 294,193 Tax base increase for other expenses 0 10,000 Total profit increase / loss decrease 3,836,803 2,166,061 Profit decrease / loss increase Dividend income and share in profit (665,338) 0 Proceeds from collection of receivables written off (79,797) (64,897) Government grants for training and education (459,895) (386,222) Total profit decrease / loss increase (1,205,030) (451,119) Tax base 2,631,773 1,714,942 Corporate income tax rate 18% 18% Tax liability 473,719 308,690 Paid advances 373,329 432,158 Difference for payment / refund 100,390 (123,468) Advances for the following tax period 39,477 25,724 The corporate income tax rate effective in the Republic of Croatia for the year 2018 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 2018 would amount to HRK 150,071,493 and for 2017 would amount to HRK 137,180,639. 36 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 15. INTANGIBLE ASSETS Concessions, patents, Intangible assets licences, trade and under service marks, software development DESCRIPTION and other rights HRK HRK COST Balance at 1 January 2017 55,129,041 0 Additions 2017 10,574,727 10,574,727 Transfer to use 2017 (4,613,777) (10,574,727) Balance at 31 December 2017 61,089,991 0 Additions 2018 0 10,537,283 Transfer to use 2018 10,537,283 (10,537,283) Disposal, alienation and deficiencies 0 0 Balance at 31 December 2018 71,627,274 0 IMPAIRMENT Balance at 1 January 2017 46,865,389 0 Amortization 2017 5,483,951 0 Disposal, alienation and deficiencies (4,613,778) 0 Balance at 31 December 2017 47,735,562 0 Amortization 2018 (5,583,843) 0 Balance at 31 December 2018 53,319,405 0 NET CARRYING VALUE Balance at 1 January 2017 8,263,653 0 Balance at 31 December 2017 13,354,430 0 Balance at 31 December 2018 18,307,869 0 37 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 16. PROPERTY, PLANT AND EQUIPMENT Plant and equipment, tools, furniture, Tangible assets Other Total property, transport Prepayments for under tangible plant and DESCRIPTION Land Buildings vehicles tangible assets construction assets equipment COST Balance at 1 January 2017 29,664,074 79,088,206,949 94,430,089 35,441,171 2,672,550,975 97,129 81,920,390,387 Addition 0 0 0 51,818,861 885,892,579 0 937,711,440 Transfer to use 51,401 1,261,471,587 3,394,985 0 (1,271,888,953) 5,790 (6,965,190) Changes on prepayments 0 0 0 (45,297,489) 0 0 (45,297,489) Transfer from CRA (categorisation) 0 175,491,664 0 0 0 0 175,491,664 Reconstruction - transfer to PC 0 (64,925,180) 0 0 0 0 (64,925,180) Expenses, shortages, replaced part – invest. maintenance 0 (98,812,752) (3,236,380) 0 0 0 (102,049,132) Balance at 31 December 2017 29,715,475 80,361,432,268 94,588,694 41,962,543 2,286,554,601 102,919 82,814,356,500 Addition 0 0 0 358,533,169 1,000,775,940 0 1,359,309,109 Transfer to use 0 1,323,387,554 4,921,257 0 (1,332,644,511) 5,790 (4,335,700) Changes on prepayments 0 0 0 (59,889,845) 0 0 (59,889,845) Transfer to CRA (categorisation) 0 (374,303,351) 0 0 0 0 (374,303,352) Transfer from CRA (categorisation) 0 378,873,582 0 0 0 0 378,873,581 Transfer from HAC (tunnel St. Ilija and harbor Ploče) 0 1,643,343,706 13,244,349 0 0 0 1,656,588,055 Reconstruction - transfer to PC 0 (227,974,804) 0 0 0 0 (227,974,804) Expenses, shortages, replaced part – invest. maintenance 0 (115,212,688) (7,701,414) 0 0 0 (122,914,102) Balance at 31 December 2018 29,715,475 82,989,546,265 105,052,886 340,605,867 1,954,686,030 102,919 85,419,709,442 IMPAIRMENT Balance at 1 January 2017 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 from CRA and cities 0 110,382,542 0 0 0 0 110,382,542 Expenses, disposals and shortages 0 (123,605) (3,226,710) 0 0 0 (3,350,315) Balance at 31 December 2017 0 9,451,973,376 85,382,348 0 0 0 9,537,355,724 Depreciation 0 446,326,911 5,300,717 0 0 0 451,627,628 Transfer of roads to CRA and cities (56,235,816) 0 0 0 0 (56,235,816) Transfer of roads from CRA and cities 0 156,113,321 0 0 0 0 156,113,321 Transfer from HAC 330,545,576 13,244,349 0 0 0 343,789,925 Expenses, disposals and shortages 0 0 (7,700,290) 0 0 0 (7,700,290) Balance at 31 December 2018 0 10,328,723,368 96,227,124 0 0 0 10,424,950,492 NET CARRYING VALUE Balance at 31 December 2017 29,715,475 70,909,458,892 9,206,346 41,962,543 2,286,554,601 102,919 73,277,000,776 Balance at 31 December 2018 29,715,475 72,660,822,897 8,825,762 340,605,867 1,954,686,030 102,919 74,994,758,950 38 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 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 2018: Disposals and 31 Dec 2017 Additions retirements 31 Dec 2018 DESCRIPTION HRK HRK HRK HRK Administrative and assembly buildings and other facilities Total 9,854,434 7,354,644 655,538 16,553,541 PC – reconstruction SR - land 17,278,985 14,976,503 17,238,146 15,017,342 PC – reconstruction SR - projects 14,655,884 11,061,140 3,197,037 22,519,986 PC – reconstruction SR - works 157,871,148 280,276,354 257,188,880 180,958,622 PC – reconstruction SR - supervision 8,840,800 11,112,659 9,795,090 10,158,369 PC – reconstruction SR – co-financing (constr. and design) (3,870,482) 0 (2,707,435) (1,163,047) PC – reconstruction - other 908,683 2,508,884 1,397,810 2,019,758 Reconstruction SR Total 195,685,018 319,935,539 286,109,527 229,511,031 PC – invest. maint. SR - land 0 5,727,693 5,678,104 49,589 PC – invest. maint. SR - projects 187,600 7,591,020 7,756,820 21,800 PC – invest. maint. SR - works 0 215,402,474 215,402,474 0 PC – invest. maint. SR - supervision 0 10,543,731 10,543,731 0 PC – invest. maint. SR - other 0 660,115 660,115 0 Investment maintenance SR Total 187,600 239,925,033 240,041,244 71,389 PC - SR - purchase of land 311,978,011 26,197,385 135,577,827 202,597,570 PC - SR – studies and projects 312,134,871 28,275,789 27,087,719 313,322,940 PC - SR - construction 1,036,963,351 197,014,459 320,834,434 913,143,377 PC - SR – co-financing (constr. and (2,129,382) 0 (40,466) (2,088,916) design) PC - SR – other costs 24,024,020 8,893,901 2,986,801 29,931,120 PC - SR – consulting services 3,112,340 1,810,024 2283051,2 2,639,313 State roads – Total 1,686,083,212 262,191,558 488,729,366 1,459,545,404 PC - Bridges - purchase of land 95,735,847 4,457,587 48,987,033 51,206,401 PC - Bridges - studies and projects 74,969,905 3,470,384 17,895,522 60,544,767 PC - Bridges - construction 200,323,389 152,725,565 243,655,517 109,393,437 PC - Bridges – consulting services 920,290 4,600,592 916,824 4,604,058 Bridges - Total 371,949,431 165,254,129 311,454,896 225,748,663 PC Betterment II - land 0 136,704 136,704 0 PC Betterment II - studies and other 0 46,328 46,328 0 costs PC Betterment II - supervision 0 17,821 17,821 0 Betterment II Total 0 200,852 200,852 0 Repair of landslides 22,275,806 842,165 427,470 22,690,502 Plant and equipment 519,100 4,611,459 4,565,059 565,500 Tools, fittings and vehicles 0 362,659 362,659 0 TOTAL 2,286,554,601 1,000,678,040 1,332,546,611 1,954,686,030 39 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 17. LONG-TERM FINANCIAL ASSETS 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Corporate shares 7,061,300 7,061,300 Investment in shares 7,061,300 7,061,300 Investment in long-term securities - frozen FX savings 644,737 644,737 Investments in securities 644,737 644,737 TOTAL 7,706,037 7,706,037 Investment in shares and stakes: 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Industrogradnja d.d. 1,000 1,000 a) Total shares in companies 1,000 1,000 Via tel d.o.o. Zagreb 5,222,300 5,222,300 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 7,060,300 7,060,300 TOTAL 7,061,300 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 2017 31 Dec 2018 DESCRIPTION HRK HRK Receivables for flats with tenancy rights 2,262,727 1,805,201 TOTAL 2,262,727 1,805,201 19. INVENTORIES 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Inventories of raw material and supplies 15,326,117 15,492,071 Inventories of food in the restaurant 18,370 14,443 Small inventory in use 337,624 322,774 Value adjustment of small inventory in use (337,624) (322,774) Car tyres in use 494,951 467,218 Value adjustment of car tyres in use (494,951) (467,218) TOTAL 15,344,487 15,506,514 40 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 20. TRADE RECEIVABLES 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Domestic trade receivables 6,858,950 12,492,587 Bad and doubtful receivables 8,879,215 8,417,639 Value adjustment of bad and doubtful receivables (8,879,215) (8,417,639) TOTAL 6,858,950 12,492,587 The age structure of customer receivables is presented below: 31 Dec 2017 31 Dec 2018 Overdue maturity date: HRK HRK Undue 6,257,551 7,342,510 Up to 60 days 420,396 288,951 From 61 to 180 days 0 231,404 From 181 to 360 days 70,235 4,515,269 Over 360 days 110,768 114,453 TOTAL 6,858,950 12,492,588 21. RECEIVABLES FROM EMPLOYEES 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Receivables for shortages 91,226 85,466 Receivables for advances 500 500 Other amounts due from employees 215,932 204,560 TOTAL 307,658 290,526 22. RECEIVABLES FROM THE STATE AND OTHER INSTITUTIONS 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Receivables from the Ministry of Finance (fuel fee) 94,485,715 151,226,444 Receivables for value added tax 27,723,070 43,015,090 Receivables from the Croatian State Health Insurance Fund 47,538 67,671 Other receivables (calc. interests on deposits) 72,194 0 TOTAL 122,328,517 194,309,205 41 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 23. OTHER RECEIVABLES 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Other receivables Hrvatske vode 3,387,738 3,387,738 Other receivables Municipality Brtonigla 500,000 210,000 Other receivables City Novi Vinodolski 804,573 804,573 Other receivables CRA Primorsko-gor. 87,497 210,387 Other receivables City Karlovac 38,170 0 Other receivables Municipality Kloštar 0 546,643 Other receivables City Dubrovnik 33,938 33,938 Other receivables City Varaždin 1,339,001 1,339,001 Other receivables City Kutina 792,319 792,319 Other receivables Vodovod d.o.o. Sl.Brod 318,062 318,062 Other receivables Ivanić Grad 378,087 0 Other receivables -DUZS (refugee camp) 1,860,318 1,860,318 Other receivables –investm. cycle (CRA) 8,584,617 7,984,617 Other receivables City Rijeka 0 691,530 Other receivables KD VIK Rijeka 0 495,222 Other receivables Tekija 0 930,437 Other receivables City Čakovec 12,000 0 Other receivables City Zagreb 435,556 0 Other receivables HEP ODS d.o.o. Elektroistra Pula 344,766 0 Other receivables HEP ODS d.o.o. Elektra Zabok 925,000 0 Value adjustment of other receivables (16,225,832) (16,818,063) TOTAL 3,615,810 2,786,722 24. CASH WITH BANKS AND IN HAND 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Foreign currency account 55,665,546 1,964,337 Gyro account balance 40,948,855 301,986,713 Specific-purpose funds and letters of credit 36,235,342 36,007,173 Cash in hand 59,488 80,744 TOTAL 132,909,231 340,038,967 25. PREPAID EXPENSES 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Prepaid expenses 82,018,320 98,340,642 TOTAL 82,018,320 98,340,642 At the end of 2017 and in April 2018, I and II phase of the financial restructuring of the Company were implemented by reprogram previous loans. The said amount refers to the costs of financing the new responsibilities which are delimited on the duration of the contract. 42 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 26. CAPITAL The subscribed capital, as disclosed in the statement of financial position (balance sheet) at 31 December 2018 in the amount of HRK 107,384,800 (31 December 2017 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 2018 in the amount of HRK 64,989,583,752 (31 December 2017: HRK 63,330,080,756) 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 2018 were as follows: 31 Dec 2018 % portion DESCRIPTION HRK Capital increase - fuel reimbursement 2,067,740,730 54.78 Capital increase – co-financing of public goods 5,833,781 0.15 Capital increase – currency differences, interest and other 118,184,630 3.13 Capital increase – sale of salt to CRA 22,486,800 0.60 Capital increase – transfer from CRA categorisation of roads 222,760,261 5.90 Capital increase – transfer from HAC (tunnel St. Ilija and harbor Ploče) 1,312,798,130 34.78 Capital increase – recognition of EU income for depreciation 15,665,440 0.42 Capital increase – decrease of provisions for court disputes 8,912,228 0.24 TOTAL 3,774,382,000 100.00 43 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 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 2018 were as follows: 31 Dec 2018 % portion DESCRIPTION HRK Capital decrease – transfer for costs and corporate income tax (150,380,183) 7.11 Capital decrease - depreciation (436,106,544) 20.62 Capital decrease – investment maintenance SR, replaced part (115,211,563) 5.45 Capital decrease – reconstruction SR – replaced parts (227,974,804) 10.78 Capital decrease – co- financing of CRA according to Regulation Act (106,944,673) 5.06 Capital decrease – co- financing of unclassified roads (25,504,923) 1.21 Capital decrease – transfer in CRA according to CRA (318,067,536) 15.04 categorisation of roads Capital decrease - currency differences, interest and other (261,513,875) 12.37 Capital decrease – maintenance cost – regular (420,971,837) 19.91 Capital decrease – extraordinary maintenance (12,572,604) 0.59 Capital decrease – flood relief (8,331,491) 0.39 Capital decrease – research and develop. (8,812,171) 0.42 Capital decrease – cost value of sold salt to CRA (22,486,800) 1.06 UKUPNO (2,114,879,005) 100.00 Profit for the year, stated in the statement of financial position (balance sheet) at 31 December 2018 in the amount of HRK nil (31 December 2017: 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. 44 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 27. PROVISIONS Movements in provisions in 2018 are shown as follows: New Reversal of 31 Dec 2017 provisions provisions 31 Dec 2018 DESCRIPTION HRK HRK HRK HRK Long-term provisions for severance payments 875,489 171,677 0 1,047,166 Long-term provisions for jubilee awards 1,191,293 294,193 0 1,485,486 Long-term litigation provisions 167,281,440 0 (8,912,228) 158,369,212 TOTAL 169,348,222 465,870 (8,912,228) 160,901,864 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 2018, pursuant to the Decision of the Management Board, there were reduction of litigation provisions in the amount of HRK 8,912,228 as a result of differences between new claims and solved disputes during 2018. 28. LONG-TERM LIABILITIES 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Liabilities to banks in Croatia 7,859,343,225 7,902,310,644 Liabilities to banks abroad 1,520,186,408 1,380,950,329 Current portion of long-term debt (see Note 29) (545,432,053) (277,236,019) TOTAL 8,834,097,580 9,006,024,954 Banks in Croatia 31 Dec 2018 Current portion Long-term portion Interest rate HRK HRK HRK < 2% 3,452,604,796 (37,422,854) 3,415,181,942 2%-4% 4,449,705,848 0 4,449,705,848 4%-6% 0 0 0 TOTAL 7,902,310,644 (37,422,854) 7,864,887,790 Banks abroad 31 Dec 2018 Current portion Long-term portion Interest rate HRK HRK HRK < 2% 150,876,027 (150,876,027) 0 2%-4% 673,487,717 (30,803,463) 642,684,254 4%-6% 556,586,585 (58,133,675) 498,452,910 TOTAL 1,380,950,329 (239,813,165) 1,141,137,164 45 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 28. LONG-TERM LIABILITIES (continued) Movements in amounts due to banks and other financial institutions are presented as follows: 2017 2018 DESCRIPTION HRK HRK At 1 January 9,809,182,035 9,379,529,633 Loans paid (5,215,470,806) (3,869,708,699) New loans 4,703,232,650 3,773,440,039 Exchange differences 82,585,754 0 At 31 December 9,379,529,632 9,283,260,973 Reclassification of liability for long-term loan EBRD (139,270,179) Current portion of the principal (545,432,053) (137,965,840) At 31 December 8,834,097,579 9,006,024,954 Long-term liabilities to banks and other financial institutions are due as follows: Amount Maturity year HRK 2020 182,392,346 2021 349,915,057 2022 537,887,382 After 2022 7,935,830,169 TOTAL 9,006,024,954 46 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 28. LONG-TERM LIABILITIES – (continued) An overview of amounts due to banks in Croatia is presented below: Year Agreed amount in the Interest Long-term Domestic banks due Currency original currency Payment rate 31 Dec 2018 Current portion portion HRK HRK HRK HBOR 2033 EUR 95,194,088 Quarterly 4-6% 612,866,359 0 612,866,359 MINISTRY OF FINANCE 2030 EUR 517,263,323 Annual 2-4% 3,836,839,490 0 3,836,839,490 ERSTE BANK d.d., HPB d.d., PBZ d.d., SG- Semi SPLITSKA BANKA, ZABA d.d. 2027 EUR 467,144,462 annual <2% 3,452,604,795 (37,422,854) 3,415,181,941 TOTAL amounts due to banks in Croatia 7,902,310,644 (37,422,854) 7,864,887,790 An overview of amounts due to banks abroad is presented below: Year Agreed amount in the Interest Long-term Banks abroad due Currency original currency Payment rate 31 Dec 2018 Current portion portion HRK HRK HRK Semi European Investment Bank I ("EIB") 2027 EUR 60,000,000 annual 4-6% 233,958,466 (31,127,460) 202,831,006 European Investment Bank II (betterment Semi II/A) 2030 EUR 60,000,000 annual 4-6% 322,628,119 (27,006,215) 295,621,904 European Investment Bank III ( (Split Semi bypass) 2036 EUR 42,900,000 annual 2-4% 251,549,247 (12,768,155) 238,781,092 European Bank for Reconstruction and Semi Development (EBRD) /i/ 2031 EUR 33,347,054 annual < 2% 150,876,027 (150,876,027) 0 European Investment Bank IV (betterment Semi ll/B) 2034 EUR 60,000,000 annual 2-4% 421,938,470 (18,035,308) 403,903,162 TOTAL amounts due to banks abroad 256,247,054 1,380,950,329 (239,813,165) 1,141,137,164 /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 the Company did not meet the contracted business indicators based on the loan agreement approved by the EBRD (loan obligation on 31 December 2018 in the amount of HRK 150,876,027), said loan with maturity up to 2031 is classified as a short-term loan. The amount of HRK 139,270,179 becomes due after 31 December 2018. In February 2019, the Company received a written statement from the bank that it will 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 (continued) for the year ended 31 December 2018 29. LIABILITIES TO RELATED COMPANIES 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Liabilities to Via tel d.o.o. 317,102 306,876 TOTAL 317,102 306,876 30. LIABILITIES FOR LOANS, DEPOSITS ETC. 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Liabilities for received deposits 4,399,988 5,304,499 Liabilities for bail and subscriptions 942,018 680,144 TOTAL 5,342,006 5,984,643 31. LIABILITIES TO BANKS AND OTHER FINANCIAL INSTITUTIONS 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Interest payable on loans 34,054,990 131,724,000 Current portion of long-term loans (see Note 28) 545,432,053 277,236,019 TOTAL 579,487,043 408,960,019 At interest payable on loans for the first time there is obligation for interest payable on loans of Ministry of Finance in the amount of HRK 105,513,000. 32. TRADE PAYABLES 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Trade accounts payables – investments 146,172,164 126,442,697 Trade accounts payable - goods and services 106,551,967 115,021,940 Liabilities under cession arrangements 17,150,299 19,886,181 Liabilities under factoring arrangements 3,619,146 1,071,406 TOTAL 273,493,576 262,422,224 The aging structure of trade payables is presented below: 31 Dec 2017 31 Dec 2018 HRK HRK Undue 234,665,167 244,469,365 Up to 60 days 24,230,814 6,516,535 From 61 to 180 days 696,390 279,993 From 181 to 360 days 4,725,566 1,945,590 Over 360 days 9,175,639 9,210,741 TOTAL 273,493,576 262,422,224 48 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 33. LIABILITIES TO EMPLOYEES 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Net salaries and wages 5,213,902 6,574,037 Other liabilities to employees 230,306 341,230 TOTAL 5,444,208 6,915,267 34. LIABILITIES FOR TAXES, CONTRIBUTIONS AND SIMILAR PAYMENTS 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Liabilities for buy buck of public flats 65% 1,470,772 1,173,381 Contribution on salaries 1,378,040 1,814,045 Contribution from salaries 1,602,371 2,110,455 Taxes and surtaxes out of salaries 1,195,359 2,003,261 Value added tax 11,609,176 22,642,929 Contributions independent of the operating result 18,242 41,866 Corporate income tax payable 100,390 (83,992) UKUPNO 17,374,352 29,701,945 35. OTHER SHORT-TERM LIABILITIES 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Liabilities to CRA 21,556,322 11,389,502 Liabilities for unclassified roads (winter maintenance) 0 7,966,626 UKUPNO 21,556,322 19,356,128 36. ACCRUED EXPENSES AND DEFERRED INCOME 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Accrued expenses for co-financing CRA 23,153,180 38,759,542 Accrued expenses for co-financing unclassified roads 20,000,000 6,365,380 Deferred income from use of road land 686,429 826,909 Deferred income -collected guarantees - guarantee period 2,460,803 3,563,643 Deferred income -collected guarantees – termination of contract 48,473,455 39,757,061 Deferred income - EU funds 225,007,108 599,528,213 TOTAL 319,780,975 688.800,748 Accrued expenses and deferred income at 31 December 2018 in the amount of HRK 688,800,748 (31 December 2017: HRK 319,780,975) relate to accrued expenses in the amount of HRK 45,124,922 (31 December 2017: HRK 43,153,180), the obligation for repayment guarantees for bail in the amount of HRK 43,320,704 kuna (31 December 2017: HRK 50,934,258) and deferred revenue for received funds from EU funds in the amount of HRK 599,528,213 (31 December 2017: HRK 225,007,108). 49 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 36. ACCRUED EXPENSES AND DEFERRED INCOME (continued) Accrued expenses in the amount HRK 45,124,922 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 2018 (National Gazette 41/18, and amendments thereof, National Gazette 4/19) 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 2018, managers did not submit documents on completed works, respectively the costs of winter service. Deferred income in the amount of HRK 826,909 relates to road land fees. Collected guaranties in the amount of HRK 39,757,061 (31 December 2017: HRK 48,473,455) which is waiting a resolution of disputes over compensation for damage due to termination of contract by the perpetrator of the works. The overview of projects funded from EU funds is given below: DESCRIPTION 31 Dec 2018 HRK Bridge Pelješac and access roads 335,380,551 Bridge land – island Čiovo 164,402,943 Bypass Vodice 39,959,943 Southern bypass Osijek 25,890,873 Plano - Split 27,219,973 Bypass Petrijevac 2,136,887 Connector road of junction Škurinje - harbor Rijeka 758,250 Dubrovnik - airport – Montenegro border 627,742 Bypass Dicmo 534,075 CEF PSA 531,964 Southern bypass Poreč 512,943 Bypass Nedelišće and Pušćina 451,819 Eastern connection road in Slavonski Brod 449,732 Sv. Helena-Vrbovec-Bjelovar-Virovitica- border with Hungary 367,177 Program of sanation of dangerous places on state roads in Croatia 286,450 Crocodile II Croatia 16,951 TOTAL 599,528,213 For the amount of depreciation of HRK 15,665,440 that has charged public capital which refers to roads and objects financed by EU funds, position of deferred income from EU funds is abolished in 2018. 50 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 37. RELATED PARTY TRANSACTIONS Related party Receivables Liabilities Income Expense HRK HRK HRK HRK 2018 Via tel d.o.o. 0 306,876 0 1,370,861 Hrvatska elektroprivreda 4,948 3,437,296 306,063 12,315,446 Hrvatske šume 2,025 29,771 462,015 23,982 Hrvatske vode 0 6,073 990 5,185,143 Hrvatska pošta 0 81,294 150 392,694 Narodne novine 0 50,625 0 458,088 Hrvatska radio televizija 0 0 0 142,080 Hrvatske telekomunikacije 45,488 720,828 373,486 2,432,827 INA Matica 98,670 365,461 110,581 1,819,704 151,131 4,998,224 1,253,285 24,140,825 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 TOTAL 1,343,889 5,105,356 2,032,111 23,846,950 38. MANAGEMENT REMUNERATION Management remuneration is presented as follows: 2017 2018 DESCRIPTION HRK HRK Gross salaries 544,297 1,182,136 TOTAL 544,297 1,182,136 51 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 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 2018 was 13,95% (year ended 31 December 2017: 14,58%). 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Long-term and short-term loan debt 9,379,529,632 9,420,969,616 Financial liabilities 9,379,529,632 9,420,969,616 Less: Cash with banks and in hand (132,909,231) (340,038,967) Net debt 9,246,620,401 9,080,930,649 Equity 63,437,465,556 65,096,968,552 Net debt-to-equity ratio 14,58% 13,95% Categories of financial instruments 31 Dec 2017 31 Dec 2018 DESCRIPTION HRK HRK Long-term financial assets 7,061,300 7,061,300 Long-term receivables 2,262,727 1,805,201 Short-term receivables 133,110,935 209,879,040 Short-term financial assets 0 0 Cash with banks and in hand 132,909,231 340,038,967 Financial assets 275,344,193 558,784,508 Loan liabilities 9,379,529,632 9,420,969,616 Other liabilities 807,314,756 1,168,405,052 Financial liabilities 10,186,844,388 10,589,374,668 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 52 HRVATSKE CESTE d.o.o., Zagreb Notes to the financial statements (continued) for the year ended 31 December 2018 39. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Financial risk management objectives - continued of these risks. The Company does not enter into, or trade with financial instruments, including derivative financial instruments, for speculative purposes. 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 2017 31 Dec 2018 31 Dec 2017 31 Dec 2018 HRK HRK HRK HRK EUR 9,279,720,108 9,283,260,973 55,665,546 1,964,337 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. 2017 2018 DESCRIPTION HRK HRK EUR change effect 93,795,296 90,060,250 TOTAL 93,795,296 90,060,250 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 (continued) for the year ended 31 December 2018 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. 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 (continued) for the year ended 31 December 2018 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 2018 Interest free 318,702,440 - - - 318,702,440 Interest bearing 208,253,099 208,253,099 1,070,194,785 8,096,732,033 9,583,433,016 2017 Interest free 318,185,559 - - - 318,185,559 Interest bearing 893,838,969 9,175,639 2,371,790,485 6,951,436,291 10,226,241,384 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 2018 Interest free 339,038,967 2,805,201 341,844,168 2017 Interest free 133,110,935 2,262,727 135,373,662 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 2018, there were 1,115 legal disputes outstanding against the Company, with the total claims amounting to approximately HRK 240,384,253 (31 December 2017: 1,171 legal disputes, with the total claims of approximately HRK 226,232,393). 55 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 8 to 10. 57 HRVATSKE CESTE d.o.o., Zagreb BALANCE SHEET AS OF 31 DECEMBER 2018 POSITION Company Public good Total HRK HRK HRK ASSETS LONG TERM ASSETS Tangible and intangible assets 182,427,514 74,830,639,305 75,013,066,819 Financial assets 7,706,037 0 7,706,037 Receivables 1,805,201 0 1,805,201 Total long-term assets 191,938,752 74,830,639,305 75,022,578,057 SHORT TERM ASSETS Inventories 14,443 15,492,071 15,506,514 Receivables Trade receivables 1,145,159 11,347,428 12,492,587 Receivables for prepayments 0 0 0 Other receivables 10,967,731 186,418,722 197,386,453 TOTAL receivables 12,112,890 197,766,150 209,879,040 Cash 190,962,777 149,076,190 340,038,967 Total short-term assets 203,090,110 362,334,410 565,424,521 PREPAYMENTS AND ACCRUED INCOME 0 98,340,642 98,340,642 TOTAL ASSETS 395,028,862 75,291,314,358 75,686,343,220 EQUITY AND LIABILITIES CAPITAL AND RESERVES Subscribed capital 107,384,800 0 107,384,800 Public capital from the result 0 64,547,571,611 64,547,571,611 Profit / (loss) for the year (150,380,183) 592,392,324 442,012,141 Total capital and reserves (42,995,383) 65,139,963,935 65,096,968,552 PROVISIONS 26,625,511 134,276,353 160,901,864 LONG TERM LIABILITIES 176,288,343 8,829,736,611 9,006,024,954 SHORT TERM LIABILITIES Trade payables 16,636,921 246,092,179 262,729,100 Taxes and contributions payable 29,701,945 0 29,701,945 Liabilities to employees 6,915,267 0 6,915,267 Short-term loan liabilities 131,724,000 277,236,019 408,960,019 Other liabilities 5,984,643 19,356,128 25,340,771 Total short-term liabilities 190,962,776 542,684,326 733,647,102 ACCRUED EXPENSES AND DEFERRED INCOME 44,147,613 644,653,135 688,800,748 TOTAL EQUITY AND LIABILITIES 395,028,861 75,291,314,359 75,686,343,220 58 HRVATSKE CESTE d.o.o., Zagreb INCOME STATEMENT for the period from 1 January to 31 December 2018 Budgeted 2018 Budget Deviation from POSITION 2018 Company Public good Total realization budget HRK HRK HRK HRK % HRK OPERATING INCOME Fuel income 2,011,000,000 0 2,067,740,730 2,067,740,730 2,82% 56,740,730 Income from co-financing (cities and munic.) 7,000,000 0 5,833,781 5,833,781 -16,66% (1,166,219) Environment protection fond - landslides 0 0 0 0 0% 0 Sales income 20,250,000 22,679,670 0 22,679,670 12,00% 2,429,670 Sales income (salt) 0 0 22,609,760 22,609,760 0% 22,609,760 Income from usage of own cars 260,000 262,472 0 262,472 0,95% 2,472 Other income (rental) 250,000 274,188 274,188 9,68% 24,188 Provisions 0 0 0 Total operating income 2,038,760,000 23,216,331 2,096,184,271 2,119,400,602 3,96% 80,640,602 OPERATING EXPENSES Raw material and material (40) 14,526,000 15,691,975 0 15,691,975 8,03% 1,165,975 Sold goods (salt) 0 22,609,760 22,609,760 0% 22,609,760 Transfer of funds to CRA and unclass.roads 130,000,000 0 132,449,596 132,449,596 1,88% 2,449,596 Regular maintenance 420,000,000 0 406,158,305 406,158,305 -3,30% (13,841,695 Extraordinary maintenance 20,000,000 0 12,572,604 12,572,604 -37,14% (7,427,396) Repair of damage on the flooded areas 15,500,000 0 8,331,491 8,331,491 -46,25% (7,168,509 Studies and developm. preparation 8,500,000 0 8,812,171 8,812,171 3,67% 312,171 Other costs of services (41 and 42) 43,392,000 21,336,721 14,813,532 36,150,253 -16,69% (7,241,747) Staff costs 108,644,600 104,368,025 0 104,368,025 -3,94% (4,276,575) Depreciation and amortisation 440,000,000 21,104,925 436,106,544 457,211,469 3,91% 17,211,469 Other operating costs (44 and 46) 10,054,000 9,518,901 0 9,518,901 -5,32% (535,099) Provisions 465,870 0 465,870 465,870 Total operating expenses 1,210,616,600 172,486,418 1,041,854,004 1,214,340,422 0,31% 3,723,822 FINANCIAL INCOME 45,561,000 206,086 118,184,631 118,390,717 159,85% 72,829,717 FINANCIAL EXPENSES 157,500,000 3,125,622 261,513,875 264,639,497 68,03% 107,139,497 EXTRAORDINARY INCOME 9,630,000 10,362,768 0 10,362,768 7,61% 732,768 EXTRAORDINARY EXPENSES 9,555,000 8,244,637 0 8,244,637 -13,71% (1,310,363) TOTAL INCOME (without EU funds) 2,093,951,000 33,785,185 2,214,368,902 2,248,154,086 7,36% 154,203,086 TOTAL EXPENSES 1,377,671,600 183,856,678 1,303,367,878 1,487,224,556 7,95% 109,552,956 Profit / (loss) before taxation 716,279,400 (150,071,493) 911,001,023 760,929,530 6,23% 44,650,130 Income tax 0 (308,690) (308,690) - (308,690) PROFIT / (LOSS) FOR THE YEAR 716,279,400 (150,380,183) 911,001,023 760,620,840 6,19% 44,341,441 59