Borusan Mannesmann Boru Sanayi ve Ticaret Anonim Şirketi and its Subsidiaries - PDF

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Borusan Mannesmann Boru Sanayi ve Ticaret Anonim Şirketi and its Subsidiaries Consolidated Financial Statements Together with Report of Independent Auditors Borusan Mannesmann Boru Sanayi ve Ticaret Anonim

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Borusan Mannesmann Boru Sanayi ve Ticaret Anonim Şirketi and its Subsidiaries Consolidated Financial Statements Together with Report of Independent Auditors Borusan Mannesmann Boru Sanayi ve Ticaret Anonim Şirketi and its Subsidiaries TABLE OF CONTENTS Page Report of Independent Auditors 1 Consolidated Balance Sheet 2 Consolidated Income Statement 3 Consolidated Statement of Changes in Equity 4 Consolidated Cash Flow Statement 5 Notes to the Consolidated Financial Statements 6-34 REPORT OF INDEPENDENT AUDITORS To the Shareholders of Borusan Mannesmann Boru Sanayi ve Ticaret Anonim Şirketi We have audited the accompanying financial statements of Borusan Mannesmann Boru Sanayi ve Ticaret Anonim Şirketi and its subsidiaries (the Group), which comprise the consolidated balance sheet as of December 31, 2005 and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. These financial statements are the responsibility of the Group s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to in the first paragraph above present fairly, in all material respects, the financial position of the Group as of and its financial performance, and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). February 20, 2006 İstanbul, Turkey CONSOLIDATED BALANCE SHEET As at (Currency in US Dollars) ASSETS Notes Current assets Cash and cash equivalents 3 17,513,489 13,814,532 Trade receivables, net 4, 25 61,059,265 60,551,287 Inventories, net 5 56,487,380 59,282,194 Other current assets 6 4,572,374 4,585,696 Total current assets 139,632, ,233,709 Non-current assets Available for sale financial assets 9 15,831,072 15,881,454 Property, plant and equipment, net 7, ,371, ,257,910 Intangible assets, net 8 1,073, ,513 Deferred tax asset 13 82, ,159 Other non-current assets 305, ,197 Total non-current assets 150,665, ,087,233 Total assets 290,297, ,320,942 LIABILITIES, MINORITY INTEREST AND EQUITY Current liabilities Trade payables, net 10, 25 82,752,059 29,297,236 Short-term bank borrowings 11 10,950,975 51,284,800 Current portion of long-term debt 11 1,790, ,054 Due to related parties (other) 25-4,191,106 Taxes on income 13 1,209,887 1,556,006 Other current liabilities 12 6,360,012 10,364,398 Total current liabilities 103,063,277 96,968,600 Non-current liabilities Long-term debt 11 2,094, ,700 Provision for employee termination benefits 14 9,481,055 6,378,359 Deferred tax liability 13 6,266,734 5,565,025 Total non-current liabilities 17,842,055 12,887,084 Equity Issued share capital 15 68,996,872 68,996,872 Revaluation reserve, net 7 65,138,665 68,981,054 Legal reserves and retained earnings 16 35,174,106 38,392,424 (2) 169,309, ,370,350 Minority interest 82,792 94,908 Total equity 169,392, ,465,258 Total liabilities and equity 290,297, ,320,942 The accompanying policies and explanatory notes on pages 6 through 34 form an integral part of the consolidated financial statements. CONSOLIDATED INCOME STATEMENT For the year ended (Currency in US Dollars) Note Net sales 17, ,407, ,211,017 Cost of sales 18, 20,21,25 (383,609,452) (305,825,359) Gross profit 47,797,716 64,385,658 Selling, marketing, general and administrative expenses 19, 20, 21, 25 (29,499,821) (25,791,741) Other operating income / (expense) 21, 25 1,024,066 (840,863) Financial income 22, 25 2,689,160 2,177,457 Financial expense 22, 25 (7,540,272) (5,582,576) Translation gain 2 3,775,178 4,849,194 Profit before tax 18,246,027 39,197,129 Taxation on income 13 - Current (Statutory) (2,876,461) (12,438,911) - Deferred (1,020,482) 5,082,580 Total taxation on income (3,896,943) (7,356,331) Profit for the year 14,349,084 31,840,798 Attributable to: Equity holders of the parent 14,343,047 31,819,069 Minority interests 2,15 6,037 21,729 14,349,084 31,840,798 Weighted average number (000 s) of shares 2,835,000 2,835,000 Earnings per share in US dollars The accompanying policies and explanatory notes on pages 6 through 34 form an integral part of the consolidated financial statements. (3) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY For the year ended (Currency in US Dollars) Share Capital Attributable to equity holders of the parent Revaluation Legal Retained Reserve Reserve Earnings Total Minority Interest Total Equity At January 1, ,996,872 72,950,999 3,920,968 16,073, ,942,479 90, ,033,269 Transfers to legal reserves from prior year profit - - 2,394,671 (2,394,671) Dividends paid (15,773,122) (15,773,122) (17,611) (15,790,733) Transfer of depreciation of revaluation reserve and its deferred tax into retained earnings (Note 7) - (2,351,869) - 2,351, Change in revaluation reserve, net of deferred tax - (1,618,076) - - (1,618,076) - (1,618,076) Net profit for the year ,819,069 31,819,069 21,729 31,840,798 At December 31, ,996,872 68,981,054 6,315,639 32,076, ,370,350 94, ,465,258 Transfers to legal reserves from prior year profit - - 3,667,461 (3,667,461) Dividends paid (21,403,754) (21,403,754) (18,153) (21,421,907) Transfer of depreciation of revaluation reserve and its deferred tax into retained earnings (Note 7) - (3,458,594) - 3,458, Disposal from revaluation fund - (383,795) - 383, Net profit for the year ,343,047 14,343,047 6,037 14,349,084 At 68,996,872 65,138,665 9,983,100 25,191, ,309,643 82, ,392,435 The accompanying policies and explanatory notes on pages 6 through 34 form an integral part of the consolidated financial statements. (4) CONSOLIDATED CASH FLOW STATEMENT For the year ended (Currency in US Dollars) Notes Cash flows provided from operating activities: Profit before taxation on income 18,246,027 39,197,129 Adjustments to reconcile profit before taxation on income to net cash provided by operating activities: Depreciation and amortization 7,8,21 7,158,063 6,457,851 Interest expense 22 7,540,272 5,582,576 Interest income 22 (2,689,160) (2,177,457) Provision for employee termination benefits 14,20 4,468,143 2,475,151 Gain on sale of property, plant and equipment and intangible assets 7,8 (552,972) (386,375) Operating profit before working capital changes 34,170,373 51,148,875 Taxes paid 13 (3,222,580) (11,461,137) Trade receivables 4,25 (507,978) (2,164,557) Inventories 5 2,794,814 (8,092,739) Other current assets and liabilities, net 6,12 (3,991,064) 4,396,260 Trade payables 10,25 53,454,823 9,701,160 Other non-current assets 475,268 51,485 Employee termination benefits paid 14 (1,365,447) (2,294,969) Net cash provided by operating activities 81,808,209 41,284,378 Investing activities Purchase of property, plant equipment and intangible assets 7,8 (11,687,431) (11,348,271) Proceeds from sale of property, plant and equipment 7,8 1,659,891 1,141,175 Net change in available for sale financial assets 9 50, ,035 Interest received 22 2,689,160 2,177,458 Net cash used in investing activities (7,287,998) (7,919,603) Financing activities Payments of borrowings 11 (86,591,390) (49,828,705) Proceeds from borrowings 11 45,273,857 49,386,100 Interest paid 22 (8,081,814) (5,383,384) Dividends paid 17 (21,421,907) (15,790,733) Net cash used in financing activities (70,821,254) (21,616,722) Net increase in cash and cash equivalents 3 3,698,957 11,748,053 Cash and cash equivalents at the beginning of the year 3 13,814,532 2,066,479 Cash and cash equivalents at the end of the year 3 17,513,489 13,814,532 The accompanying policies and explanatory notes on pages 6 through 34 form an integral part of the consolidated financial statements. (5) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. CORPORATE INFORMATION General Borusan Mannesmann Boru Sanayi ve Ticaret A.Ş. (Borusan Mannesmann Boru) ( the Company ) is a joint stock company incorporated in Turkey. The Company s shares have been traded in Istanbul Stock Exchange since The Company is registered in Turkey and the address of the registered office is as follows: Meclis-i Mebusan Caddesi No: 103 Fındıklı - İstanbul In the extraordinary General Assembly meeting of Borusan Birleşik Boru Fabrikaları A.Ş. (Borusan Boru) held on November 25, 2004, the merger with Mannesmann Boru Endüstrisi T.A.Ş. (Mannesmann Boru) is approved. The merger of these entities under common control is effected legally through dissolution without liquidation and take over of Mannesmann Boru by Borusan Boru by transferring all its assets, liabilities, rights and obligations. Following the merger, the registered name of Borusan Boru has been changed to Borusan Mannesmann Boru Sanayi ve Ticaret A.Ş. and the change was registered on the Trade Registry Gazette dated as December 13, The consolidated financial statements have been prepared as if Borusan Boru and Mannesmann Boru were one single entity at January 1, The parent and the ultimate parent of the Company are Borusan Mannesmann Boru Yatırım Holding A.Ş. and Borusan Holding A.Ş., respectively. Borusan Mannesmann Boru has the following subsidiaries. Business segments, the location and the Company s ultimate effective shareholding in such subsidiaries equity are as follows: Business Segment Subsidiary % of ownership Location Steel Pipe Trade Kartal Boru Sanayi ve Ticaret A.Ş Istanbul - Turkey Engineering Services Borusan Mühendislik İnşaat ve Sanayi Makinaları İmalat A.Ş Gemlik - Turkey Consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) were authorized for issue on February 20, 2006 by the management of the Company on behalf of the Board of Directors of the Company. Although there is no such intention, the General Assembly and certain regulatory bodies have the power to amend statutory financial statements after issue. Nature of Activities of the Company The Company is involved in the manufacturing and sale of longitudinally and spirally welded steel pipes and plastic pipes. (6) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of Preparation Borusan Mannesmann Boru and its subsidiaries ( the Group ) maintain its books of account and prepare its statutory financial statements in New Turkish Lira (YTL) in accordance with regulations on accounting and reporting framework and accounting standards promulgated by the Turkish Capital Market Board (CMB), Turkish Commercial Code tax legislation and starting from January 1, 1994, the Uniform Chart of Accounts issued by Ministry of Finance. The consolidated US dollar (USD) financial statements are based on the statutory records which are maintained under the historical cost convention (except for the revaluation of property, plant and equipment as discussed in Note 7) with adjustments and reclassifications for the purpose of fair presentation in accordance with IFRS, which comprise standards and interpretations approved by the International Accounting Standards Board and International Accounting Standards and Standing Interpretations Committee interpretations approved by the IASC that remain effect. Statement of Compliance The consolidated financial statements of Borusan Mannesmann Boru and its subsidiaries have been prepared in accordance with IFRS. Basis of Consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries on the basis set out below: (i) (ii) (iii) The balance sheets and statements of income of the subsidiaries are consolidated on a line-by-line basis and the carrying value of the investment held by the Company is eliminated against the related shareholders equity accounts. Intercompany transactions and balances between the Company and its subsidiaries, and unrealized gains and losses on transactions among them are eliminated. Subsidiaries are consolidated from the date on which control is transferred to the Company. Minority shareholders share in the net assets of the consolidated subsidiaries is separately classified in the consolidated financial statements as minority interest. (7) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 Changes in Accounting Policies Effective January 1, 2005, the following represent the revised International Accounting Standards and other new standards in the IFRS series: - ΙAS 1 Presentation of Financial Statements, - IAS 2 Inventories, - IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, - IAS 10 Events after the Balance Sheet Date, - IAS 16 Property, Plant and Equipment, - IAS 17 Leases, - IAS 21 The Effects of Changes in Foreign Exchange Rates, - IAS 24 Related Party Disclosures, - IAS 27 Consolidated and Separate Financial Statements, - IAS 28 Investments in Associates, - IAS 31 Interests in Joint Ventures, - IAS 32 Financial Instruments: Disclosures and Presentations - IAS 33 Earnings per Share, and - IAS 39 Financial Instruments: Recognition and Measurement - IAS 40 Investment Property. - IFRS 2 Share-based payment - IFRS 4 Insurance Contracts - IFRS 5 Non-Current Assets Held For Sale and Discontinued Operations There was no impact on opening retained earnings of the Group at January 1, 2005 from the adoption of any of the above mentioned standards. 2.3 Significant Accounting Judgments and Estimates The preparation of the financial statements in accordance with IFRS requires management to make judgments and estimates that affect the reported amounts of assets and liabilities within the next financial year. Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Estimation The key assumption concerning the future and other key sources of estimation uncertainty at the balance sheet date that has a significant risk of causing a material adjustment to the carrying amounts of liabilities within the next financial year is discussed below: Employee termination benefits: In accordance with existing social legislation, the Group is required to make lump-sum payments to employees upon termination of their employment based on certain conditions. In calculating the related liability to be recorded in the financial statements for these defined benefit plans, the Group makes assumptions and estimations relating to the discount rate to be used, turnover of employees, future change in salaries/limits, etc. These estimations are reviewed regularly. (8) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Functional and Presentation Currency Foreign Currency Translation The consolidated financial statements are presented in U.S. Dollars, which is the Company s presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. The US dollar is used to a significant extent, or has a significant impact on the operations of the Group and reflects the economic substance of the underlying events and circumstances relevant to the Group. Therefore, all the Group companies uses the US dollar (US$) as functional currency. All currencies other than the currency selected for measuring items in the financial statements are treated as foreign currencies. Based on the economic substance of the underlying events and circumstances relevant to the Group, the functional currency of all subsidiaries of the Group has been determined to be US dollars as defined by IAS 21, due to the fact that the purchase and sales prices of the Group companies and the main services and products are mainly quoted in US$. The Turkish countrywide wholesale price index (WPI) published by State Institute of Statistics and YTL exchange rates for the purchases of USD announced by the Central Bank of the Republic of Turkey for the last two years were as follows : Year Year End USD/YTL Exchange Rates Inflation Rates (WPI) % YTL/USD Annual Devaluation Rates % (3.85) (0.02) 2.5 Summary of Significant Accounting Policies Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, balances with banks and amounts in reverse repurchase agreements having maturities of less than 3 months and checks having a maturity at December 31. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value. Assets purchased with a corresponding commitment to resell at a specified future date (reverse repurchase agreements) are not recognized in the consolidated balance sheet, as the Group does not obtain control over the assets. Amounts paid under these agreements are included in cash and cash equivalents. The difference between purchase and resale price is treated as interest income and accrued over the life of reverse repurchase agreement. Trade Receivables Trade receivables are recognized at original invoice amount and are carried at amortized cost (which is determined using the effective interest rate method) less an allowance for any uncollectible amounts. Interest rates used for amortized cost computation for YTL denominated trade receivables is 18% ( %) and for USD and EUR denominated trade receivables is around 4.3% ( %). The average collection period of trade receivables and notes receivables is 55 and 30 days respectively ( and 30 days). (9) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Inventories Inventories are valued at the lower of cost and net realizable value after provision for obsolete stock. Cost is determined by using the monthly weighted average cost. Cost of work in progress and finished goods includes materials, direct labor and an appropriate portion of variable and fixed overhead expenditure, the latter being allocated on the basis of nominal operating capacity. Net realizable value is the selling price in the ordinary course of business less the estimated costs of completion, marketing and distribution. Provision for slow obsolete items is recognized in cost of sales at the time it is incurred. Obsolete inventories are written off against the provision. Property, Plant and Equipment and Depreciation Property, plant and equipment is initially recorded at cost. Land, buildings and machinery and equipment are stated at revalued amounts less accumulated depreciation and any impairment in value. The last revaluations were made in July 1999 and in December 2004 by an independent professional valuer. Increases or decreases in the carrying amount arising on revaluation of these assets net off the related deferred income taxes are transferred to revaluation reserve in equity. (Note 7). All other tangible assets are stated at historical cost less accumulated depreciation and any accumulated impairment loss. When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the income statement. On disposal of revalued assets, amounts in revaluation reserves relating to that asset are transferred to retained earnings. Further, the difference between depreciation based on the revalued carrying amount of the
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