PORT HARCOURT ELECTRICITY DISTRIBUTION Plc REPORT OF THE DIRECTORS AUDITED FINANCIAL STATEMENTS AND OTHER NATIONAL DISCLOSURES

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1 PORT HARCOURT ELECTRICITY DISTRIBUTION Plc REPORT OF THE DIRECTORS AUDITED FINANCIAL STATEMENTS AND OTHER NATIONAL DISCLOSURES FOR THE YEAR ENDED 31 DECEMBER 2013

2 REPORTS OF THE DIRECTORS, AUDITED FINANCIAL STATEMENTS AND OTHER NATIONAL DISCLOSURES FOR THE YEAR ENDED 31 DECEMBER 2013 Content Page Corporate information 3 Report of the directors 4 Audited Financial Statements Statement of directors' responsibilities 8 Independent auditors report 9 Statement of profit or loss and other comprehensive income 11 Statement of financial position 12 Statement of changes in equity 13 Statement of cash flows 14 Notes to the financial statements 15 Other National Disclosures Statement of value added 59 Five year financial summary 60 2

3 CORPORATE INFORMATION FOR THE YEAR ENDED 31 DECEMBER 2013 Directors: HRM King A. Turner Engr. Matthew Edevbie (Managing Director) Dr. Ransome Owan Dr. Abdul Wahaab Adebayo Ibraheem Dr. Christian Nwinia Mr. Jon Abbas (Pakistan) Secretary: Registered office: Sterling Law Alliance 11 Iriebe Street D/ Line Port Harcourt Rivers State 1 Moscow Road Port Harcourt Rivers State Registration number: RC Principal bankers: Auditors: Access Bank Plc Ecobank Plc First City Monument Bank Plc Guaranty Trust Bank Plc Skye Bank (formerly Mainstreet Bank Ltd ) United Bank for Africa Plc Zenith Bank Plc Ernst & Young 10 th & 13th Floors, UBA House 57, Marina, Lagos, Nigeria 3

4 REPORT OF THE DIRECTORS FOR THE YEAR ENDED 31 DECEMBER 2013 The directors have pleasure in submitting to the members of the Company their report together with the audited financial statements for the year ended 31 December PRINCIPAL ACTIVITIES The principal activities of the Company is the distribution and marketing of electricity to Rivers, Cross River, Akwa-Ibom and Bayelsa states in Nigeria. STATE OF AFFAIRS In the opinion of the Directors, the state of the Company s affairs is satisfactory and there has been no material change since the reporting date, which would affect the financial statements as presented. RESULTS FOR THE YEAR N 000 N 000 Revenue 23,510,528 21,368,524 ========= ========= Loss before taxation (13,325,422) (16,901,377) Income tax expense (191,641) (68,569) Loss after taxation (13,517,063) (16,969,946) ========== ========== ECONOMIC AND BUSINESS PERFORMANCE REVIEW Port Harcourt Electricity Distribution Plc had the following: Total number of customers 537, ,073 Total energy received (thousand kilowatts) 1,725,044 1,737,272 Total cash collections (millions of naira) 13,574 11,652 REPORTING FRAMEWORK The annual financial statements have been prepared in accordance with the International Financial Reporting Standards and the requirements of the Companies and Allied Matters Act, CAP C20, Laws of the Federation of Nigeria (LFN) BUSINESS TRANSITION In 1999, the Federal Government of Nigeria set up the Electric Power Sector Implementation Committee (EPIC) to undertake a comprehensive study of the electricity power industry. The EPIC created Power Holding Company of Nigeria (PHCN), a company registered under the Companies and Allied matters Act, to assume the assets, liabilities and employees of the former Federal Government parastatal- National Electric Power Authority ( NEPA ) that was in charge of electricity generation, transmission and distribution in Nigeria. PHCN was set up to achieve greater operational autonomy. The shares of PHCN were fully owned by the Federal Government of Nigeria. 4

5 REPORT OF THE DIRECTORS - Continued FOR THE YEAR ENDED 31 DECEMBER 2013 In 2005, PHCN was unbundled to form 6 electricity generation, 1 electricity transmission and 11 electricity distribution companies with the intent of sale of shares in these companies to private investors. PHED is one of the electricity distribution companies. The Federal Government also set up a special purpose agency, Nigeria Electricity Liability Management Company Limited (NELMCO), to take over some assets and liabilities of these companies in order to sell the shares of the companies to intending investors. On 1 November 2013, 4power Consortium bought over 60% of the shares in PHED from the Federal Government. PHED is responsible for the distribution and marketing of electricity to Rivers, Cross River, Akwa-Ibom and Bayelsa states in Nigeria. All electricity companies are regulated by Nigerian Electricity Regulatory Commission (NERC), a Federal Government parastatal that ensures efficiency, stability and reliability in the supply of electricity in Nigeria. SHAREHOLDING The issued and fully paid shares of the Company were held as follows: Power Consortium Number of shares 6,000,000 held Number of shares held - Bureau of Public Enterprises (BPE) 3,200,000 8,000,000 Ministry of Finance Incorporated (MOFI) 800,000 8,000,000 2,000, ,000,000 10,000,000 - ========== ========= PROPERTY, PLANT AND EQUIPMENT Information relating to movement in property, plant and equipment is as shown in Note 12 to the financial statements. In the opinion of the directors, the market value of the Company s property, plant and equipment is not less than the carrying value shown in the financial statements. DIRECTORS The names of the Directors at the date of this report and of those who held office during the year are as follows: Mohammed Kyari Dikwa Resigned 31 October 2013 Benjamin Ezra Dikki Resigned 21 July 2016 King A. Turner Appointed 1 November 2013 Engr. Matthew Edevbie (Managing Director) Appointed 1 November 2013 Dr. Ransome Owan Appointed 1 November 2013 Dr. Abdul Wahaab Adebayo Ibraheem Appointed 1 November 2013 Dr. Christian Nwinia Appointed 1 November 2013 Mr. Jon Abbas (Pakistan) Appointed 1 November

6 REPORT OF THE DIRECTORS - Continued FOR THE YEAR ENDED 31 DECEMBER 2013 DIRECTORS' INTEREST IN SHARES Pursuant to Section 275 and 276 of the Companies and Allied Matters Act, CAP C20, Laws of the Federation of Nigeria 2004, none of the directors has any direct and indirect interest in the shares of the Company as notified by them and recorded in the Register. DIRECTORS INTERESTS IN CONTRACTS None of the directors has notified the Company for the purpose of section 277 of the Companies and Allied Matters Act, CAP C20, Laws of the Federation of Nigeria 2004 of any disclosable interest in contracts with which the Company is involved as at 31 December EQUAL EMPLOYMENT OPPORTUNITY The Company pursues an equal employment opportunity policy. It does not discriminate against any person on the ground of race, religion, colour, or physical disability. EMPLOYMENT OF PHYSICALLY DISABLED PERSONS The Company maintains a policy of giving fair consideration to applications from physically disabled persons, bearing in mind their respective aptitudes and abilities. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Company continues and that the appropriate training is arranged. The Company does not have any disabled person during the year. INDUSTRIAL AND EMPLOYEE RELATIONS The Company places considerable value on the involvement of its employees and keeps them informed on matters affecting them as employees and the various factors affecting the performance of the Company. This is achieved through management s open door policy and improved communication channels. These channels include the and an intranet and the entrenchment of regular departmental meetings. TRAINING AND DEVELOPMENT The Company places great emphasis on the training and development of its staff and believes that its people are its greatest assets. Training courses are geared towards the developmental needs of staff and the improvement in their skill sets to face the increasing challenges in the industry. The Company continues to invest in human capital to ensure that people are well motivated and positioned to compete in the industry. EMPLOYEE HEALTH, SAFETY AND WELFARE The Company enforces strict health and safety rules and practices within work environment, which are reviewed and tested regularly. Fire prevention and fire-fighting equipment are installed in strategic locations within the Company s premises. The Company operates a defined contributory pension plan managed by various pension fund managers. 6

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11 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER Notes N 000 N 000 Revenue 5 23,510,528 21,368,524 Cost of sales 6 (23,043,054) (21,120,932) Gross profit 467, ,592 Administrative expenses 7 (13,792,896) (17,150,051) Operating loss (13,325,422) (16,902,459) Finance income 8-1, Loss before tax (13,325,422) (16,901,377) Income tax expense 10 (13,325,422) (191,641) (16,901,377) (68,569) Loss for the year (13,517,063) (16,969,946) Other comprehensive income Total comprehensive loss for the year (13,517,063) (16,969,946) ========== ========== Basic and diluted loss per share (N) 11 (1,352) (1,697) ======= ======= The accounting policies and notes on pages 15 to 57 form an integral part of these financial statements. 11

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13 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2013 Attributable to equity holders of the Company Issued Capital Retained earnings Other reserves Total equity N 000 N 000 N 000 N 000 Balance at 1 January ,000 10,770,550 5,325,454 16,101, Loss for the year - (16,969,946) (16,969,946) Other comprehensive income Total comprehensive loss for the year - (16,969,946) - (16,969,946) Transactions with owners: Contribution from the Federal Government (Note 18) , , Balance as at 31 December ,000 (6,199,396) 5,997,443 (196,953) Balance at 1 January ,000 (6,199,396) 5,997,443 (196,953) Loss for the year - (13,517,063) - (13,517,063) Other comprehensive income Total comprehensive income for the year - (13,517,063) - (13,517,063) Transactions with owners: Funds distribution to the Federal Government (Note 19) - (3,151,589) - (3,151,589) Additional contribution through transfers of assets and liabilities (Note 18) ,317,205 49,317, Balance as at 31 December ,000 (22,868,048) 55,314,648 32,451, The accounting policies and notes on pages 15 to 57 form an integral part of these financial statements. 13

14 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2013 Notes N 000 N 000 Cash flows from operating activities Net cash flow from operating activities 20 3,138,901 (342,259) Net cash flows from operating activities 3,138,901 (342,259) ======= ======= Cash flows from investing activities Purchase of property, plant and equipment 12 (186,729) (2,060,164) Interest received - 1, Net cash flows used in investing activities (186,729) (2,059,082) ======= ======= Cash flow from financing activities Federal government funds received - 671,989 Distribution to Federal government (3,151,589) Net cash flows (used in)/from financing activities (3,151,589) 671,989 ======= ======= Net decrease in cash and cash equivalents (199,417) (1,729,352) Cash and cash equivalents at start of year 741,170 2,470, Cash and cash equivalents at 31 December , ,170 ======= ======= The accounting policies and notes on pages 15 to 57 form an integral part of these financial statements. 14

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16 2 Significant accounting policies 2.1 Basis of preparation The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). For all periods up to and including the year ended 31 December 2012, the Company prepared its financial statements in accordance with Nigeria Generally Accepted Accounting Principles (NGAAP). These financial statements for the year ended 31 December 2013 are the first the Company has prepared in accordance with IFRS. Refer to Note 2.4 for information on how the Company adopted IFRS. The financial statements have been prepared on a historical cost basis. The financial statements are presented in Naira and all values are rounded to the nearest thousand (N000), except when otherwise indicated. 2.3 Summary of significant accounting policies a) Current versus non-current classification The Company presents assets and liabilities in statement of financial position based on current/noncurrent classification. An asset is classified as current when it is: Expected to be realised or intended to be sold or consumed in normal operating cycle Held primarily for the purpose of rendering of service Expected to be realised within twelve months after the reporting period, or Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period All other assets are classified as non-current. A liability is classified as current when: It is expected to be settled in normal operating cycle It is held primarily for the purpose of rendering of service It is due to be settled within twelve months after the reporting period, or There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period The Company classifies all other liabilities as non-current. Deferred tax assets and liabilities are classified as non-current assets and liabilities. b) Revenue Recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The Company has concluded that it is the principal in all of its revenue arrangements. The Company is the primary obligor in all the revenue arrangements has pricing latitude and is also exposed to inventory and credit risks. 16

17 The specific recognition criteria described below must also be met before revenue is recognised. Sale of Electricity Revenues are recognised upon supply of power to the customers. The Nigerian Electricity Regulatory Commission (NERC) under Section 32 (d) of the Electric Power Sector Reform (EPSR) Act, 2005 Act established a methodology for regulating electricity prices called the Multi-Year Tariff Order (MYTO). The MYTO provides a 15 year tariff path for the Nigerian electricity industry with limited minor reviews each year in the light of changes in a limited number of parameters (such as inflation and gas prices) and major reviews every 5 years, when all of the inputs are reviewed with stakeholders. On 1 July 2012 the NERC issued the Multi-Year Tariff Order (MYTO) for the determination of charges and tariffs for electricity generation, transmission and retail tariffs which consist of monthly fixed charge and monthly energy charge for the different customer classification. Connection fee These relate to sums received from customers to connect them to the distribution network and other revenue from the electricity system, these services are recognised at their invoice values. Interest income For all financial instruments measured at amortised cost, interest income is recognised using the effective interest rate (EIR). EIR is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included in finance income in profit or loss. c) Taxation The Company s taxes cover current income tax and deferred tax. Current Income Tax Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in Nigeria. Current income tax relating to items recognised directly in equity is recognised in equity through other comprehensive income and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. 17

18 Deferred tax Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax liabilities are recognised for all taxable temporary differences, except: When the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except: where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income (OCI) or directly in equity. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Value added tax (VAT) Expenses and assets are recognised net of the amount of value added tax, except: When the value added tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case, the value added tax is recognised as part of the cost of acquisition of the asset or as part of the expense item, as applicable. 18

19 When receivables and payables are stated with the amount of value added tax included. The net amount of value added tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. d) Foreign currency transactions The Company s financial statements are presented in Nigeria Naira, which is also the Company s functional currency. Transactions in foreign currencies are translated to the functional currency spot exchange rates at the dates the transaction first qualifies for recognition. Transactions and balances Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognised in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of gain or loss on change in fair value of the item (i.e. translation differences on items whose fair value gain or loss is recognised in other comprehensive income or profit or loss are also recognised in other comprehensive income or profit or loss, respectively). e) Property, plant and equipment Property, plant and equipment are initially stated at cost and subsequently carried at revalued amount, net of accumulated depreciation and accumulated impairment losses, if any. When significant parts of property, plant and equipment are required to be replaced at intervals, the Company recognises such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognised in profit or loss as incurred. Property, plant and equipment are measured at fair value less accumulated depreciation and impairment losses recognised at the date of revaluation. Valuations are performed with sufficient frequency to ensure that the carrying amount of a revalued asset does not differ materially from its fair value at the reporting date. A revaluation surplus is recorded in OCI and credited to the asset revaluation surplus in equity. However, to the extent that it reverses a revaluation deficit of the same asset previously recognised in profit or loss, the increase is recognised in profit or loss. A revaluation deficit is recognised in the statement of profit or loss, except to the extent that it offsets an existing surplus on the same asset recognised in the asset revaluation reserve. 19

20 An annual transfer from the asset revaluation reserve to retained earnings is made for the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset s original cost. Additionally, accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows: Asset Type Sub-transmission and distribution Buildings and improvements Office furniture and fixtures Motor vehicle Estimated Useful Lives years, depending on the life of the significant parts 40 years 5-10 years 5 7 years An item of property, plant and equipment and any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of profit or loss when the asset is derecognised. The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate. Transfer of assets from customers When electricity distribution items such as transformers, are purchased by or transferred from customers, the Company assesses whether such assets are being transferred to the Company and if the items meets the definition of an asset, that is, if the Company has control, if the cost can be reliably measured and if it is probable that economic benefit will flow to the Company from the use of the item. If this is met, such items would be recognised at fair value on initial recognition in property, plant and equipment with an increase in other income in the period when the assets are purchased or transferred from customers. Construction Work in Progress Construction in progress is stated at cost, which includes cost of construction, plant and equipment and other direct costs. Construction in progress is not depreciated until such time that the relevant assets are substantially completed and available for their intended use. Major spare parts and stand-by equipment qualify as property, plant and equipment when an entity expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are accounted for as property, plant and equipment under construction work in progress. 20

21 f) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. g) Financial instruments initial recognition and subsequent measurement A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets Initial recognition and measurement Financial assets are classified, at initial recognition, as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments or as Available for Sale (AFS) financial assets. All financial assets are recognised initially at fair value plus, in the case of financial assets not measured at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Company commits to purchase or sell the asset. Subsequent measurement Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate (EIR) method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The losses arising from impairment are recognised in the statement of profit or loss in finance costs for loans and in other administrative expenses for receivables. This category generally applies to trade and other receivables. For more information on receivables, refer to Note 14. Derecognition A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: The rights to receive cash flows from the asset have expired or The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through 'arrangement; and either (a) the Company has transferred substantially all the 21

22 risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all of the risks and rewards of the asset nor transferred control of it, the asset is recognised to the extent of the Company s continuing involvement in it. In such case, the Company also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the company has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay. Impairment of financial assets Further disclosures relating to impairment of financial assets are also provided in the following notes: Disclosures for significant assumptions Note 3 Trade receivables Note 14 The Company assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the receivables or a group of receivables is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial re-organisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Financial assets carried at amortised cost For financial assets carried at amortised cost, the Company first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. The amount of any impairment loss identified is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognised in the statement of profit or loss. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been 22

23 transferred to the Company. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to finance costs in the statement of profit or loss. Financial liabilities Initial recognition and measurement Financial liabilities are classified, at initial recognition, as payables. All financial liabilities are recognised initially at fair value, net of directly attributable transaction costs. The Company s financial liabilities include trade and other payables. Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Subsequent measurement The measurement of financial liabilities depends on their classification, as described below: Trade and other payables After initial recognition, trade and other payables are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss. For more information on trade and other payables, refer to Note 16 Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously. h) Inventories Inventories are valued at the lower of cost and net realisable value. The cost of inventories is based on the First in First Out (FIFO) principle, and includes expenditure incurred in acquiring the inventories and other costs incurred in bringing them to their existing location. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. 23

24 i) Impairment of Non-financial assets Further disclosures relating to impairment of non-financial assets are also provided in the following notes: Disclosures for significant assumptions Note 3 The Company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cash-generating unit s (CGU) fair value less costs of disposal and its value in use. Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. The Company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Company s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. For longer periods, a long-term growth rate is calculated and applied to project future cash flows after the fifth year. Impairment losses on inventories are recognised in the statement of profit or loss in expense categories consistent with the function of the impaired asset. For Property, plant and equipment, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the Company estimates the asset s or CGU s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is treated as a revaluation increase. j) Cash and cash equivalent Cash and cash equivalent in the statement of financial position and statement of cash flows comprise cash at banks and on hand, which are subject to an insignificant risk of changes in value. For the purpose of the statement of cash flows, cash and cash equivalents comprises of cash on hand cash at bank and overdraft. 24

25 k) Provisions Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Company expects some or all of a provision to be reimbursed, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any provision is presented in profit or loss net of any reimbursement. l) Pension and other post-employment benefits Pension plan The Company operates a defined contribution plan for its staff in accordance with the provisions of the Pension Reform Act This plan is in proportion to the services rendered to the Company by the employees with no further obligation on the part of the Company. The Company and its employees contribute 7.5% each of employees current salaries and designated allowances to the scheme. Staff contributions to the plan are funded through payroll deductions while the Company's contribution is recorded as employee benefit expense in profit or loss. The Company does not have any legal or constructive obligation to pay further amounts if the plan asset is not sufficient to fund the obligation. m) Fair value measurement The Company measures financial instruments measured at amortised cost and non-financial assets such as property, plant and equipment at fair value at each reporting date. Fair value related disclosures for financial instruments and non-financial assets that are measured at fair value or where fair values are disclosed, are summarised in the following notes: Property, plant and equipment under revaluation model Note 4 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible to by the Company. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. 25

26 The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3 Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. External valuers are involved for valuation of significant assets, such as property, plant and equipment. Involvement of external valuers is decided upon every five years or when there is a significant change in market value of the property, plant and equipment after discussion with and approval by the Company s Board of directors. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained. The Board of directors decides, after discussions with the Company s external valuers, which valuation techniques and inputs to use. The Board of director, in conjunction with the Company s external valuers, also compares the change in the fair value of the asset with relevant external sources to determine whether the change is reasonable. For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. 26

27 2.4. First-time adoption of IFRS These financial statements, for the year ended 31 December 2013, are the first the Company has prepared in accordance with IFRS. For periods up to and including the year ended 31 December 2012, the Company prepared its financial statements in accordance with Nigerian generally accepted accounting principle (Nigerian GAAP). The Company has prepared financial statements which comply with IFRS applicable for periods ending on or after 31 December 2013, together with the comparative period data as at and for the year ended 31 December 2012, as described in the summary of significant accounting policies. In preparing these financial statements, the Company s opening statement of financial position was prepared as at 1 January 2012, the Company s date of transition to IFRS. This note explains the principal adjustments made by the Company in restating its Nigerian GAAP financial statements, including the statement of financial position as at 1 January 2012 and the financial statements as at and for the year ended 31 December Exemptions applied IFRS 1 allows first-time adopters certain exemptions from the retrospective application of certain requirements under IFRS. The Company has applied the following exemption under IFRS 1: The Company measured its property, plant and equipment at fair value at the date of transition to IFRSs and used that fair value as the item s deemed cost at that date. IFRS mandatory exceptions The Company applied the following mandatory exceptions as available under IFRS 1. ESTIMATES The estimates at 1 January 2012 and at 31 December 2012 are consistent with those made for the same dates in accordance with Nigerian GAAP (after adjustments to reflect any differences in accounting policies). 27

28 Reconciliation of equity and comprehensive income as previously reported under Nigerian GAAP to IFRS The table below is a summarised reconciliation of equity and comprehensive income for 31 December 2012 and 1 January 2012 (transition date). 31 December January 2012 N-GAAP Adjustments IFRS N-GAAP Adjustments IFRS Notes Reclassification Remeasurement Reclassification Remeasurement N 000 N 000 N 000 N 000 N 000 N 000 N 000 N 000 Assets Non-current Assets Fixed assets A 39,815,024 (39,815,024) ,785,144 (39,785,144) - - Property, plant and equipment B - 41,128,341 (8,168,749) 32,959,592 41,022,122 (9,167,486) 31,854, ,815,024 1,313,317 (8,168,749) 32,959,592 39,785,144 1,236,978 (9,167,486) 31,854,636 ======== ======== ======== ======== ======== ======== ======== ======== Current assets Inventory C 1,565,709 (1,313,317) - 252,392 1,410,301 (1,236,978) - 173,323 Trade and other D 4,510, ,510,788 10,253, ,727 10,506,802 receivables Cash and cash equivalents 741, ,170 2,470, ,470, ,817,667 (1,313,317) - 5,504,350 14,133,898 (1,236,978) 253,727 13,150, Total assets 46,632,691 - (8,168,749) 38,463,942 53,919,042 - (8,913,759) 45,005,283 ======== ======== ======== ======== ======== ======== ======== ======== Liabilities Current liabilities Trade and other payables E 34,904,968 3,017, ,000 38,272,201 26,417,078 2,167,076-28,584,154 Income tax liabilities 388, , , , ,293,662 3,017, ,000 38,660,895 26,737,203 2,167,076-28,904,279 Non-current liability Employee retirement obligation F 3,017,233 (3,017,233) - - 2,167,076 (2,167,076) Total liabilities 38,310, ,000 38,660,895 28,904,279-28,904,279 ========= ======== ======== ======== ======== ======== ======== ======== 28

29 Notes 31 December January 2012 N-GAAP Adjustments IFRS N-GAAP Adjustments IFRS Reclassificatiomeasuremenclassificatiomeasurement Re- Re- Re- N 000 N 000 N 000 N 000 N 000 N 000 N 000 N 000 Equity Share capital 5, ,000 5, ,000 General reserves G 44,984,654 (44,984,654) ,984,654 (44,984,654) - - Federal government H funding 5,997,443 (5,997,443) - - 5,325,454 (5,325,454) - - Other reserves I - 5,997,443-5,997,443 5,325,454-5,325,454 Retained earnings J (42,665,301) 44,984,654 (8,518,749) (6,199,396) (25,300,345) 44,984,654 (8,913,759) 10,770, Total equity 8,321,796 - (8,518,749) (196,953) 25,014,763 - (8,913,759) 16,101,004 ======== ======== ======== ======== ======== ======== ======== ======== Total equity and liabilities 46,632,691 - (8,168,749) 38,463,942 53,919,042 - (8,913,759) 45,005,283 ======== ======== ======== ======== ======== ======== ======== ======== 29

30 Reconciliation of comprehensive income as previously reported under Nigerian GAAP to IFRS for the year ended 31 December months ending 31 December 2012 Reconciliation of profit for the period Notes N-GAAP Remeasurement Reclassification N'000 N'000 N'000 Revenue L 21,294,052-74,472 21,368,524 Cost of sales (21,550,236) 429,304 (21,120,932) Gross profit M (256,184) 429,304 74, ,592 Other income N 74,472 - (74,472) - Administrative expenses O (17,115,757) (34,294) (17,150,051) Operating profit (17,297,469) 395,010 (16,902,459) Finance income 1,082-1, Loss before tax (17,296,387) 395,010 (16,901,377) Income tax expense (68,569) - (68,569) Loss for the year (17,364,956) 395,010 (16,969,946) ========== ====== ====== ========== Other comprehensive income Total comprehensive loss for the year IFRS (17,364,956) 395,010 (16,969,946) ========== ====== ====== ========== The transition to IFRS did not have any impact on the cash flow statements presented by the Company under Nigerian GAAP. 30