2
TURBOMECANICA SA
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2022
PREPARED IN ACCORDANCE WITH
MINISTER OF FINANCE ORDER NO. 2844/2016,
FOR THE APPROVAL OF ACCOUNTING REGULATIONS IN ACCORDANCE WITH
INTERNATIONAL FINANCIAL REPORTING STANDARDS,
with subsequent amendments and clarifications
3
Tab
l
e o
f
Con
t
en
t
s
4
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2022
December 31,
Note2022
December 31,
2021
RON
RON
Revenues from contracts with clients4
Changes in inventories of finished goods and work in progress
Raw materials, consumables and utilities5
Employee benefits and salaries6
Depreciation and amortization expenses11, 12
Other operating expenses7
Other operating income7
Financial costs8
Finance income8
Other gains and losses9
139,161,607
(1,397,289)
(48,016,004)
(52,742,599)
(11,154,177)
(10,744,195)
2,144,011
(3,000,113)
824,690
(1,636,849)
131,331,165
2,242,607
(41,843,823)
(53,408,568)
(10,977,081)
(9,491,455)
1,349,869
(2,036,616)
108,129
(3,070,518)
Profit before taxation13,439,08214,203,709
Income tax10(1,249,939)(2,454,482)
Profit for the year12,189,14311,749,227
Other comprehensive income, net of taxation:
-
Items which will be reclassified to profit and loss
Items which will not be reclassified to profit and loss:
Actuarial gain/ (loss) on defined benefits plan, net of deferred tax22
67,444
534,442
Other comprehensive income for the year
67,444
534,442
Comprehensive income for the year
12,256,587
12,283,669
Result per share:27
(RON / share)
0,0335
0.0323
The financial statements were approved by the Board of Administration and authorized for issuance on March 23, 2022.
CLAUDIA ANGHEL,
RADU VIEHMANN,
Economic & Commercial Director
CEO
5
STATEMENT OF FINANCIAL POSITION AS AT DECEMBER 31, 2022
December 31,
2022
RON
December 31,
2021
RON
Note
ASSETS
Long-term assets
Property, plant and equipment11
Intangible assets12
Other assets
61,375,822
435,158
6,000
63,583,402
938,549
6,000
Total long-term assets61,816,98064,527,951
Current assets
Inventories13
Trade receivables15
Contract assets14
Other receivables16
Other current receivables*17
Financial Investments18
Cash and cash equivalents18
55,658,919
28,706,415
12,219,893
1,534,620
3,563,416
5,880,000
12,043,696
59,341,922
20,270,368
11,952,778
1,250,786
1,180,357
-18,961,360
Total current assets
Total assets
119,606,959
112,957,571
181,423,939
177,485,522
EQUITY AND LIABILITIES
Capital and reserves
Issued capital19
Reserves20
Retained earnings
Own shares
36,944,248
68,451,765
17,954,675
(599,408)
36,944,248
82,454,086
1,800,021
(599,408)
Total equity122,751,280120,598,947
Long-term liabilities
Leases21
Deferred tax liabilities10
Provisions22
Other financial liabilities21
Total long-term liabilities
1,857,927
2,050,962
813,667
4,627,544
2,055,578
3,989,086
1,485,978
-
9,350,100
7,530,642
Current liabilities
Trade and other liabilities23
Borrowing & leasess21
Current income tax
Provisions 22
Other current liabilities 24
6,743,521
27,117,137
2,219,617
4,295,456
8,946,828
5,551,518
27,895,049
1,927,794
4,798,822
9,182,750
Total current liabilities
Total liabilities
49,322,559
49,355,933
Total equity and liabilities
58,672,659
56,886,575
181,423,939
177,485,522
*The comparative figures as of December 31, 2021 have been reclassified in accordance with the presentation adopted in 2022. The
amount of 1,180,357 RON included on December 31, 2021 in the "Other receivables" category is now presented separately in the
"Other current assets" category.
The financial statements were approved by the Board of Administration and authorized for issuance on March 23, 2023.
CLAUDIA ANGHEL,
RADU VIEHMANN,
Financial & Commercial Director
CEO
6
STATEMENT OF CASH FLOWS AS AT DECEMBER 31,
2022
Note
Cash flow from operations:
December 31,
2022
December 31,
2021
Net profit / (loss) of the year
11,749,227
2,454,482
10,977,081
101,480
2,727,590
180,498
102,305
2,036,616
(108,129)
-
Changes in working capital
12,189,143
Adjustments for:
Income tax10
Depreciation and amortization expenses
11, 12
Charge / (Reversal) of provision for receivables
15
Allowances for inventories and contractual assets
13
Other provisions
22
Net
loss on sale of fixed assets
11, 12
Financial costs
8
Other
financial gains
8
Prescribed dividents gains
7,26
Net gains / loss from exchange rate differences
1,249,939
11,154,177
(28,281)
806,336
(1,095,386)
96,507
3,000,113
(824,690)
(1,058,809)
87,051
(26,976)
25,576,100
30,194,174
(Increase) in trade and other receivables
(Increase) in contract assets
(Increase) of inventories
Increase / (Decrease) in trade and other liabilities
Net cash generated by operating activities
(11,054,156)
(267,115)
2,876,668
662,976
(7,686,309)
21,843,262
(34,682,189)
5,014,270
17,794,473
14,683,208
Income tax paid
Interest received
Interest paid
Net cash (used in) operating activities
(2,909,086)
824,690
(2,479,307)
(2,904,870)
108,129
(1,821,691)
13,230,770
10,064,776
Cash flows from investment activities:
Purchase of tangible assets*
Purchase of intangible assets
Purchase of financial assets
Proceeds from sale of fixed assets
Net cash (used in) investment activities
(6,951,749)
(995,847)
(5.880.000)
54,483
(2,039,759)
(666,174)
-
-
(13,773,113)
(2,705,933)
Net cash from financing activities:
Proceeds/ payments from borrowings
Payments related to leasing obligations*
Collections from other financial institutions
Dividends paid
Net cash generated from / (used in) financing activities
26
(
704
,5
08
)
26
(
1,0
04
,7
07
)
21, 26
4,6
27
,651
26
(
9,293,6
51
)
8,069,666
(929,858)
-(686,082)
Net increase / (decrease) of cash and cash equivalents
(6,375,321)
6,453,726
Cash and cash equivalents at the beginning of the period
13,812,569
Cash and cash equivalents at the end of the period
5,148,791
(6,917,664)
18
18,961,360
18
12,043,696
18,961,360
The financial statements were approved by the Board of Administration and authorized for issuance on March 23, 2023.
CLAUDIA ANGHEL,
RADU VIEHMANN,
Economic & Commercial Director
CEO
7
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUTY
FOR THE YEAR ENDED DECEMBER 31, 2022
Balance on January 1, 2022
Share
capital
Reserves
Revaluation
reserve
Retained
earnings
Total
36,944,248
35,263,201
47,190,885
1,200,613
120,598,947
Profit of the year
-
-
12,189,143
12,189,143
Other comprehensive income:
-
-
-
Actuarial gains related to the determined benefits plan, net of deferred tax
Total other comprehensive income for the year
-
-
-
12,256,587
12,256,587
-
-
-
67,444
67,444
-
-
-
(10,104,254)
(10,104,254)
Dividend distribution in year (Note 27)
Distribution of Other reservs to retained earning (Note 20)
Reevaluation reserves
-
(13,779,390)
-
13,779,390
-
Balance of December 31, 2022
(222,931
)
222,931
36,944,248
21,483,811
46,967,954
17,355,267
122,751,280
Balance on January 1, 2021
1,024,571,055
55,980,030
47,579,992
(1,019,815,798)
108,315,279
Share
capital
Reserves
Revaluation
reserve
Retained
earnings
Total
Profit of the year
-
-
11,749,227
11,749,227
Other comprehensive income
Actuarial gains related to the determined benefits plan, net of deferred tax
-
-
534,442
534,442
Total comprehensive income for the year
-
12,283,669
12,283,669
-
Realization of revaluation reserves
-
(389,107)
389,107
-
Closing the reported result from the adoption of IAS 29 (Note 19)
Balance of December 31, 2021
(987,626,807)
(20,716,829)
-
1,008,343,636
-
36,944,248
35,263,201
47,190,885
1,200,613
120,598,947
The financial statements were approved by the Board of Administration and authorized for issuance on March 23, 2023.
CLAUDIA ANGHEL,
Economic & Commercial Director
RADU VIEHMANN,
CEO
8
NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2022
1.GENERAL INFORMATION
TURBOMECANICA SA (“Turbomecanica” or the “Company”) is a joint-stock company, incorporated in 1975, with the main activity the
manufacturing of engines, mechanical assemblies and equipment for aircraft. It is a privately owned company whose shares are listed on the
Bucharest Stock Exchange.
The main shareholdings is as follows:
Viehmann Radu – shareholding of 25.91%
Ciorapciu Dana Maria – shareholding of 15.15%
Romanian State Authority through the authority regarding the administration of state assets - 150 shares, shareholding of 0.00004%
Other shareholders – shareholding of 58.94%.
The evolution of the Company is as follows: 1975-1977- Engine production company Bucharest; 1978-1990 - Turbomecanica Bucuresti; from
20.11.1990, through GD no. 1213, the joint stock company “Compania Comerciala Turbomecanica SA” was incorporated. After 1991, from
Turbomecanica SA two companies were formed: Aeroteh SA and Micron-Turboteh SA.
The company has the following revenue streams:
a. MRO services for engines and mechanical assemblies for aircrafts and helicopters. The main products serviced by the Company are:
Turbo engines, Viper engines, modernization of Puma helicopters, spare parts for Viper, and Turbo engines, spare parts and engines for Rolls-
Royce.Turbomecanica isthe onlyproducer and approvedMROservice provider ofgas turbine enginesand mechanicalassemblies for aircrafts on
the Romanian market.
b. Revenues from production of customer build to print components and spare parts under de above mentioned lincenses - the entity
provides: components for aircraft and rotorcraft engines and/or mechanical assemblies by using client’s tehnical documentation and spare parts
for base maintenance activities to the Ministry of Defense
c. Income from the sale of materials - the sale of materials that the company has in stock.
For more details on revenue recognition policies, see Note 3.
The main clients of the Company are on the domestic market - the Ministry of Defense and IAR Barsov, but the company also has transactions
with clients located in Europe.
The average number of employees is as follows:
20212021
Average number of employees457501
9
2.ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs)
2.1 Changes in accounting policies and adoption of revised/amended IFRS
The accounting policies adopted are consistent with those of the previous financial year except for the following amended IFRSs which have
been adopted by the Company as of 1 January 2022:
-IFRS 3 Business Combinations; IAS 16 Tangible assets; IAS 37 Provisions, contingent liabilities and contingent assets, as well
as the project for annual improvements 2018-2020 (amendments)
The amendments are effective for annual periods beginning on or after January 1, 2022, with early adoption permitted. The IASB issued
amendments to the IFRS standards as follows:
Ø
IFRS 3 Business Combinations (Amendments) updates a reference in IFRS 3 to the previous version of the IASB’s Financial
Conceptual Reporting Framework to the current version issued in 2018, without significantly changing the accounting requirements for
business combinations.
Ø
IAS 16 Tangible assets (amendments) prohibits an entity from deducting from the cost of tangible assets any proceeds from the sale
of goods produced while the said asset is brought to the location and in the conditions necessary for it to be able to function according
to management’s decision. Instead, an entity recognizes such sales revenue and selling costs in profit or loss.
Ø
IAS 37 Provisions, Contingent Liabilities and Contingent Assets (amendments) specifies what costs an entity includes in
determining the cost of a performing contract in order to determine whether a contract is onerous. According to the amendments, costs
directly related to a contract for the provision of goods or services include both incremental costs and an allocation of costs directly
related to contractual activities.
Ø
2018-2020 Annual Improvements make minor changes to IFRS 1 First-time Adoption of International Financial Reporting
Standards, IFRS 9 Financial Instruments, IAS 41 Biological Assets and the illustrative examples accompanying IFRS 16 Leases.
The changes had no impact on the Company’s financial statements.
-
IFRS 16 Leases- Cοvid 19 Related Rent Concessions of related rent after June 30, 2021 (Amendment) - The amendments apply to
annual reporting periods beginning on or after April 1, 2021, with early adoption permitted, including financial statements that have not
yet been authorized for issue at the date the amendments are issued. In March 2021, through the amendments brought, the Council offers
exemption to tenants from the application of the provisions of IFRS 16 for the changes that appear as a direct consequence of the covid-19
pandemic. Following the change, the practical solution now applies to rent concessions for which any reduction rate only affects
payments originally due on or before 30 June 2022, provided the other conditions for the practical measure are met.
The changes had no impact on the Company’s financial statements.
2.2 New standards and amendments to the existing standards issued but not yet effective and not early adopted
-
IFRS 17: Insurance contracts
The standard is effective for annual periods beginning on or after 1 January 2023, with early adoption permitted provided the entity also applies
IFRS 9 Financial Instruments on or before the date it first applies IFRS 17. It is a new accounting standard for insurance contracts, covering
recognition, measurement and presentation requirements. IFRS 17 applies to all types of insurance contracts issued, as well as certain
guarantees and financial instruments with discretionary participation. The company has no contracts within the scope of IFRS 17; therefore the
application of this standard has no impact on the Company’s financial performance, financial position or cash flows.
-
IAS 1 Presentation of Financial Statements: Classification of Liabilities as Current or Non-current (Amendments)
The amendments are effective for annual periods beginning on or after January 1, 2023, with early adoption permitted. The amendments
provide guidance on the application of materiality judgments to the disclosure requirements of accounting policies. In particular, the
amendments to IAS 1 replace the requirement to present "significant" accounting policies with a requirement to present "material" accounting
policies. Guidance and illustrative examples are also added to the Practice Statement to assist in applying the concept of materiality when
making judgments about the accounting policies to be presented. The management assessed that the amendment will not have an impact on the
Company’s financial statements.
-
IAS 8 Accounting policies, changes in accounting estimates and errors: definition of accounting estimates
(amendments)
The amendments are effective for annual reporting periods beginning on or after January 1, 2023, with early adoption permitted, and apply to
changes in accounting policies and changes in accounting estimates that occur on or after the beginning of that period. The changes introduce a
definition of accounting estimates, namely the monetary values from the financial statements that are subject to measurement uncertainty, if they
do not result from a correction of the error of the previous period. The amendments also clarify what changes in accounting estimates are and how
they differ from changes in accounting policies and corrections of errors. The management assessed that the amendment will not have an impact
on the Company’s financial statements.
10
2.ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) (continued)
-
IAS 12 Income tax: Deferred tax related to assets and liabilities arising from a single transaction (amendments)
The amendments are effective for annual periods beginning on or after January 1, 2023, with early adoption permitted. The amendments
narrow the scope and provide further clarity on the initial recognition exception under IAS 12 and specify how entities should account for
deferred tax assets and liabilities arising from a single transaction, such as leases and site restoration obligations. The amendments clarify that,
where payments extinguishing a debt are tax deductible, it is a matter of judgement, having regard to applicable tax law, whether such deductions
are attributable for tax purposes to the debt or asset related to the transaction. Under the amendments, the initial recognition exception does
not apply to transactions that, on initial recognition, give rise to temporary differences that are both taxable and deductible. It only applies if the
recognition of a lease asset and a lease liability give rise to taxable and deductible temporary differences that are not equal. The management
assessed that the amendment will not have an impact on the Company’s financial statements.
-
IAS 1 Presentation of financial statements: Classification of liabilities into current liabilities or long-term liabilities
(amendments)
The amendments are effective for annual reporting periods beginning on or after 1 January 2024, with early adoption permitted, and will need to
be applied retrospectively in accordance with IAS 8. The objective of the amendments is to clarify the principles in IAS 1 for classifying liabilities
as current or long term. The amendments clarify the meaning of the contractual right to delay the settlement of a liability, the requirement that
this right exists at the end of the reporting period, the fact that management’s intention regarding a possible settlement does not affect the
classification, and the fact that the counterparty’s options that could lead to settlement based on equity instruments does not affect the
classification. Also, according to the amendments only clauses in loan agreements that an entity must comply with on or before the reporting date
will affect the classification of a liability. Also, additional information presentations are required for long-term debts represented by loan contracts in
which there are clauses that must be complied with within twelve months of the reporting period. The amendments have not yet been approved by
the EU. Management is in the process of evaluating the effect that these amendments to the existing standards and interpretations may have on
the Company’s financial statements during the initial application period.
-
IFRS 16 Leasing contracts: Lease liability in a sale and take-back contact (amendments)
The amendments are effective for annual reporting periods beginning on or after January 1, 2024, with early adoption permitted. The
amendments are intended to improve the requirements that a seller-lessee uses in measuring lease liabilities arising from a sale and leaseback
transaction under IFRS 16, while not changing the accounting for leases that do not relate to sale and leaseback transactions. In particular, the
seller-lessee determines "lease payments" or "revised lease payments" in such a way that the seller-lessee does not recognize any amount of gain
or loss relatedto the right ofusethat it retains. The applicationof these requirements does not preventtheseller-lessee from recognizing in the profit
or loss account any gain or loss related tothepartial ortotal termination of aleasingcontract.Aseller-lesseeapplies theamendment retroactively,in
accordance withIAS 8,tosale andleasebacktransactions entered into after thedate of initial application, which isthe beginning of the annual
reporting period in which an entity first applied IFRS 16. The amendments were still not approved by the EU. Management is in the process of
evaluating the effect that these amendments to the existing standards and interpretations may have on the Company’s financial statements during
the initial application period.
-
Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures:
the sale or contribution of assets between an investor and the associate or joint venture
The amendments address a known inconsistency between the requirements of IFRS 10 and those of IAS 28 regarding the sale or contribution of
assets between an investor and its associate or joint venture. The main consequence of the changes is that a gain or loss is recognized when a
transaction involves a business. Apartial gain or loss is recognized when atransaction involvesassets thatdo notconstitute abusiness, even if
those assets are housed in a subsidiary. In December 2015, the IASB postponed the effective date of this amendment indefinitely, pending the
outcome of its research project on the equity method. The amendments have not yet been approved by the EU. The management assessed that
the amendment will not have an impact on the Company’s financial statements.
The Company anticipates that the adoption of these new standards and amendments to existing standards will not have a material impact on
the Company’s financial statements during the period of initial application.
3.SIGNIFICANT ACCOUNTING POLICIES
The main accounting policies applied in preparing these financial statements are presented below. These policies have been applied
consistently throughout all the years disclosed, unless otherwise presented.
Statement of compliance
The individual financial statements have been prepared in accordance with the Order of the Minister of Public Finance no. 2844/2016 for the
approval of the Accounting Regulations compliant with the International Financial Reporting Standards, with the subsequent modifications and
clarifications.
11
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
The order of Minister of Finance no. 2844/2016, with subsequent amendments, is in accordance with the International Financial Reporting
Standards (IFRS) adopted by the European Union, with the exception of IAS 21. The effects of the variation of exchange rates regarding the
functional currency, the provisions of IAS 20 Accounting for government subsidies regarding to the recognition of revenues from green
certificates, with the exception of IFRS 15 Revenues from contracts with customers regarding revenues from connection fees to the distribution
network.
These exceptions have no impact on the financial statements of the Company.
Basis of preparation
The individual financial statements have been prepared on the historical cost basis, except for tangible assets, which are measured at revalued
amount, as described in the accounting policies below. The historical cost is generally based on the fair value of the consideration given in
exchange for the assets.
The financial statements are presented in Romanian lei ("RON") and all values are rounded to the nearest RON, unless otherwise indicated.
Going concern
The Company’s financial statements were drawn up based on the going concern principle, which assumes that the Company will be able to carry
out its current activity in the future. The year 2022 was dominated by the conflict between Russia and Ukraine. In this context, the Company
was not directly affected by the conflict, but indirectly, as a result of the price increases for raw materials and materials, energy and gas. In order to
evaluate the applicability of this hypothesis, the Company’s Management analyzed the forecasts regarding the cash flows resulting from the
translation of existing and future commercial relationships. Based on this analysis, which also took into account the current economic context, the
management considers that the Company will be able to continue its activity in the future and, therefore, the application of the principle of continuity
of activity in the preparation of the financial statements is justified.
In 2022, the Company registered a net profit of 12,189,143 RON (2021: 11,749,227 RON). The company is currently dependent on the activity
with two main local customers. The turnover with these customers for 2022 represents 81,3% of the total turnover of the Company.
However, the management of the Company considers that this aspect does not constitute an impediment, given the specialised nature of the
services provided and also having orders concluded with these partners for the following periods, which ensure sufficient income. Also, the
Company intends to start developing its activity in the civil industry, and in this sense it is considering a series of significant investments in the
coming periods.
Current versus non-current classification
The Company presents assets and liabilities in the statement of financial position based on current/non-current classification. An asset is
current when it is:
·
Expected to be realised or intended to be sold or consumed in the normal operating cycle
·
Held primarily for the purpose of trading
·
Expected to be realised within twelve months after the reporting period, or
·
Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the
reporting period.
All other assets are classified as non-current.
12
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
A liability is current when:
·
It is expected to be settled in the normal operating cycle
·
It is held primarily for the purpose of trading
·
It is due to be settled within twelve months after the reporting period, or
·
There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period
Deferred tax assets and liabilities are classified as non-current assets and liabilities.
Fair value measurement
The Company measures and recognizes at fair value certain non-financial assets such land, buildings, equipment’s and furniture. Also, fair
values of financial instruments measured at amortized cost are estimated for disclosure purposes.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Fair value measurement is based on the presumption that the sale transaction of the asset or the transfer of the liability
occurs either:
- on the main market for the asset or liability, or
- in the absence of a main market, on the most advantageous market for the asset or liability.
The principal or most advantageous market must be accessible to the Company.
The fair value of an asset or liability is measured using the assumptions that market participants would use when pricing the asset or liability,
assuming that market participants are acting in their own economic self-interest. A fair value measurement of a non-financial asset takes into
account the ability of a market participant to generate economic benefits by using the asset in its best use or by selling it to another market
participant who would use the asset in its best use use.
All assets and liabilities for which fair value is measured or presented in the financial statements are classified within the fair value hierarchy,
described as follows, based on the lowest input level that is significant to the fair value measurement as a whole:
Level 1: market prices in active markets for identical assets or liabilities
Level 2: inputs other than quoted market prices included in level 1, which are observable for the asset or liability, directly or indirectly.
Level 3: inputs are unobservable for the asset or liability.
For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have
occurred between levels in the hierarchy by reassessing the categorization (based on the input data from the lowest level that is significant to the
fair value assessment as whole) at the end of each reporting period.
The Company’s management determines the policies and procedures for both recurring fair value measurement, such as land, buildings, and
equipment, and non-recurring measurement, such as assets held for sale from discontinued operations, if applicable.
External valuers are involved in the valuation of significant assets such as land, buildings and equipment. The involvement of external
evaluators is decided annually by management. Selection criteria include market knowledge, reputation, independence and whether
professional standards are maintained.
At each reporting date, management analyzes movements in the values of assets and liabilities that need to be revalued according to the
Company’s policies, verifying the main inputs applied in the most recent valuation and evaluating changes from the previous valuation.
For the purpose of fair value disclosure, the Company has established classes of assets and liabilities based on the nature, characteristics and
risks of the asset or liability and the level of the fair value hierarchy, as explained above.
13
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
IFRS 15 "Revenue from contracts with customers" introduced a comprehensive model for the recognition and measurement of revenue.
Revenue is recognized when the customer acquires control of the goods or services provided, at an amount that reflects the price the company
expects to receive in exchange for those goods or services.
The information regarding the reasoning, estimates and significant accounting assumptions regarding the revenues from the contracts with
clients are presented in the section Reasoning, estimates and significant accounting assumptions at the end of this note.
The company has the following revenue streams:
a.The manufacture of parts, components and assemblies for plains and helicopters
The main products produced by the Company are: Turmo engines, Viper engines, modernization of Puma helicopters, spare parts for Turmo and
Viper engines, parts and engines for Rolls-Royce. Turbomecanica is the only manufacturer of gas turbine engines and mechanical
assemblies for aircraft in the Romanian industry.
Revenue is recorded on the basis of an agreed order between the parties, the parties being committed to fulfill their respective obligations. The
rights and payment terms of each party can be easily identified. Payment terms are from 30-120 days after the delivery of the goods. Orders have
commercialsubstance and it is likely that the entity willcollect the consideration to which it is entitled in exchange for the goods or services
transferred to the customer.
Performance obligations refer to distinct performance obligations represented by the manufacture of parts, components and assemblies for
various clients and are satisfied as the services are preset.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for the transfer of promised goods to
a customer, excluding those amounts collected on behalf of third parties (for example, some sales taxes). These include fixed amounts as
agreed between the parties. Both the terms of the order and the entity’s usual business practices must be considered in determining the
transaction price. The orders clearly mention the price for each delivered component. It is also assumed that the goods will be transferred to
the customer as promised under the sales order.
IFRS 15 requires that the transaction price be allocated to each performance obligation identified in the order on the relative basis of the stand-
alone selling price. There is no difficulty in allocating the price as it is clearly attributable and negotiated at the conclusion of the contract.
For orders with a fixed price, the Company recognizes revenues as production is completed, evaluating the completion stage of the projects. The
Company transfers control of a good or service over time and therefore fulfills a performance obligation and recognizes revenue over time because
the Company’s performance creates or improves an asset that the customer controls as the asset is created or improved. The stage of completion
is determined, using the method based on input, depending on the contractual costs incurred until the end of the reporting period, in the form of a
percentage of the estimated total cost for each contract.
In case the outcome of an order cannot be estimated reliably, the revenue of the order is recognized only in line with the costs of the order that are
likely to be recoverable. When the result of a production order can be reliably estimated and it is likely that the said order will be profitable, the
predicted profit is recorded proportionally to the degree of execution during the duration of the order. If it is likely that the total costs of the order
will exceedthetotalrevenues oftheorder,the estimated lossisrecorded as anexpense,inaccordance withIAS37Provisions,contingent liabilities
and contingent assets.
The company presents as contractual assets the gross amounts owed by customers, related to ongoing contracts, for which the costs incurred and
recognized profits (minus recognized losses) exceed the total invoiced value of the respective contract. If the invoices issued exceed the costs
incurred plus the recognized profits (less the recognized losses), the gross amounts owed to the customers are presented as liabilities related to
the contracts.
b.Revenues from MRO services of engines and mechanical assemblies for aircrafts and helicopters - the entity provides
MRO services sold to Ministry of Defense.
The revenues are recorded based on approved contract between parties, parties being committed to perform their respective obligations. Each
party’s rights and payment terms can be easily identified. The payment terms range from 10 days after the services will be provided. The
contracts have commercial substance and it is probable that the entity will collect the consideration to which will be entitled in exchange for the
goods or services transferred to the customer.
The performance obligations relate to distinct performance obligations represented by MRO services satisfied over time.
14
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised services to a
customer, excluding those amounts collected on behalf of third parties.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for the provision of repair services.
This includes fixed amounts as agreed between the parties. Both the terms of the contract and the entity’s usual business practices must be
considered in determining the transaction price. The contracts clearly mention the price for each repair. It is also assumed that the goods will
be transferred to the customer as promised under the sales contract.
IFRS 15 requires the transaction price to be allocated to each performance obligation identified in the contract on a relative stand-alone selling
price basis. There are no difficulties in allocating the price as they are clearly attributable and negotiated at the contract settlement.
For fixed price contracts, the Company recognizes the revenues as the services are provided, evaluating the completion stage of the projects. The
Company transfers control over a good or service over time and, therefore, fulfills an obligation to execute and recognizes revenue over time, as
the Company’s execution creates or improves an asset that the client controls as the asset is created or improved. The completion stage is
determined using the input method, based on the contractual costs incurred up to the end of the reporting period, as a percentage of the total
estimated cost for each contract. If the outcome of a contract cannot be estimated reliably, the revenue of the contract is recognized only in line
with the costs of the contract which are likely to be recoverable. When the result of a service contract can be estimated reliably and the contract is
likely to be profitable, the expected profit is recorded in proportion to the degree of performance over the term of the contract. If the total costs
ofthecontract are likely to exceedthe total revenues ofthe contract,the estimated loss is recorded as an expense, in accordance with IAS 37
Provisions, contingent liabilities and contingent assets.
The company presents as contractual assets the gross amounts owed by customers, related to the ongoing contracts, for which the costs
incurred and the recognized profits (minus the recognized losses) exceed the total invoiced value of the respective contract. If the invoices
issued exceed the costs incurred plus the recognized profits (less the recognized losses), the gross amounts due to customers are presented as
debts related to contracts.
c) Revenues from the sale of materials, waste materials and other services provided.
The revenues are recorded based on approved contract between parties, parties being committed to perform their respective obligations. Each
party’s rights and payment terms can be easily identified. The payment terms range from 10 days after the services will be provided. The
contracts have commercial substance and it is probable that the entity will collect the consideration to which will be entitled in exchange for the
goods or services transferred to the customer.
The performance obligations relate to distinct performance obligations represented by sales of materials and are satisfied at point in time, when
the delivery takes place.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised materials to
a customer, excluding those amounts collected on behalf of third parties (e.g. some sales taxes).
They include fixed amounts, as agreed between the parties. Both the terms of the contract and the entity’s customary business practices need to be
considered in order to determine the transaction price. The Company has distinct transaction price for each material sold. It is also assumed
that the materials will be transferred to the customer as promised in accordance with exiting contract.
IFRS 15 requires that the transaction price be allocated to each performance obligation identified in the contract on the basis of the relative
independent selling price. There are no difficulties in allocating the price, as these are clearly attributable and negotiated at the conclusion of the
contract. The entity recognizes revenue in accordance with the arrangements established at the time of delivery.
For the activities performed, mentioned above in points a and b, the Company grants to its clients guarantees of good execution for a period
that varies between 12 and 18 months. These fall within the scope of IAS 37 as:
a. the guarantees according to the contract offer the customer the assurance that the product will work;
b. the guarantees do not provide additional services other than the assurance that the good will work according to the agreed specifications; c.
customers do not have the option to purchase the warranty separately.
Therefore, these guarantees do not constitute separate performance obligations, but should be recognized as provisions in accordance with
IAS 37.
15
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Trade Receivables
Trade receivables are recognized at the transaction price determined in accordance with IFRS 15. They are subsequently measured at
amortised cost using the effective interest method, less loss allowance. The Company assesses at each balance-sheet date the requirement for
an allowance for impairment in trade receivables. When measuring expected credit loss (hereinafter “ECL”) the Company uses reasonable and
supportable forward looking information, which is based on assumptions for the future movement of different economic drivers and how these
drivers will affect each other. Probability of default constitutes a key input in measuring ECL. Probability of default is an estimate of the likelihood
of default over a given time horizon, the calculation of which includes historical data, assumptions and expectations of future conditions.
Leases
The Company assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the
use of an identified asset for a period of time in exchange for consideration.
Company as a lessee
i)Right-of-use assets
The Company recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use).
Right-of-use assets are presented in the statement of financial position at fair value ar revaluation date, less any accumulated depreciation and
impairment losses and adjusted for any re-measurement of lease liabilities. The initial cost of right-of-use assets includes the amount of lease
liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives
received.
Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets.
The right of use of asset relates to rented cars which are depreciated over 3 years, as well as leased equipment amortised over a period
between 3 to 20 years.
The right-of-use assets are also subject to impairment. Refer to the accounting policies in note 3 Impairment of non-financial assets.
ii)Lease liabilities
At the commencement date of the lease, the Company recognises lease liabilities measured at the present value of lease payments to be made
over the lease term. The lease payments include fixed payments less any lease incentives receivable, variable lease payments that depend on
an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a
purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating the lease, if the lease term reflects
the Company’s exercising the option to terminate.
Variable lease payments that do not depend on an index or a rate are recognised as expenses in the period in which the event or condition
that triggers the payment occurs.
In calculating thepresentvalueof lease payments,the Company uses its incremental borrowing rate atthe leasecommencement datebecause
the interest rate implicit in the lease is not readily determinable.
After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments
made. In addition, the carrying amount of lease liabilities is re measured if there is a modification, a change in the lease term, a change in the lease
payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in
the assessment of an option to purchase the underlying asset.
iii)Short-term leases and leases of low-value assets
The Company applies the short-term lease recognition exemption to its short-term leases (i.e., those leases that have a lease term of 12
months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition
exemption to leases of equipment that are considered to be low value. Lease payments on short-term leases and leases of low value assets are
recognised as expense on a straight-line basis over the lease term.
16
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency transactions
Functional and presentation currency
Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (‘the
functional currency’). The financial statements are presented in RON, which is functional currency of Turbomecanica SA and also the
presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign
exchange gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets and liabilities
denominated in foreign currencies at year end exchange rates, are generally recognised in profit or loss.
Foreign exchange gains and losses are presented in the statement of comprehensive income on a net basis within other net foreign exchange
losses/(gains).
Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair
value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss.
The exchange rates used are 1 EUR = 4,9474 RON și 1 USD = 4,6346 RON, curs mediu 2022 1 EUR = 4,9315 RON (2021: 1 EUR =4,981
RON si 1 USD =4,3707, cures mediu 1 EUR=4,9204).
Borrowing costs
Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any
difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the
borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to
the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the
extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity
services and amortised over the period of the facility to which it relates.
Borrowings are removed from the statement of financial position when the obligation specified in the contract is discharged, cancelled or
expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the
consideration paid, including any noncash assets transferred or liabilities assumed, is recognised in profit or loss as other income or finance
costs. Borrowings are classified as current liabilities unless the company has an unconditional right to defer settlement of the liability for at least 12
months after the reporting period
Employee benefits
In the normal course of business, the Company makes payments to the Romanian State on behalf of its employees, for pensions, health and
unemployment fund. The cost of these payments is charged to the income statement in the same period as the related salary cost.
All employees of the Company are members of the Romanian State pension plan.
The Company rewards its employees with retirement benefits according to the collective labor contract. For such pension plan, the cost of
benefits is determined using the projected unit credit method, and actuarial assessments are performed on each balance sheet date.
The Company recognizes all actuarial gains and losses arising from defined benefit plans immediately in other comprehensive income and all
expenses related to defined benefit plans in personnel expenses in profit or loss.
The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of
assumptions. The assumptions used in determining the net cost (income) for pensions include the discount rate, the expected inflation rate and
the expected rate of salary increase. Any changes in these assumptions will impact the carrying amount of pension obligations.
The Company determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the
present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate
discount rate, the Company considers the interest rates of high-quality government bonds that are denominated in the currency in which the
benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. Other key assumptions for pension
obligations are based on current market conditions.
17
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
Employee benefits (continued)
Benefits for termination of employment contract
Benefits for termination of the employment contract may be paid when the Company terminates the employment contract prior to the normal
retirement date or any time the employee accepts voluntary redundancy in exchange for such benefits. The Company recognizes the benefits for
termination of employment contract either when it clearly undertakes either to terminate the current employees’ employment contracts
according to an official plan without the realistic possibility to avoid it; or to offer benefits for terminating the employment contract further to an offer
submitted to encourage voluntary redundancy. Benefits owed within more than 12 months from the reporting period are discounted on the
reporting date.
Taxation
Income tax expenses consist of all current taxes payable, and deferred income taxes.
Current tax
The tax currently payable is based on the taxable income for the year. Taxable income differs from the income reported in the statement of
comprehensive income due to items of revenues or expenses that are taxable or deductible in other years, and due to items that are never
taxable or deductible. The Company’s current income tax liability is determined by using the taxation rates enacted or substantively enacted by
the end of the reporting period.
Deferred tax
Deferred tax is recognized based on temporary differences between the carrying value of assets and liabilities in the financial statements and the
corresponding fiscal base used in calculating taxable income. Deferred tax liabilities are generally recognized for all taxable temporary
differences.
Deferred tax receivables are generally recognized for all taxable temporary differences if the taxable profits against which the deferred tax
receivable can be used are available. No deferred tax receivables or liabilities are recognized if the temporary difference is generated by the initial
recognition of goodwill or initial recognition of an asset or liability in a transaction that does not constitute a business combination and does not
affect either the accounting income or taxable income upon the conclusion of the transaction (fiscal loss).
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer
probable that sufficient taxable income will be available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are measured at the level of the taxes assumed to apply during the period set for the recovery of the debt or
realization of the asset, considering the level of taxes (and tax laws) that are or will be in force until the end of the reporting period. The
measurement of deferred assets and liabilities reflect the tax consequences that would arise from the manner in which the Company estimates, at
the end of the reporting period, to recover or settle the carrying value of its assets and liabilities.
Current and deferred annual tax
Current and deferred tax are recognized in the profit or loss account, unless they refer to elements that are recognized in other global results or
directly in equity, in which case current and deferred tax are also recognized in other global income results, respectively, equity.
The income tax for the year ended December 31, 2022 was 16% (December 31, 2021: 16%).
Cash and cash equivalents
Cash and cash equivalents include cash on hand, demand deposits held with financial institutions, other short-term, highly liquid investments with
original maturities of three months or less that are readily convertible into known amounts of cash and that are subject to an insignificant risk of
change in value, as well as bank overdraft. The overdraft is presented under loans as short-term liabilities in the statement of financial position.
18
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, plant and equipment
Tangible assets used in production or to supply goods or services, or for administrative purposes, are presented in the statement of financial
position at fair value at the date of reevaluation less depreciation andany impairment,subsequently accumulated. Revaluations are performed with
sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the reporting
date. The accumulated depreciation at the revaluation date is eliminated with the gross accounting value of the asset, and the net value of the
asset is replaced by its revalued value
Any revaluation surplus is recorded in other comprehensive income and is therefore credited to the reserve from the revaluation of equity
assets, except to the extent that it includes a reduction in the revaluation of the same asset previously recognized in profit or loss and, in this case,
the increase is recognized in the income statement. A revaluation deficit is recognized in the income statement, unless it offsets an existing
surplus for the same asset, recognized in the asset revaluation reserve.
The revaluation surplus is transferred to retained earnings as the assets are written off / sold.
Tangible assetsin progressthat will be used in productionor in administration arestatedatcostless any impairment. Costs include professional
fees and, in case of qualifying assets, borrowing costs capitalized in accordance with the Company’s accounting policies. Such assets are
classified under such categories of tangible assets when completed or ready for use for the purpose they were intended. The depreciation of such
assets, on the same basis as other owned assets, commences when the assets are ready for use as intended by the management.
The depreciation periods for tangible assets are:
Years
Buildings10-50
Installations and technological equipment3-20
Furniture and other office equipment3-15
Land is not depreciated.
Depreciation is charged so as to systematically allocate the cost of the asset less the residual value over its estimated useful life, using the
straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any
changes in estimate accounted for on a prospective basis.
Assets held under leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of
the relevant lease.
An item of property, plant and equipment is no longer recognized further to its assignment or when no future economic benefits are expected from
the continued use of the asset. Any gain or loss resulting from the assignment or disposal of an item of property, plant and equipment is
determined as the difference between proceeds from sales and the carrying value of the asset and is recognized in the Company’s profit or loss.
Intangible assets
Intangible assets acquired separately
Intangible assets with determined useful lives and which are acquired separately are reported at cost less any subsequent accumulated
amortization and any accumulated impairment losses. Amortization is charged on a straight-line basis over their estimated useful lives. The
estimated useful life and amortization method are reviewed at the end of each annual reporting period, with the effect of any changes in
estimate being accounted for on a prospective basis. Intangible assets with undetermined useful lives and which are acquired separately, are
reported at cost less accumulated impairment losses.
The depreciation periods for intangible assets are:
Other intangible assets1-10 ani
De-recognition of intangible assets
An intangible asset is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. The gains or
losses from the de-recognition of an intangible asset, measured as difference between net proceeds from sale and the asset’s carrying value are
recognized in profit and loss when the asset is derecognized.
19
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of tangible and intangible assets other than goodwill
At the end of each reporting period, the Company reviews the carrying values of its tangible and intangible assets to determine whether there is
any indication that that such assets have impaired. Should such indication exist, the Company estimates the recoverable value of the asset to
determine the extent of the impairment (if any).
Where the recoverable value of a particular asset cannot be estimated, the Company estimates the recoverable value of the cash generating unit
to which the asset belongs. Where there can be identified a reasonable and consistent basis of allocation, corporate assets will also be allocated
to individual cash generating units or, if not, to the smallest company of cash generating units for which a reasonable and consistent basis of
allocation can be identified.
Intangible assets with undetermined useful lives and intangible assets not yet available for use are tested at least annually for impairment or
anytime there is an indication that the asset might be impaired.
The recoverable value means the highest of fair value minus sale costs and its value in use. When measuring the value in use, estimated future
cash flows are discounted at their current value by using a discount rate determined prior to taxation, which reflects the current market
assessments of the time value of money and the risks specific to the asset for which the estimates related to future cash flows have not been
adjusted.
If the recoverable value of an asset (or cash-generating unit) is estimated to be lower than its carrying value, then the carrying value of the asset
(or the cash-generating unit) is reduced to the level of the recoverable value. Impairment is recognized immediately in profit or loss, if the relevant
asset is not registered at a re-measured value, in which case the impairment is treated as reduction of re-measurement.
Where the impairment is reversed, the carrying value of the asset (or the cash-generating unit) is increased at the level of its new estimated
recoverable value, only that the increased carrying value must not exceed the carrying value that would have been established should the
impairment for the asset (cash-generating unit) had not been recognized in previous years. A reversal of impairment is immediately recognized in
profit or loss, except where the asset is accounted at revalued amount, in which case the reversal of the impairment is treated as increase of the
revaluation.
Inventories
Inventories, which include raw materials, finished products, semi-finished products, work in progress, are valued at the lowest of cost and net
realizable value.
The cost of inventories includes all the costs related to the acquisition and processing, as well as other costs incurred to bring the stocks in the
form and in the place where they are found. The cost of finished products and production in progress includes the direct expenses related to
production, namely: direct materials, energy consumed, direct labor and other direct production expenses, as well as the share of indirect
production expenses rationally allocated as being related to manufacturing them.
Raw material inventory costs are determined using the weighted average cost method. The net realizable value represents the estimated sale
price during the normal course of the activity, minus the estimated costs for completion and the estimated costs necessary to carry out the
sale.
Provisions
Provisions are recognized when the Company has a present obligation (legal or implicit) as a result of a past event, and it is probable that an
outflow of resources incorporatingeconomic benefits will be requiredto settlethatobligation and areliable estimate ofthevalueofthe obligation
may be made.
The value recognized as provision is the best estimate of the counter value required to settle the present obligation at the end of the reporting
period, considering the risks and uncertainties related to the obligation. When a provision is measured using the cash flows estimated to settle the
present obligation, the carrying value thereof is the present value of such cash flows (if the effect of the time value of money is material).
When expected that some or all the economic benefits required to settle a provision will be recovered from third parties, then the receivable is
recognized as asset if it is almost certain that the repayment will be collected and the value of the receivable can be reliably assessed.
Onerous contracts
Present obligations generated under onerous contracts are recognized and measured as provisions. A contract is onerous when the
unavoidable costs of meeting the obligations under the contract exceeds the economic benefits expected to be received under it.
20
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
Provisions (Continued)
Restructurings
A provision for restructuring costs is recognized when the Company has a detailed formal plan for the restructuring and has raised a valid
expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those
affected by it. The measurement of a provision for restructuring includes only direct expenses related to the restructuring, which mean such
values that are mandatorily generated by restructuring and are not associated with the Company’s ongoing activities.
Guarantees
Provisions for estimated costs of guarantee obligations according to local legislation concerning the sale of goods are recognized on the date
when the relevant products are sold, at the best estimate made by the management as regards the expenses required to settle the Company’s
obligation.
Trade and other payables
These amounts represent liabilities for goods and services provided to the Company prior to the end of the financial year which are unpaid. The
amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless
payment is not due within 12 months after the reporting period. They are recognised initially at their fair value and subsequently measured at
amortised cost using the effective interest method. In this category are also included non-trade liabilities such as VAT and social securities
recognized at the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.
Financial assets and liabilities
Financial assets and financial liabilities are recognized when the Company becomes a party in the contractual provisions of the instrument.
Financial assets
Initial recognition and measurement
Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive
income (OCI), and fair value through profit or loss.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the entity’s
business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the
company has applied the practical expedient, the company initially measures a financial asset at its fair value plus, in the case of a financial asset
not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the
company has applied the practical expedient are measured at the transaction price.
In order for a financial asset to be classified and measured at amortized cost or fair value through the OCI, it must give rise to cash flows that are
"excluding principal and interest payments (SPPIs)" of the outstanding principal amount. This assessment is called the SPPI test and is
performed at the instrument level. Non-SPPI cash-flow financial assets are classified and measured at fair value through profit or loss,
regardless of business model.
The Company’s business model for managing financial assets refers to how it manages deal with its financial assets in order to generate cash
flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
Financial assets classified and measured at amortised cost are held within a business model with the objective to hold financial assets in order to
collect contractual cash flows while financial assets classified and measured at fair value through OCI are held within a business model with the
objective of both holding to collect contractual cash flows and selling.
Subsequent measurement
For purposes of subsequent measurement, financial assets are classified in four categories:
1.Financial assets at amortised cost (debt instruments)
2.Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments)
3.Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon de-
recognition (equity instruments)
4.Financial assets at fair value through profit or loss
21
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial assets and liabilities (continued)
Financial assets at amortised cost
Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and
losses are recognised in profit or loss when the asset is derecognised, modified or impaired. The effective interest method is a method of
calculating the amortized cost of a financial instrument and of allocating interest over the relevant period.
The Company’s financial assets at amortised cost includes trade receivables, other receivables and contractual receivalbes.
The Company does not hold any financial assets at fair value through OCI or profit or loss.
De-recognition
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and
the Company has transferred substantially all the risks and rewards of ownership.
Impairment
The Company recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs
are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company
expects to receive, discounted at an approximation of the original effective interest rate.
For trade receivables and contract assets, the Company applies a simplified approach in calculating ECLs. Therefore, the Company does not
track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date.
The Company performed an assessment at year end and no material difference arise in applying ELC model and current accounting policy by
allowing receivables older than 270 days.
Significant increase in credit risk
In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Company compares the risk
of a default occurring on the financial instrument at the reporting date with the risk of a default occurring on the financial instrument at the date of
initial recognition. In making this assessment, the Company considers both quantitative and qualitative information that is reasonable and
supportable, including historical experience and forward-looking information that is available without undue cost or effort. Forward looking
information considered includes the future prospects of the industries in which the Company’s debtors operate, obtained from economic expert
reports, financial analysts, governmental bodies, relevant think-tanks and other similar organisations,
aswell as the consideration of various external sources of actual and forecast economic information that relate to the Company’s core
operations.
In particular, the following information is taken into account when assessing whether credit risk has increased significantly since initial
recognition:
•an actual or expected significant deterioration in the financial instrument’s external (if available) or internal credit rating; •
significant deterioration in external market indicators of credit risk for a particular financial instrument
•existing or forecast adverse changes in business, financial or economic conditions that are expected to cause a significant decrease in
the debtor’s ability to meet its debt obligations;
•an actual or expected significant deterioration in the operating results of the debtor;
•significant increases in credit risk on other financial instruments of the same debtor; and
•an actual or expected significant adverse change in the regulatory, economic, or technological environment of the debtor that results in
a significant decrease in the debtor’s ability to meet its debt obligations.
Irrespective of the outcome of the above assessment, the Company presumes that the credit risk is remote as the greatest part of company
balance of accounts receivables consists of four main clients which are state owned, the average collection period is 20 days, thus there is
limited risk of material credit losses.
Despitethe foregoing,the Company assumesthatthe credit risk on afinancial instrument has not increased significantly since initial recognition if
the financial instrument is determined to have low credit risk at the reporting date.
22
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial assets and liabilities (continued)
A financial instrument is determined to have low credit risk if:
1.the financial instrument has a low risk of default;
2.the debtor has a strong capacity to meet its contractual cash flow obligations in the near term; and
3.adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of
the borrower to fulfil its contractual cash flow obligations.
The Company considers a financial asset to have low credit risk when the asset has external credit rating of investment grade in accordance with
the globally understood definition or if an external rating is not available, the asset has an internal rating of ‘performing’. Performing means that the
counterparty has a strong financial position and there is no past due amounts.
For financial guarantee contracts, the date that the Company becomes a party to the irrevocable commitment is considered to be the date of initial
recognition for the purposes of assessing the financial instrument for impairment. In assessing whether there has been a significant increase in
the credit risk since initial recognition of a financial guarantee contract, the Company considers the changes in the risk that the specified debtor
will default on the contract.
The company does not have financial guarantee contracts.
The Company regularly monitors the effectiveness of the criteria used to identify whether there has been a significant increase in credit risk and
revises them as appropriate to ensure that the criteria are capable of identifying significant increase in credit risk before the amount becomes
past due.
Definition of default
The Company considers the following as constituting an event of default for internal credit risk management purposes as historical experience
indicates that financial assets that meet either of the following criteria are generally not recoverable:
·
when there is a breach of financial covenants by the debtor; or
·
information developed internally or obtained from external sources indicates that the debtor is unlikely to pay its creditors, including
the Company, in full (without taking into account any collateral held by the Company).
Irrespective of the above analysis, the Company considers that there is limited probability of default for the existing clients, as mentioned above
there is a high concentration of three state owned clients, the average number of collection days is 22 days, no default occurred in the last years
and few chances to occur as the clients are stated owned acting in defence industry.
Credit-impaired financial assets
A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial
asset have occurred. Evidence that a financial asset is credit-impaired includes observable data about the following events:
a.significant financial difficulty of the issuer or the borrower;
b.a breach of contract, such as a default or past due event;
c. the lender of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty,having granted
to the borrower a concession that the lender would not otherwise consider;
d. it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or
e. disappearance of an active market for that financial asset because of financial difficulties.
Write-off policy
The Company writes off a financial asset when there is information indicating that the debtor is in severe financial difficulty and there is no
realistic prospect of recovery, e.g. when the debtor has been placed under liquidation or has entered into bankruptcy proceedings, or in the case
of trade receivables, when the amounts are over three years past due, whichever occurs sooner. Financial assets written off may still be subject
to enforcement activities under the Company’s recovery procedures, taking into account legal advice where appropriate.Any recoveries made are
recognised in profit or loss within other gains or losses line.
