Croatian Telecom Inc.

Financial statements

31 December 2021

Contents

                                                                                                                              Page

Independent Auditor’s Report                                                                                    3

Responsibility for the financial statements                                                                                                                                                                                 10

Statement of comprehensive income                                                                      11

Statement of financial position                                                                                13

Statement of cash flows                                                                                           15

Statement of changes in equity                                                                               16

Notes to the financial statements                                                                            17

Supervisory Board

The members of the Supervisory Board who served during 2021 and until the issuing of these statements are as follows:

Jonathan Richard Talbot	Chairman	From 25 April 2017
Ivica Mišetić, Ph. D.	Deputy Chairman	Member from 21 April 2008 until 24 April 2020 (Deputy Chairman from 8 May 2008) From 20 July 2020
Vesna Mamić	Member, workers’ representative	From 1 January 2016
Dolly Predovic	Member	From 29 April 2014
Marc Stehle	Member	From 16 December 2015
Eirini Nikolaidi	Member	From 25 April 2016 until 24 April 2020 From 20 July 2020
Eva Somorjai-Tamassy	Member	From 25 April 2017
Tino Puch	Member	From 24 April 2018
Professor Gordan Gledec, Ph.D.	Member	From 20 July 2020

Management Board

The members of the Management Board who served during 2021 and until the issuing of these statements are as follows:

Konstantinos Nempis	President	From 1 April 2019
Daniel Darius Denis Daub	Member	From 1 November 2017
Nataša Rapaić	Member	From 1 February 2013
Boris Drilo	Member	From 1 January 2017
Ivan Bartulović	Member	From 1 March 2019

	Notes	2021	2020
		HRK million	HRK million
Revenue	3	5,888	5,664
Other operating income	4	98	87
Merchandise, material and energy expenses	5	(973)	(954)
Service expenses	6	(596)	(560)
Employee benefits expenses	8	(893)	(910)
Work performed by the Company and capitalised		33	41
Depreciation and amortization	7	(1,861)	(1,712)
Impairment of non-current assets	7	(71)	(22)
Net impairment losses on trade receivables and contract assets	24	(54)	(51)
Other expenses	9	(808)	(769)
		__________	__________
Operating profit	3	763	814
		__________	__________
Finance income	10	27	42
Finance costs	11	(74)	(100)
Income from dividends – subsidiaries	19	80	86
		__________	__________
Finance income – net		33	28
		__________	__________
Profit before income tax		796	842
Income tax expense	12	(130)	(138)
		__________	__________
Profit for the year		666	704
		__________	__________
Items that may be subsequently reclassified to comprehensive income
Changes in the fair value of debt instruments at fair value		(1)	-
		__________	__________
Other comprehensive (loss)/income for the year, net of tax		(1)	-
		__________	__________
Total comprehensive income for the year, net of tax		665	704
		__________	__________

	Notes	2021	2020
		HRK million	HRK million
Profit attributable to:
Equity holders of the Company		666	704
		__________	__________
		666	704
		__________	__________
Total comprehensive income arisen from continuing operations attributable to:
Equity holders of the Company		665	704
		__________	__________
		665	704
		__________	__________
Earnings per share
Basic and diluted, from continuing operations attributable to equity holders of the Company during the year	13	HRK 8.30	HRK 8.75
		__________	__________

The accompanying accounting policies and notes are an integral part of these financial statements.

Signed on behalf of the Company on 8 March 2022:

Mr. Konstantinos Nempis President of the Management Board (CEO)

Mr. Daniel Darius Denis Daub Member of the Management Board and CFO

	Notes	31 December	31 December
		2021	2020
		HRK million	HRK million
ASSETS
Non-current assets
Intangible assets	14	1,052	1,072
Right-of-use assets	17	562	519
Property, plant and equipment	15	5,654	5,508
Investment property	16	12	16
Lease receivables from subsidiaries	18	-	48
Investments in subsidiaries	19	1,711	1,772
Investments accounted for using the cost method	20	334	334
Financial assets at fair value through other comprehensive income	21	8	8
Trade and other receivables	23	220	246
Contract assets	24	49	58
Contract costs	24	102	78
Deferred income tax asset	12	105	106
		__________	__________
Total non-current assets		9,809	9,765
		__________	__________
Current assets
Inventories	22	140	104
Trade and other receivables	23	1,119	1,054
Contract assets	24	222	204
Contract costs	24	44	43
Receivables from subsidiaries	37	257	261
Lease receivables from subsidiaries	18	-	5
Prepayments	25	78	87
Financial assets at fair value through other comprehensive income	21	201	-
Income tax prepayments		6	50
Loans receivable from subsidiaries	37	60	232
Bank deposits	26	-	1
Cash and cash equivalents	26	2,513	2,706
		__________	__________
Total current assets		4,640	4,747
		__________	__________
TOTAL ASSETS		14,449	14,512
		__________	__________

	Notes	31 December	31 December
		2021	2020
		HRK million	HRK million
EQUITY AND LIABILITIES
Issued capital and reserves
Issued share capital	31	10,245	10,245
Legal reserves	32	512	512
Fair value reserves		-	1
Share base program		4	-
Reserve for treasury shares	33	64	90
Treasury shares	33	(64)	(90)
Retained earnings	34	1,842	1,918
		__________	__________
Total issued capital and reserves		12,603	12,676
		__________	__________
Non-current liabilities
Provisions	29	105	72
Lease liabilities	17	397	415
Employee benefit obligations	28	12	5
Trade and other liabilities	27	105	26
Deferred income tax liability	12	3	3
		__________	__________
Total non-current liabilities		622	521
		__________	__________
Current liabilities
Trade payables and other liabilities	27	889	1,035
Contract liabilities	24	56	40
Employee benefit obligations	28	7	6
Accruals	30	81	78
Payables to subsidiaries	37	54	42
Lease liabilities	17	129	113
Deferred income		8	1
		__________	__________
Total current liabilities		1,224	1,315
		__________	__________
Total liabilities		1,846	1,836
		__________	__________
TOTAL EQUITY AND LIABILITIES		14,449	14,512
		__________	__________

The accompanying accounting policies and notes are an integral part of these financial statements.

Signed on behalf of the Company on 8 March 2022:

Mr. Konstantinos Nempis President of the Management Board (CEO)

Mr. Daniel Darius Denis Daub Member of the Management Board and CFO

	Notes	2021	2020
		HRK million	HRK million
Operating activities
Profit before income tax		796	842
Depreciation and amortization	7	1,861	1,712
Impairment loss of PPE & Intangible assets	7	13	22
Impairment of investment in subsidiary	7	58	-
Interest income	10	(7)	(7)
Interest expense	11	51	61
(Gain) on disposal of assets	4,9	(11)	(3)
(Gain) on disposal of assets held for sale		-	(11)
Other net financial loss	10,11	3	5
Income from dividends - subsidiaries		(80)	(86)
(Increase) in inventories		(36)	(10)
Decrease / (increase) in receivables and prepayments		75	(71)
(Increase) / decrease in contract assets/costs	24	(34)	8
(Decrease) in payables and accruals		(136)	(114)
Increase / (decrease) in contract liabilities		16	(10)
Increase / (decrease) in provisions		32	(6)
Increase in accruals	30	3	27
Increase / (decrease) in employee benefit obligations		8	(1)
Other non-cash items		8	(19)
		__________	__________
Cash generated from operations		2,620	2,339
Interest paid		(62)	(56)
Income tax paid		(157)	(208)
		__________	__________
Net cash flows from operating activities		2,401	2,075
		__________	__________
Investing activities
Payments for property, plant and equipment and intangible assets		(1,366)	(1,551)
Proceeds from sale of non-current assets		10	4
Proceeds from sale of assets held for sale		-	60
Proceeds from sale of financial assets at fair value through other comprehensive income		-	951
Other investment received		10	20
Dividend received - subsidiaries		9	86
Given loan to subsidiary		(30)	(24)
Loan repayment from subsidiary		-	5
Interest received		5	5
		__________	__________
Net cash flows used in investing activities		(1,362)	(444)
		__________	__________
Financing activities
Dividends paid	34	(640)	(643)
Repayment of radio frequency spectrum and content	41	(198)	(255)
Other financial repayments		-	(5)
Repayment of lease liability	17	(288)	(311)
Acquisition of treasury shares	33	(100)	(90)
		__________	__________
Net cash flows used in financing activities		(1,226)	(1,304)
		__________	__________
Net (decrease)/increase in cash and cash equivalents		(187)	327
Cash and cash equivalents as at 1 January		2,706	2,389
Exchange (losses) on cash and cash equivalents		(6)	(10)
		__________	__________
Cash and cash equivalents as at 31 December	26	2,513	2,706
		__________	__________

	Issued               share capital	Legal reserves	Fair value reserves	Share base program	Fair value treasury shares	Reserve for treasury shares	Retained earnings	Total
	HRK million	HRK million	HRK million	HRK million	HRK million	HRK million	HRK million	HRK million
	(Note 31)	(Note 32)			(Note 33)	(Note 33)	(Note 34)
Balance as at 31 December 2019	10,245	491	1	-	73	(73)	1,968	12,705
	__________	__________	__________	__________	__________	__________	__________	________
Balance as at 1 January 2020	10,245	491	1	-	73	(73)	1,968	12,705
	__________	__________	__________	__________	__________	__________	__________	______
Profit for the year	-	-	-	-	-	-	704	704
Other comprehensive income for the year	-	-			-	-	-	-
	__________	__________	__________	__________	__________	__________	__________	__________
Total comprehensive income for the year	-	-	-	-	-	-	704	704
Reserve for treasury shares	-	-	-	-	90	-	(90)	-
Acquisition of treasury shares	-	-	-	-	-	(90)	-	(90)
Shares cancelled	-	-	-	-	(73)	73	-	-
Reclassification to legal reserves	-	21	-	-	-	-	(21)	-
Dividends paid to equity holders of the Company	-	-	-	-	-	-	(643)	(643)
	__________	__________	__________	__________	__________	__________	__________	__________
Balance as at 31 December 2020	10,245	512	1	-	90	(90)	1,918	12,676
	__________	__________	__________	__________	__________	__________	__________	__________
Balance as at 1 January 2021	10,245	512	1	-	90	(90)	1,918	12,676
Profit for the year	-	-	-	-	-	-	666	666
Other comprehensive income for the year	-	-	(1)	-	-	-	-	(1)
	__________	__________	__________	__________	__________	__________	__________	__________
Total comprehensive income for the year	-	-	(1)	-	-	-	666	665
Reserve for treasury shares	-	-	-	-	100	-	(100)	-
Acquisition of treasury shares	-	-	-	-	-	(100)	-	(100)
Shares cancelled	-	-	-	-	(126)	126	-	-
Treasury base program	-	-	-	4	-	-	-	4
Effect of merger of subsidiary	-	-	-	-	-	-	(2)	(2)
Reclassification to legal reserves	-	-	-	-	-	-	-	-
Dividends paid to equity holders of the Company	-	-	-	-	-	-	(640)	(640)
Balance as at 31 December 2021	10,245	512	-	4	64	(64)	1,842	12,603
	__________	__________	__________	__________	__________	__________	__________	__________

The accompanying accounting policies and notes are an integral part of these financial statements.

1.     Corporate information

Croatian Telecom Inc. (“HT” or the “Company”) is a joint stock company whose majority shareholder is Deutsche Telekom Europe B.V. with a 52.2% holding. Deutsche Telekom Europe B.V. is 100% owned by Deutsche Telekom Europe Holding B.V. Deutsche Telekom Europe Holding B.V is 100% owned by Deutsche Telekom Europe Holding GmbH which is 100% owned by Deutsche Telekom AG. Thus, Deutsche Telekom AG is the ultimate controlling parent.

The registered office address of the Company is Radnička cesta 21, Zagreb, Croatia.

The total number of employees of the Company as at 31 December 2021 was 4,036 (31 December 2020: 4,234).

The principal activities of the Company are described in Note 3.

The financial statements for the financial year ended 31 December 2021 were authorized for issue in accordance with a resolution of the Management Board on 8 March 2022. These financial statements are subject to approval of the Supervisory Board as required by the Croatian Company Act. Annual consolidated financial statements of HT Group are disclosed on the Company's web page in Investor Relations.

2.1. Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the EU. The financial statements also comply with the Croatian Accounting Act on financial statements, which refers to IFRS as endorsed by the EU.

The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through other comprehensive income (Note 21), as disclosed in the accounting policies hereafter.

The Company’s financial statements are presented in Croatian Kuna (“HRK”) which is the Company’s functional currency. All amounts disclosed in the financial statements are presented in millions of HRK if not otherwise stated.

The Company has also prepared consolidated financial statements in accordance with IFRS for the Company and its subsidiaries (the “Group”), which were approved by the Management Board on 8 March 2022. In the consolidated financial statements, subsidiary undertakings (Note 19) have been fully consolidated. Users of these separate financial statements should read them together with the Group's consolidated financial statements as at and for the year ended 31 December 2021 in order to obtain full information on the financial position, results of operations and changes in the financial position of the Group as a whole.

Impact of COVID-19 on business

Although the challenges related to Covid-19 continued throughout the entire year 2021, HT has managed to stabilise its business in line with the new normal, including continued smart work model, ensured necessary sanitary material and disinfection to all offices and T-Shops, but also continued its investments in digital infrastructure. In order to ensure productivity and business continuity, contingency plan for workforce in Frontline operations including Field Service, Shops, and Call Centres was revised with concrete contingency measures assured.

2.1. Basis of preparation

Impact of COVID-19 on business (continued)

The Company continues to actively monitor the situation with the COVID-19 virus and correlated risk aspects on operational activities. Even though Covid-19 related financial impact is integrated in the regular business dealing, certain uncertainties still remain, tied to externalities such as potential supply chain delays, and the overall economic activity and related population standard on the distribution and usage of telco services.

Revenue was improved by HRK 224 million or 4.0% to HRK 5,888 million in 2021 compared to 2020. Increase was driven by improved mobile revenue (HRK 241 million or 7.9%) mainly influenced by favourable epidemic situation during spring and summer which resulted in better tourist season and increased mobile visitor revenue.   

2.2. Changes in accounting policies and disclosures

Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2021 or later. The new standards did not have any material impact on the Company:

·       Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB)

·       IFRS 17 "Insurance Contracts"(issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2023)

·       Classification of liabilities as current or non-current – Amendments to IAS 1 (issued on 23 January 2020 and effective for annual periods beginning on or after 1 January 2023)

·       Proceeds before intended use, Onerous contracts – cost of fulfilling a contract, Reference to the Conceptual Framework – narrow scope amendments to IAS 16, IAS 37 and IFRS 3, and Annual Improvements to IFRSs 2018-2020 – amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41 (issued on 14 May 2020 and effective for annual periods beginning on or after 1 January 2022)

·       Interest rate benchmark (IBOR) reform – phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (issued on 27 August 2020 and effective for annual periods beginning on or after 1 January 2021).

New standards and interpretations not yet adopted

Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2022 or later. The new standards did not have any material impact on the Company:

The amendments to IFRS 3 (Business Combinations):

·       Update IFRS 3 so that it refers to the 2018 Conceptual Framework instead of the 1989 Framework;

·       Add to IFRS 3 a requirement that, for transactions and other events within the scope of IAS 37 or IFRIC 21, an acquirer applies IAS 37 or IFRIC 21 instead of the Conceptual Framework;

·       Add to IFRS 3 an explicit statement that an acquirer does not recognise contingent assets acquired in a business combination.

The amendments to IAS 16 (Property, Plant and Equipment) prohibit deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity recognises the proceeds from selling such items, and the cost of producing those items, in profit or loss.

The amendments to IAS 37 (Onerous Contracts) specify that the “cost of fulfilling” a contract comprises the “costs that relate directly to the contract”. Costs that relate directly to a contract consist of both the incremental costs of fulfilling that contract (examples would be direct labour or materials) and an allocation of other costs that relate directly to fulfilling contracts (an example would be the allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling the contract).

2.2. Changes in accounting policies and disclosures (continued)

New standards and interpretations not yet adopted (continued)

The annual improvements package (2018-2020 cycle) includes the following minor amendments:

·       Subsidiary as a First-time Adopter (IFRS 1)

·       Fees in the “10 per cent” Test for Derecognition of Financial Liabilities (IFRS 9)

·       Lease Incentives (Illustrative Example 13 of IFRS 16)

·       Taxation in Fair Value Measurements (IAS 41).

The Company is currently assessing the impact of the amendments on its financial statements.

However, the new standards and interpretations are not expected to significantly affect the Company’s financial statements.

2.3. Significant accounting judgments, estimates and assumptions

The preparation of the Company's financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, during the reporting period or at the reporting date respectively. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. The key assumptions concerning the future and other key sources of estimation uncertainty at the statement of financial position date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

Capitalized content rights

The rights to use electronic signals to broadcast sport events, TV programs, movies, music streams, etc. shall be capitalized as intangible assets if all of the following conditions are met:

-        there is no doubt whatsoever that the content will be delivered as agreed in the contract. That means that the probability that the signal will eventually not be delivered is remote. If the probability of non-delivery is higher than remote, such contract is accounted for as an executory contract where any prepayments are presented as other assets and amortized through expenses for services purchased.

-        the non-cancellable minimum term and the period over which revenues from customers are expected to be generated exceed one year. If the term is shorter, the contract is accounted for as an executory contract.

-        cost can be estimated reliably.

Contract values ​​are calculated based on the price in the contract and the estimated number of users discounted for the duration of the contract. Used discount rate depends on the duration of the contract.

Provisions and contingencies

The Company is exposed to a number of legal cases and regulatory proceedings and ownership dispute over distributive telecommunication infrastructure that may result in significant outflow of economic resources or derecognition of related assets. The Company uses internal and external legal experts to assess the outcome of each case and makes judgments as to if and in what amount provisions need to be recorded in the financial statements as explained further in Notes 29 and 36. Changes in these judgments could have a significant impact on the financial statements of the Company.

Impairment of non-financial assets

The determination of impairment of assets involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment. Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the industry, increased cost of capital, changes in the future availability of financing, technological obsolescence, discontinuance of services, current replacement costs, prices paid in comparable transactions and other changes in circumstances that indicate an impairment exists. The recoverable amount and the fair values are typically determined using the discounted cash flow method which incorporates reasonable market participant assumptions.

2.3. Significant accounting judgments, estimates and assumptions (continued)

Impairment of non-financial assets (continued)

The identification of impairment indicators, as well as the estimation of future cash flows and the determination of fair values for assets (or groups of assets) require management to make significant judgments concerning the identification and validation of impairment indicators, expected cash flows, applicable discount rates, useful lives and residual values. Specifically, the estimation of cash flows underlying the fair values of the business considers the continued investment in network infrastructure required to generate future revenue growth through the offering of new data products and services, for which only limited historical information on customer demand is available. If the demand for those products and services does not materialize as expected, this would result in less revenue, less cash flow and potential impairment to write down these investments to their fair values, which could adversely affect future operating results.

The fair value less costs of disposal calculation is based on available data from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the financial plan covering a mid-term period. The cash flows beyond the planning period are extrapolated using appropriate growth rates. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes. Further details including carrying values and effects on the result of the period are given in Notes 14, 15, 16 and 19.

Useful lives of assets

The determination of the useful lives of assets is based on historical experience with similar assets as well as any anticipated technological development and changes in broad economic or industry factors. The appropriateness of the estimated useful lives is reviewed annually, or whenever there is an indication of significant changes in the underlying assumptions. We believe that this is a critical accounting estimate since it involves assumptions about technological development in an innovative industry and is heavily dependent on the investment plans of the Company. Further, due to the significant weight of depreciable assets in the Company’s total assets, the impact of significant changes in these assumptions could be material to the financial position and results of operations of the Company.

The following table demonstrates the sensitivity to a reasonably possible change in useful life on amortization and depreciation, with all other variables held constant, on the Company’s profit post tax:

	Increase / decrease in %	Effect on profit post tax
		HRK million
Year ended 31 December 2021	+10	118
	-10	(144)
Year ended 31 December 2020	+10	123
	-10	(150)

2.3. Significant accounting judgments, estimates and assumptions (continued)

Impairment of investments in subsidiaries held by HT holding

The Company tests annually whether investments in subsidiaries have suffered any impairment. The recoverable amounts of investment have been determined based on value in use calculation. These calculations require the use of estimates. In estimates that are used for calculations is included the impact of COVID-19 for changes of revenue and costs or ratios. In case of investment in Iskon Internet d.d., a reasonably possible change in certain key assumptions when viewed separately (such as decrease of revenue growth by 2% or increase of costs by 2%) with all other variables held constant, could result in an impairment charge of up to HRK 53 million (2020: no impairment charge). In case of investment in other subsidiaries, management believes that no reasonably possible change in any of the key assumptions would cause the carrying value of the investment to materially exceed their recoverable amount.

Impairment of investments in subsidiaries

In case of investment in HT Production, a reasonably possible change in certain key assumptions when viewed separately (such as decrease of revenue growth by 2%, increase of costs by 2% or change in capex and revenue ratio) with all other variables held constant, could result in an impairment charge of up to HRK 25 million (2020: up to HRK 113 million).

Content contract liability

As explained in intangible asset accounting policy (Note 2.4) content costs are capitalised with related liability recognised. The determination of liability for variable content contracts requires judgement as it is based on estimated number of future customers and use of a discount rate.

Expected credit loss (ECL) measurement

With application of IFRS 9, Model of Expected Loss (ECL) is introduced. The measurement of expected loss is based on reasonable and supporting information that is available without additional expenses and effort and which include information on past events, current and foreseeable future conditions and circumstances.

When estimating the expected credit loss, historical probabilities of non-collection are usually used, complemented with future parameters relevant to the credit risk.

Macroeconomic data are linked to historical customer behavior, which is corrected under the following conditions:

-        Unemployment rate - If changes in unemployment rate are more than 2% compared to the average of the last two years

-        GDP - If GDP change rates are higher than 1% compared to the average of the last four years

-        Average interest rates - If changes in average interest rates are greater than 2% compared to the average of the last four years.

The general approach of expected credit losses applies to loans, debt instruments measured at amortized cost and debt instruments measured at fair value through other comprehensive income. A simplified approach to expected credit losses is applied to customer and contract assets, which results in earlier recognition of impairment charges.

2.3. Significant accounting judgments, estimates and assumptions (continued)

Expected credit loss (ECL) measurement (continued)

Besides above stated assets to which a simplified approach applies, subsequent measurement of all other financial assets applies a general approach of expected credit loss consisting of three stages: Bucket 1, Bucket 2 and Bucket 3. The degree of application depends on the increase in credit risk by financial instrument after initial recognition, i.e. on the credit quality of the financial instrument:

Buckets for measurement of credit risk	Period of measurement of ECL	Increase of credit risk
Bucket 1 Performing	12-month expected credit losses	None or not significant
Bucket 2 Underperforming	Lifetime expected credit losses	Significant
Bucket 3 Non-performing	Lifetime expected credit losses	Significant
		+
		There is an evidence that financial asset is impaired at the reporting date

A credit risk is the risk that a counterparty of a financial instrument creates financial losses for the other counterparty by not fulfilling the contractual obligation. Since the standard does not prescribe a definition of “significant increase in credit risk” an entity decides how to define it in the context of its specific types of instruments taking into account the availability of information and own historic data. Basis for assessing an increase in credit risk is either the probability of default or an analysis of overdue receivables. Revision of applied simplified approach credit risk percentages is done twice a year to measure credit risk and historical data in order to quantify expected credit loss. Additionally, financial analyst analyses macroeconomic and external data – inflation rates, consumer credit interest rates, GDP per capita, unemployment and employment rates and consumer price index change. These data are put in correlation with historical Company’s customer payment behaviour in order to see possible change of credit risk percentages applied.

The standard contains the rebuttable assumption that a “default event” has occurred when the financial asset is more than 90 days overdue. The assumption may also be supported by the following indicators:

·       Counterparty repeatedly fails to meet payment obligations and the service is blocked (contract not yet terminated).

·       Counterparty is over the credit limit with unpaid invoices and fails to pay despite repeated demands.

·       Country embargo/countries are in recession or payment restrictions by the relevant state bank.

2.3. Significant accounting judgments, estimates and assumptions (continued)

Expected credit loss (ECL) measurement (continued)

In making these assumptions, estimates based on historical data and existing market conditions are used.

Simplified approach of expected credit loss measurement i.e measurement on collective basis is applied for trade receivables, due to large number of analytical data (customers) and homogeneous base of receivables. Trade receivables are divided into portfolios based on type of customer and tracked according to aging structure. Portfolios are created based on similarities of the customer behavior as to historical data and future expectations. Portfolios are for example Mobile Residential Customers, Fixed Residential Customers, Mobile Business Customers, Fixed Business Customers. Aging clusters for example are Undue, Overdue 0-29 days, Overdue 30-89 days and so further. Aging clusters are created based on the similarities in collection process steps.

If not collected earlier, all telco receivables are claimed at Court within one year from due date.

Analysis of claimed and impaired receivables showed significant collection in first year from due date and subsequent two years through claims. Historically these trends were stable and there are no known facts nor expected indication that the trend will change in future periods.

Trade receivables credit risk was recognized through ECL provision matrix. Risk assumptions include historical collection risk and dynamics adjusted for significant changes in macroeconomic indicators (GDP change, unemployment rate, and credit default swap rate for long term receivables).

During the reporting period there were no significant changes in the gross carrying amount of financial instruments, so there were no significant impacts on the loss allowance.

2.3. Significant accounting judgments, estimates and assumptions (continued)

Revenue recognition

Following IFRS15 judgments are applied in portfolio approach in order to reflect contracts behaviour from contract inception over the contract duration period. The most relevant judgements include:

-        value adjustment of contract asset due to early contract termination in range of 3%-10% (2020:3%-10%) and penalty fee collection in range of 52%-76% (2020: 52%-76%), depending on portfolio / customer group.

-        value adjustment of contract asset due to non-payment (relation with IFRS 9) in range of 0.1%-3% (2020: 0.1%-3%), depending on portfolio / customer group

-        handset budget is not used evenly during contract duration which is mostly 24 months so linear usage within 12 months after contract inception is approximation of the uneven usage.

2.4. Significant accounting policies

a)   Operating profit

Operating profit is defined as the result before income taxes and finance items. Finance items comprise interest revenue on cash balances in the bank, deposits, treasury bills, interest bearing financial assets at fair value through other comprehensive income, dividend income from associate, subsidiaries and joint venture, interest expense on borrowings, gains and losses on the sale of financial assets at fair value through other comprehensive income and foreign exchange gains and losses on all monetary assets and liabilities denominated in foreign currency.

b)       Investments in subsidiaries

Subsidiaries are all entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Investments in subsidiaries are measured at cost less any impairment in value.

c)       Investment in associate

In the Company’s financial statements, investment in an associated company (generally a shareholding of between 20% and 50% of voting rights) where significant influence is exercised by the Company is measured at cost less any impairment in value. An assessment of investment in associate is performed when there is an indication that the asset has been impaired or that the impairment losses recognized in previous years no longer exist.

d)       Investment in joint venture

The Company has an interest in a joint venture which is a jointly controlled entity, whereby the venturers have a contractual arrangement that establishes joint control over the economic activities of the entity. This investment is measured at cost less any impairment in value. An assessment of investment in joint venture is performed when there is an indication that the asset has been impaired or that the impairment losses recognized in previous years no longer exist.

e)       Intangible assets

Intangible assets are measured initially at cost. Intangible assets are recognized in the event that the future economic benefits that are attributable to the assets will flow to the Company, and that the cost of the asset can be measured reliably. After initial recognition, intangible assets are measured at cost less accumulated amortization and any accumulated impairment losses. Intangible assets are amortised on a straight-line basis over the best estimate of their useful life. The amortization method is reviewed annually at each financial year-end.

Amortization of the telecommunication licence commences when the licence is acquired and ready for use, with the amortization period being the term of the licence.

The Company recognizes costs of content as an intangible asset at the inception of the related contract. The Company determined that the following conditions have to be met for capitalization of content provider contracts: contract duration must be longer than one year, cost must be determined or determinable, contracted rights must be continuous and costs under the contract are unavoidable. Assets recognized under these contracts will be amortized over the contract period. Content contracts which do not meet the criteria for capitalization are expensed and presented in ‘other expenses’ in the statement of comprehensive income.

2.4. Significant accounting policies (continued)

e)       Intangible assets (continued)

Useful lives of intangible assets are as follows:

Licences and rights
Radio frequency spectrum in 2100 MHz frequency band	15 years
Radio frequency spectrum in 700 MHz/3600 MHz/ 26 GHz frequency bands	15 years
Radio frequency spectrum in 800 MHz frequency band	11-12 years
Radio frequency spectrum in 1800 MHz frequency band	10-13 years
Radio frequency spectrum in 2600 MHz frequency band	6 years
Radio frequency spectrum for digital television multiplexes	10 years
5G spectrum licence	15 years
Software, content and other assets	2-8 years or as per contract duration

With the introduction of the new business (ERP) system, the structure of intangible assets within the DT Group was harmonized in the area of fixed assets register classification, which resulted in a change of estimated useful life of certain categories of intangible assets. The Group has changed the estimate of useful lives in order to reflect the technical characteristics and technological functionalities of the future benefits from existing and newly acquired intangible assets. The effect of the change in accounting estimate is not significant for financial statements. 

Assets under construction are not amortised but are being reviewed for impairment annually.

2.4. Significant accounting policies (continued)

f)          Property, plant and equipment

An item of property, plant and equipment that qualifies for recognition as an asset is measured at its cost. The cost of an item of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

In addition to directly attributable costs, the costs of internally constructed assets include proportionate indirect material and labour costs, as well as administrative expenses relating to production or the provision of services.

Subsequent expenditure on an asset that meets the recognition criteria to be recognized as an asset or an addition to an asset is capitalized, while maintenance and repairs are charged to expense when incurred.

After recognition as an asset, an item of property, plant and equipment is measured at cost less accumulated depreciation and any accumulated impairment losses.

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately.

Depreciation is computed on a straight-line basis.

Useful lives of newly acquired assets are as follows:

Buildings	10-50 years
Telecom plant and machinery
Cables	8-20 years
Cable ducts and tubes	20-35 years
Other	2-15 years
Customer premises equipment (CPE)	7 years
Tools, vehicles, IT, office and other equipment	2-15 years

Land, works of art and assets under construction are not depreciated but are being reviewed for impairment annually.

Useful lives, depreciation method and residual values are reviewed at each financial year-end, and if expectations differ from previous estimates, the change(s) are accounted for as a change in an accounting estimate.

With the introduction of the new business (ERP) system, the structure of tangible assets within the DT Group was harmonized in the area of fixed assets register classification, which resulted in a change of estimated useful life of certain categories of tangible assets. The Group has changed the estimate of useful lives in order to reflect the technical characteristics and technological functionalities of the future benefits from existing and newly acquired tangible assets. The effect of the change in accounting estimate is not significant for financial statements. 

Assets under construction represent plant and properties under construction and are stated at cost.

Depreciation of an asset begins when it is available for use.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within ‘Other expenses’ in the statement of comprehensive income.

2.4. Significant accounting policies (continued)

g)          Impairment of non-financial assets

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use amount. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

h)         Inventories

Inventories are measured at the lower of cost and net realisable value, after provision for obsolete items. Net realisable value is the selling price in the ordinary course of business, less the costs necessary to make the sale. Cost is determined on the basis of weighted average cost.

i)       Investment property

Investment property, principally comprising business premises and land, is held for long-term rental yields or appreciation and is not occupied by the Company. Investment property is treated as a long-term investment unless it is intended to be sold in the next year and a buyer has been identified in which case it is classified within current assets.

Investment property is carried at historical cost less accumulated depreciation and provision for impairment. Depreciation of buildings is calculated using the straight-line method to allocate their cost over their estimated useful lives of 10 to 50 years (2020: 10 to 50 years). Subsequent expenditure is capitalised only when it is probable that future economic benefits associated with it will flow to the Company and the cost can be measured reliably. All other repairs and maintenance costs are charged to the statement of comprehensive income when incurred. If an investment property becomes owner-occupied, it is reclassified to property, plant and equipment, and its carrying amount at the date of reclassification becomes its deemed cost to be subsequently depreciated.

2.4. Significant accounting policies (continued)

j)      Assets Classified as Held for Sale       

Held for sale assets are long-lived assets for which a Company has a concrete plan to dispose of the asset by sale. They are carried on balance sheet at the lower of carrying value or fair value and no depreciation is charged on them. Assets are classified as held for sale: when the following conditions are met: management is committed to a plan to sell, the asset is available for immediate sale, an active program to locate a buyer is initiated, the sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions), the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value, actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn.

k)       Financial assets

All assets are classified and measured as described below:

Classification and measurement	Classification / measurement
Assets
Current assets
Cash and cash equivalents (deposits, commercial papers, ...)	Amortized cost
Trade and other receivables	Amortized cost
Other financial assets	Amortized cost
Given loans and other receivables	Amortized cost
Equity instruments	Fair value through Other Comprehensive Income without recycling to Profit and Loss (FVOCI)
Debt instruments	Fair value through Other Comprehensive Income with subsequent reclassification to the income statement
Non-current assets
Trade and other receivables	Amortized cost
Other financial assets	Amortized cost
Given loans and other receivables	Amortized cost
Equity instruments	Hold to collect and sell Fair value through Other Comprehensive Income without recycling to Profit and Loss (FVOCI)

2.4. Significant accounting policies (continued)

k)    Financial assets (continued)

The business model reflects how the Company manages the debt financial assets in order to generate cash flows – whether the Company’s objective is: (i) solely to collect the contractual cash flows from the assets (“hold to collect contractual cash flows”,) or (ii) to collect both the contractual cash flows and the cash flows arising from the sale of assets (“hold to collect contractual cash flows and sell”) or, if neither of (i) and (ii) is applicable, the financial assets are classified as part of “other” business model and measured at FVTPL.

Debt instruments

For the measurement of debt instruments, it is important which business model applies to each of them, and whether they have the characteristics of an ordinary loan, i.e. whether their cash flows consist solely of interest and principal. If they have these characteristics, and if they are not sold according to the business model but are held to maturity, they must be measured at amortized cost. If the business model aims to sell and partially hold such instruments, they are to be measured at fair value through other comprehensive income with subsequent reclassification to the income statement. In all other cases, financial assets are to be measured at fair value through profit or loss.

Receivables which are sold to Collecting Agency as way of collection are initially considered to be in the ‘held to collect’ business model and are therefore measured at amortized cost since the Company initially has the credit risk and the SPPI test is satisfied.

Equity instruments

Held equity instruments include strategic investments. The Company has exercised the option of valuing these in the Other comprehensive income without subsequent reclassification. The reason for this is that strategic investments do not focus on short-term profit maximization. Acquisition and sale of strategic investments are based on business policy considerations. Dividends are recognized directly in profit or loss, in case that they do not constitute a capital repayment.

2.4. Significant accounting policies (continued)

l)          Foreign currencies

Transactions denominated in foreign currencies are translated into local currency at the middle exchange rates of the Croatian National Bank prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into local currency at the middle exchange rates of the Croatian National Bank prevailing at the statement of financial position date. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included in the statement of comprehensive income within financial income or financial expense, respectively.

m)      Taxation

The income tax charge is based on profit for the year and includes deferred taxes. Deferred taxes are calculated using the balance sheet liability method.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes at the reporting date.

Deferred tax is determined using income tax rates that have been enacted or substantially enacted by the financial statement date and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is settled.

The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would arise from the manner in which the Company expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred income tax liabilities are provided on taxable temporary differences arising from investments in subsidiaries, associates and joint arrangements, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

Deferred tax assets are recognized to the extent that it is probable that future taxable profit (or reversing deferred tax liabilities) will be available against which the temporary differences can be utilized.

Deferred tax assets and liabilities are not discounted and are classified as non-current assets and liabilities in the statement of financial position. Deferred tax assets are recognized when it is probable that sufficient taxable profits will be available against which the deferred tax assets can be utilised.

Current and deferred taxes are charged or credited in other comprehensive income if the tax relates to items that are credited or charged, in the same or a different period in other comprehensive income.

2.4.   Significant accounting policies (continued)

n)       Employee benefit obligations

The Company provides other long-term employee benefits (Note 28). These benefits include pension payments. The defined benefit obligation is calculated annually by independent actuary using a projected unit credit method. The projected unit credit method considers each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation.

Past service costs are recognized in profit or loss immediately in the period in which they occur. Gains or losses on the curtailment or settlement of benefit plans are recognized when the curtailment or settlement occurs. The benefit obligation is measured at the present value of estimated future cash flows using a discount rate that is similar to the interest rate on government bonds where the currency and terms of the government bonds are consistent with the currency and estimated terms of the benefit obligation. Gains and losses resulting from changes in actuarial assumptions are recognized in other comprehensive income in the period in which they occur.

The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation and the fair value of plan assets. This cost is included in employee benefit expense in the statement of comprehensive income.

The Company provides death in service short term benefits which are recognized as an expense of the period in which it is incurred.

o)       Revenue recognition

Revenue is income arising in the course of the Company’s ordinary activities.

Revenue is recognized for each distinct performance obligation in the contract in the amount of transaction price. Transaction price is the amount of consideration in a contract to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer. For contracts that contain more than one performance obligation (multiple element arrangements), Company allocates the transaction price to those performance obligations on a relative stand-alone selling price basis. The stand-alone selling price (SSP) is the price at which Company would sell a promised good or service separately to a customer.

Revenue is recognized when performance obligations are satisfied by transferring control of a promised good or service to a customer. Control of good (e.g. sale of equipment) is transferred when goods are delivered to customer, the customer has full discretion over goods and there is no unfulfilled obligation that could affect the customer’s acceptance of the goods. Delivery occurs when goods have been shipped to the specific location, and the risks of obsolescence and loss have been transferred to customer. Control of good is usually transferred at point in time.

2.4. Significant accounting policies (continued)

o)         Revenue recognition (continued)

Control of services (e.g. sales of telecommunication services, maintenance services, sale of licences, etc) transfers over time or at a point in time, which affects when revenue is recorded. Revenue from providing services is recognized in the accounting period in which the services are rendered. If service realization extends to more than one accounting period both, input method (based on cost incurred) and output method (based on units/work delivered) are used to measure progress towards completion.

Output method is used in mass market services (e.g. voice and data services provided on a monthly basis to customers) as well as in system solutions (e.g. installation of equipment, when time period between start of work and delivery of service is not too long and / or where work completed is regularly confirmed by both parties). Input method is mainly used in complex systems solution (e.g. in case of development of customer tailored maid solution which lasts longer period of time), where revenue is recognized monthly based on cost incurred in order to reflect progress towards completion in periods where mutual confirmations are still not due.

In determining the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer or the Company with a significant benefit of financing the transfer of goods or services to the customer.

The Company makes use of the option not to consider a significant financing component if the maximum period between delivery of a good or provision of a service and payment by the customer is one year or less. As well under the Company’s policy, it is assumed that if the amount of the financing component exceeds 5% of a total contract’s transaction price, this will indicate that such financing component will be deemed significant. By contrast, if the amount is 5% or lower, an entity may conclude that the financing component is not considered significant. Based on these criteria the Company did not identify significant financing component in contracts with customers.

The IFRS 15 Standard specifies the accounting for an individual contract with a customer. However, as a practical expedient, the Standard may be applied to a portfolio of contracts, if:

-        the contracts aggregated to a portfolio possess similar characteristics, and

-        applying the Standard to the portfolio does not result in a materially different result compared to accounting of single contracts.

In the Company IFRS 15 revenue is applied to portfolios of contracts as well as to single contracts. The Standard is applied to portfolios of contracts for mass market products, while for special solutions it is applied on individual contracts level. Portfolios are defined within each relevant business area and are set up based on common adjustment requirements for the individual contracts.