Tofaş Türk Otomobil Fabrikası Anonim Şirketi - PDF

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CONVENIENCE TRANSLATION OF FINANCIAL STATEMENTS ORIGINALLY ISSUED IN TURKISH - SEE NOTE 47 TO THE FINANCIAL STATEMENTS Tofaş Türk Otomobil Fabrikası Anonim Şirketi Consolidated Interim Financial Statements

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CONVENIENCE TRANSLATION OF FINANCIAL STATEMENTS ORIGINALLY ISSUED IN TURKISH - SEE NOTE 47 TO THE FINANCIAL STATEMENTS Tofaş Türk Otomobil Fabrikası Anonim Şirketi Consolidated Interim Financial Statements Together with Review Report of Independent Auditors June 30, 2007 (Convenience Translation of Financial Statements Originally Issued in Turkish - See Note 47 to the Financial Statements) TABLE OF CONTENTS Pages Review Report of Independent Auditors 1-2 Consolidated Balance Sheet 3-4 Consolidated Income Statement 5 Notes to the Consolidated Financial Statements 6-44 (Convenience Translation of a Report Originally Issued in Turkish - See Paragraph 5 Below) INDEPENDENT AUDITOR'S REVIEW REPORT To the Shareholders of : Introduction We have reviewed the accompanying consolidated interim balance sheet of Tofaş Türk Otomobil Fabrikası Anonim Şirketi and its subsidiaries (together will be referred to as the Group ) as of June 30, 2007 and the related consolidated income statement for the six-months period then ended, and a summary of significant accounting policies and other explanatory notes. Management is responsible for the preparation and fair presentation of these interim consolidated financial statements in accordance with financial reporting standards issued by Capital Market Board. Our responsibility is to express a conclusion based on our review of the interim consolidated financial statements. Scope of Review We conducted our review in accordance with standards on auditing issued by Capital Market Board. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with standards on auditing issued by Capital Market Board and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the interim consolidated financial statements referred to above do not present fairly the consolidated financial position of Tofaş Türk Otomobil Fabrikası A.Ş. as of June 30, 2007 and the results of operations for the six months period then ended in accordance with financial reporting standards (Note 2) issued by Capital Markets Board. Other Matters As disclosed in Note 9 to the accompanying consolidated financial statements, major portion of the Company s sales and purchases are conducted through its related parties. Additional paragraph for convenience translation to English : The effect of the differences between the accounting principles summarized in Note 2 and the accounting principles generally accepted in countries in which the financial statements are to be distributed and International Financial Reporting Standards (IFRS), have not been quantified and reflected in the accompanying financial statements. The differences with IFRS mainly related to the application of inflation accounting which was ceased one year later in IFRS, and the presentation of the basic financial statements and the notes to them. Accordingly, the financial statements are not intended to present the Group s financial position and results of its operations in accordance with accounting principles generally accepted in such countries of users of the financial statements and IFRS. Güney Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik Anonim Şirketi An Affiliated Firm of Ernst & Young International Ethem Kutucular, SMMM Engagement Partner September 4, 2007 İstanbul, Turkey (2) CONSOLIDATED BALANCE SHEET Reviewed Audited ASSETS Notes June 30, 2007 December 31, 2006 Current Assets Cash and cash equivalents Investment securities Trade receivables from third parties (net) Financial lease receivables Trade receivables from related parties (net) Other receivables (net) Biological assets (net) Inventories (net) Receivables from construction projects in progress (net) Deferred tax asset Other current assets Non-current Assets Trade receivables from third parties (net) Financial lease receivables Trade receivables from related parties (net) Other receivables (net) Available for sale financial assets (net) Positive/negative goodwill (net) Investment properties (net) Property, plant and equipment (net) Intangibles (net) Deferred tax asset Other non-current assets Total Assets The accompanying policies and explanatory notes on pages 6 through 44 form and integral part of the consolidated financial statements. (3) CONSOLIDATED BALANCE SHEET Reviewed Audited LIABILITIES Notes June 30, 2007 December 31, 2006 Current Liabilities Short-term bank borrowings (net) Current portion of long-term bank borrowings (net) Short-term financial lease payables (net) Other financial liabilities (net) Trade payables to third parties (net) Trade payables to related parties (net) Advances taken Progress billings amounts of construction in progress (net) Provisions Deferred tax liability Other current liabilities (net) Non-current Liabilities Long-term bank borrowings (net) Long-term financial lease payables (net) Other financial liabilities (net) Trade payables to third parties (net) Trade payables to related parties (net) Advances taken Provisions Deferred tax liability Other non-current liabilities (net) Minority interest Shareholders Equity Paid-in share capital Adjustments to share capital and equity instruments Capital reserves Share premium - - Gain on cancellation of shares - - Revaluation fund - - Revaluation surplus of financial assets Inflation adjustment on equity items Profit reserves Legal reserves Statutory reserves - - Extraordinary reserves Special funds - - Gain on sale of fixed assets and financial assets subject to share capital increase - - Foreign currency translation adjustment - - Cumulative gain on the hedging Net income for the period Transfer from net income for the period of gain on sale of fixed asset to share capital 26, Retained earnings Total Liabilities and Shareholders Equity The accompanying policies and explanatory notes on pages 6 through 44 form and integral part of the consolidated financial statements. (4) CONSOLIDATED INCOME STATEMENT For the interim period ended June 30, 2007 Notes Reviewed Unaudited Reviewed Unaudited June 30, 2007 June 30, 2007 June 30, 2006 June 30, 2006 Cumulative First Quarter Cumulative First Quarter Operational Income Net sales Cost of sales (-) 36 ( ) ( ) ( ) ( ) Service income (net) Other income from operational activities (net) Gross Operational Profit Operating expenses (-) 37 ( ) (76.155) ( ) (71.411) Net Operational Profit Other operating income Other operating expense (-) 38 (1.203) (537) (10.888) (10.799) Financial income / (expense) perating Profit Net monetary gain Minority interest Net Income Before Provision for Taxes Taxation 41 (10.941) (5.110) (82.636) (80.753) Net Income Weighted average number of shares (thousand shares with 1 New Turkish Kuruş each) Earnings per share (New Turkish Kuruş) 42 0,147 0,088 0,055 0,003 The accompanying policies and explanatory notes on pages 6 through 44 form and integral part of the consolidated financial statements. (5) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. CORPORATE INFORMATION Tofaş Türk Otomobil Fabrikası A.Ş. (a Turkish corporation, the Company - Tofaş) was established in 1968 as a Turkish-Italian cooperation venture to manufacture passenger cars and light commercial vehicles under licenses from Fiat Auto S.p.A. (Fiat). The Company, who is jointly controlled by Koç Holding A.Ş. (Koç Holding) and Fiat, also produces various automotive spare parts used in its automobiles. The Company s main office is located in Büyükdere Cad. No:145 Zincirlikuyu Şişli, İstanbul. The manufacturing facilities are located in Bursa. The Company manufactures its cars pursuant to license agreements between the Company and Fiat. These license agreements prohibit the Company from assembling, producing, importing or selling any car other than Fiat cars. The Company has been registered with the Turkish Capital Market Board (CMB) and quoted on the İstanbul Stock Exchange (ISE) since The Company conducts a significant portion of its business with corporations, which are affiliates of Koç Holding or Fiat (See Note 9). and December 31, 2006, consolidated subsidiaries of the Company are as follows: Name of the Company Operating Area Percentage of Ownership June 30, 2007 December 31, 2006 Koç Fiat Kredi Tüketici Finansmanı A.Ş. (KFK) Consumer financing 99,9% 99,9% Mekatro Araştırma Geliştirme A.Ş. Research and development 97,0% 97,0% Platform Araştırma Geliştirme Tasarım ve Tic. A.Ş. (Platform) Research and development 99,0% 99,0% Fer Mas Oto Ticaret A.Ş. Trading of automobile and spare parts 99,4% 99,4% For the purpose of the consolidated financial statements, the Company and its consolidated subsidiaries are referred to as the Group . The average number of personnel in accordance with their categories is as follows : June 30, 2007 December 31, 2006 Blue-collar White-collar Total number of personnel SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Preparation The financial statements of the Group have been prepared in accordance with accounting and reporting standards (CMB Accounting Standards) as prescribed by Turkish Capital Market Board (CMB). CMB has issued Communiqué no. XI-25 Communiqué on Accounting Standards in Capital Markets which sets out a comprehensive set of accounting principles. In this Communiqué, CMB stated that alternatively application of accounting standards prescribed by the International Accounting Standards Board (IASB) and International Accounting Standards Committee (IASC) will also be considered to be compliant with CMB Accounting Standards. On March 17, 2005, CMB has issued a resolution and declared that application of inflation accounting is no longer required for companies operating in Turkey and reporting under CMB Accounting Standards, with effect from January 1, Financial statements have been prepared under the alternative application defined by CMB as explained above. The financial statements and footnotes are presented using the compulsory standard formats as prescribed by CMB. (6) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The consolidated financial statements were authorized for issue on September 4, 2007 by the Board of Directors of the Company and signed by Nezih Olcay, Accounting, Finance and Control Group Director and Selçuk Öncer, Accounting Director, representing Board of Directors. The Group Management and certain regulatory bodies have the power to amend the statutory financial statements after issue. Functional Currency and Reporting Currency The functional and reporting currency of the Group is accepted as New Turkish Lira (YTL). In accordance with CMB announcement No.11/367 dated March 17, 2005; since the objective conditions for the application of restatement is no longer available and since CMB foresees that the probability of the re-occurance of the conditions is remote, lastly the financial statements as of December 31, 2004 have been subject to the restatement per IAS 29 (Financial Reporting in Hyperinflationary Economies). Therefore, the non-monetary assets, liabilities and shareholders equity including share capital reported in the balance sheet as of June 30, 2007 and December 31, 2006 are derived by indexing the additions occurred until December 31, The additions after December 31, 2004 are carried with their nominal amounts. Restatement of balance sheet and income statement items through the use of a general price index and relevant conversion factors does not necessarily mean that the Group could realize or settle the same values of assets and liabilities as indicated in the consolidated balance sheets. Similarly, it does not necessarily mean that the Group could return or settle the same values of equity to its shareholders. Basis of Consolidation The control relation is normally evidenced when the Company owns, either directly or indirectly, more than 50% of the voting rights of a company s share capital and is able to govern the financial and operating policies of an enterprise so as to benefit from its activities. During consolidation inter-company balances and transactions, including intercompany profits and unrealized profits and losses are eliminated. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. 3. ACCOUNTING POLICIES AND PRINCIPLES Cash and Cash Equivalents Cash and cash equivalents includes cash on hand and cash at banks. Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts and that are subject to an insignificant risk of change in value. Cash and cash equivalent balances in the consolidated cash flow statements do not include the cash amounts with original maturity of three months or more. Held- to- Maturity Investments Financial assets with fixed or determinable payments and fixed maturities where management has both the intent and the ability to hold to maturity are classified as held-to-maturity. Investments that are intended to be held to maturity are measured at amortized cost by using effective interest rate. For investments carried at amortized cost, gains and losses are recognized in income when the investments are derecognized or impaired, as well as through the amortization process. Interest income of held-to-maturity investments is included in income statement. (7) 3. ACCOUNTING POLICIES AND PRINCIPLES (continued) During 2005, the Group has sold its investment securities which are classified as held to maturity before their maturities. Based on the provisions of IAS 39 (Financial Instruments: Recognition and Measurement), an entity is not allowed to classify any financial assets as held-to-maturity in the current financial year or in the following two fiscal years if the entity has sold or reclassified more than an insignificant amount of held-to maturity investments before maturity other than the specific exceptions provided in the Standard. The track record of the sales made by the Group from its held-to-maturity investment securities portfolio indicates that the Group stands ready to sell its held-to-maturity investment securities in response to changes in market interest rates, and therefore, the positive intention to hold these marketable securities to maturity does not exist. Accordingly, the entire portfolio of the Group is reflected in available for sale category and be subjected to measurement criteria of available for sale securities. Available for Sale Financial Assets, net Available for sale financial assets are those non-derivative financial assets that are designated as available-forsale or are not classified in any of the preceding categories. After initial recognition, available for sale financial assets are measured at fair value. Gains or losses on remeasurement to fair value are recognized as a separate component of equity, under revaluation surplus of financial assets. Loans (Consumer Financing Loans) Consumer financing loans originated by the wholly owned subsidiary, KFK are carried at amortized cost. Interest on these loans are recorded on accrual basis using the effective interest rate method. A specific credit risk provision for loan impairment is established to provide for management s estimate of credit losses as soon as the recovery of an exposure is identified as doubtful. When a loan is deemed uncollectible, it is written off against the related provision for impairment. Subsequent recoveries are credited to the income statement if previously written off. Trade Receivables Trade receivables have a maturity range of days and are recognized at original invoice amount and carried at amortized cost less an allowance for any uncollectible amounts. An estimate for doubtful debt is made when collection of the full amount is no longer probable. Bad debts are written off when identified. Trade Payables Trade payables have average maturities changing between days and consist of amounts invoiced or not related with the realized material or service purchases, and are carried at amortized cost. Inventories Inventories are valued at the lower of cost or net realizable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: Raw materials - purchase cost on a monthly average basis; finished goods and work-in-process - cost includes the applicable allocation of fixed and variable overhead costs on the basis of monthly average basis. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs necessary to make the sale. The scrap inventory is written off when identified. (8) 3. ACCOUNTING POLICIES AND PRINCIPLES (continued) Property, Plant and Equipment Property, plant and equipment (PP&E) are stated at cost less accumulated depreciation and accumulated impairment loss. When assets are sold or retired, their costs and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the income statement. The initial cost of PP&E comprises its purchase price, including import duties and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the PP&E have been put into the operation, such as repairs and maintenance and overhaul costs are normally charged to income in the period the costs are incurred. Expenditures are added to cost of assets if the expenditures provide economic added value for the future use of the related PP&E. Depreciation is computed on a straight-line basis over the estimated useful lives. The useful lives and depreciation methods are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of PP&E. The depreciation terms are as follows : Starting from January 1, 2006 (years) Upto December 31, 2005 (years) Land improvements Buildings Machinery and equipment Motor vehicles Furnitures and fixtures Moulds and models Leasehold improvements The Group has performed a review of the useful lives of its fixed assets and revised the useful lives of certain assets effective from January 1, In case of any indication of the impairment in the carrying value of property, plant and equipment, the recoverable amount is re-assessed and provision for impairment is reflected in the financial statements. Intangible Assets Intangible assets acquired separately from a business are capitalized at cost. Intangible assets, created within the business are not capitalized and expenditure is charged against profits in the year in which it is incurred. Intangible assets are amortized on a straight-line basis over the their useful lives (5 years). The depreciation period for the intangibles capitalized in relation with the new models will be started after the production of these models is started. The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. (9) 3. ACCOUNTING POLICIES AND PRINCIPLES (continued) Research and Development Costs Expenditures for research and development are charged against income in the period incurred except for project development costs which comply with the following criteria: - The product or process is clearly defined and costs are separately identified and measured reliably, - The technical feasibility of the product is demonstrated, - The prod
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