MUNICIPAL DEVELOPMENT FUND OF GEORGIA Financial Statements and Independent Auditor's Report For the Period Ended 31 December 2016 MUNICIPAL DEVELOPMENT FUND OF GEORGIA TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 1 INDEPENDENT AUDITORS' REPORT 2-3 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016: Statement of profit or loss and other comprehensive income 4 Statement of financial position 5 Statement of changes in reserves 6 Statement of cash flows 7 Notes to the financial statements 8-33 MUNICIPAL DEVELOPMENT FUND OF GEORGIA STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER, 2016 Management is responsible for the preparation of the financial statements that present fairly the financial position of Municipal Development Fund of Georgia (the "Fund") as at 31 December 2016, and the results of its operations, changes in reserves and cash flows for the year ended 31 December 2016, In compliance with International Financial Reporting Standards ("IFRS"). In preparing the financial statements, management is responsible for: * Properly selecting and applying accounting policies; * Presenting Information, including accounting policies, In a manner that provides relevant, reliable, comparable and understandable Information; * Providing additional disclosures when compliance with the specific requirements In International Financial Reporting Standards ("IFRS") are insufficient to enable users to understand the Impact of particular transactions, other events and conditions on the fund's financial position and financial performance; * Making an assessment of the Fund's ability to continue as a going concern. Management is also responsible for: * Designing, implementing and maintaining an effective and sound system of Internal controls, throughout the fund; * Maintaining adequate accounting records that are sufficient to show and explain the fund's transactions and disclose with reasonable accuracy at any time the financial position of the fund, and which enable them to ensure that the financial statements of the fund comply with IFRS; * Maintaining statutory accounting records in compliance with local legislation and accounting standards; * Taking such steps as are reasonably available to them to safeguard the assets of the fund; and * Detecting and preventing fraud and other Irregularities. The financial statements of the fund for the year ended 31 December 2016 were approved by management on June 30 2017. On behalf of the Ma gmt Gala Natalie Godzij&hv Head of Financial Management and Investments Unit 30 June 2017 30 June 2017 1 Deloitte & Touche LLC 36A Lado Asstlani Street Deloitte 224 450 9 Georgia Tel: +995 (32) 224 45 66 Fax: +995 (32) 224 45 69 deloitte.ge INDEPENDENT AUDITOR'S REPORT To the management of the Municipal Development Fund of Georgia Opinion We have audited the financial statements of Municipal Development Fund of Georgia (the "Fund"), which comprise the statement of financial position as at December 31, 2016, and the statement of comprehensive income, statement of changes In equity and statement of cash flows for the year then ended, and notes to the financial statements, Including a summary of signIficant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Fund as at December 31, 2016, and Its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards ("IFRSs"). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described In the Auditor's Responsibilities for the Audit of the consolidated Financial Statements section of our report. We are independent of the Fund in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (the "IESBA Code") together with the ethical requirements that are relevant to our audit of the financial statements in Georgia, and we have fulfilled our other ethical responsibilities In accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained Is sufficient and appropriate to provide a basis for our opinion. Emphasis of Matter We draw attention to Note 5 to the financial statements which describes the restatement of corresponding figures for the year ended 31 December 2016. Our opinion is not modified In respect of this matter. Responsibilities of Management for the Financial Statements Management Is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs, and for such Internal control as management determines Is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management Is responsible for assessing the Fund's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either Intends to liquidate the Fund or to cease operations, or has no realistic alternative but to do so, Delcitte rafers to one or more of Deloitt Touche Tohmatsu Umited, a UK private company tmited by guarante (Drl.", Its network of member frms, and their related enitles. DTTL and each of its member rrns are legaty separate and independent entities. DTTL (also referred to as 'Dlolt Global) does not provide services to c!irits. please see Tpwtv deq;t crrpjatQZ for a mem detailed descrIption of OTTL and Its member Airms. C 2017 Daloitte , Touche L.C. All rights reserved. 2 Deloitte Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free From material misstatement, whether due to fraud or error, and to issue an auditor's report that Includes our opinion, Reasonable assurance is a high level of assurance, but Is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when It exists. Misstatements can arise from fraud or error and are considered material if, Individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financlal statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's Internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Fund's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the inancial statements or, if such disclosures are Inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Fund to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events In a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any signiftcant deficiencies in internal control that we identify during our audit. 30 June 2017 TbllisI, Georgia 3 MUNICIPAL DEVELOPMENT FUND OF GEORGIA STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2016 &1 GEL) Year ended Year ended 31 December 31 December Notes 2016 2015 Restated Income from loans to municipalities 6 3,446,998 3,775,908 Bank Interest Income 3,840,723 3,750,390 Other Interest income 1,907,323 718,293 Other income/(expense) 7 5,290,772 (2,246,062) Gain from exchange rate differences 6,309,470 13,164,530 Administrative expenses 8 (4,758,997) (7,130.061) Profit before Income Tax 16,036,288 12,032,998 Income tax expense 9 (959,066) (360,044) Net profi for the period 15 077,222 11,672,954 On behalf of the Manage en Galaktion Buadz Natalie GodzlasouIl Executive Dire r Head of Financil Management and Investments Unit June 30, 2017 June 30, 2017 The notes on pages 8-33 form an Integral part of these financial statements. 4 MUNICIPAL DEVELOPMENT FUND OF GEORGIA STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016 (in GEL) 31 December 13anuary 31 December 2015 2015 Notes 2016 Restated Restated ASSETS NON-CURRENT ASSETS Property, plant and equipment 10 2,495,049 2,864,974 3,172,706 Intangible assets 281,942 158,534 69,842 Deferred tax asset 9 - 68,986 112,925 Loans to municipalities 11 25,485,644 23,463,217 22,765,213 Other loans disbursed 12 30,608,993 20,697,240 5,839,462 TOTAL NON-CURRENT ASSETS 58,871,628 47,252,951 31,960,148 CURRENT ASSETS Loans to municipalities 11 6,016,231 5,527,733 10,302,245 Other loans disbursed 12 5,558,628 8,457,676 1,888,670 Other current assets 14 3,445,948 21,165 54,412 Current Income tax assets 42,139 379,150 303,259 Receivables and advances 13 94,056,012 59,319,231 65,817,860 Deposits In banks 16 30,000,000 22,600,000 30,000,000 Cash and cash equivalents 15 139,608,316 142,308,107 90,318,804 TOTAL CURRENT ASSETS 278,727,274 238,613,062 198,685,250 TOTAL ASSETS 337,598,902 285,866,013 230,645,398 RESERVES AND LIABILITIES RESTRICTED RESERVES Sources of financing 19 211,878,375 195,387,832 149,504,65 Loan revolving fund 31,013,647 27,566,775 32,139,454 UNRESTRICTED RESERVES Retained earnings 58,550,247 43,473,025 31,800,071 TOTAL RESERVES 301,442,269 266,427,632 213,444,190 LIABILITIES NON-CURRENT LIABILITIES Grants related to assets 17 2,072,538 2,177,966 2,155,220 Long-term Trade payable 18 3,420,699 Deferred income tax liability 9 349,892 - Long-term debt 12 14,693,589 - TOTAL NON-CURRENT LIABILITIES 20,536,718 2,177,966 2,155,220 CURRENT LIABILITIES Trade payables 1 15,199,915 17,260,415 15,045,988 TOTAL CURRENT LIABILITIES 15,199,915 17,260,415 15,045,955 TOTAL RESERVES AND LIABILITIES 337,598,902 285,966,013 230,645,395 On behalf of the Mana a ytr 2]o sNatalie Godzla vill E i IHead of Financial Management and Investments Unit June 30 201 June 30 2017 The notes on pages 8-33 form an integral part of these financial statements. 5 MUNICIPAL DEVELOPMENT FUND OF GEORGIA STATEMENT OF CHANGES IN RESERVES FOR THE YEAR ENDED 31 DECEMBER 2016 [ln GEL) Sources of Loan revolving Retained Total Note financing fund Earnings reserves 1 January 2015 restated 149,504,665 32,139,454 31,800,071 213,444,190 Profit for the year - - 11,672,954 11,672,954 Decrease In loan revolving fund - (4,572,679) - (4,572,679) Net financing of Implemented projects 19 45,883,167 - - 45,883,167 31 December 2015 restated 195,387,832 27,566,775 43,473,025 266,427,632 Profit for the year - 15,077,222 15,077,222 Increase in loan revolving fund 3,446,872 - 3,446,872 Net financing of implemented projects 19 16,490,543 - 16,490,543 31 December 2016 211,878,375 31,013,647 3 442, On behalf of the Management: Galaktlon Natalie Godziastivill EKeCutiV Head of Financial Management and Investments Unit nJune 30 2017 The notes on pages 8-33 form an integral part of these financial statements. 6 MUNICIPAL DEVELOPMENT FUND OF GEORGIA STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2010 {in GEL) 31 December 31 December 2015 2016 Restated Cash flow from operating activities; Income after income tax 15,077,222 11,672,954 Adjustments for: Depreciation and amortisation expense 513,181 808,959 Provision for Impairment losses on Interest-bearing assets - (593,568) Write-off of other loans disbursed 1,678,407 Recovery of assets previously written-off (1,104,133) - Income from grants related to assets (196,947) (191,702) Interest income (9,195,044) (8,244,590) Income tax expense 959,066 360,044 Foreign exchange gain (5,534,384) (13,164,530) Operating loss/(gain) before working capital changes 518,961 (7,674,026) Change in receivables and advances (34,736,781) 6,882,859 Change In other current assets (3,424,783) 33,247 Change in loans to banks (7,400,000) 7,400,000 Change In payables 1,183,320 (2,833,495) Cash inflow /(outflow) from operating activities before taxation (43,859,283) 3,808,585 Income tax paid (316,106) (391,996) Net cash inflow /(outflow) from operating activities (44,175,3589 3,416,589 Cash flows from investing activities Purchase or equipment and Intangible assets (248,205) (706,913) Interest received from municipalities and banks 8,994,679 7,022,703 Net cash flows used in investing activities 8,746,474 6,315,790 Cash flows from financing activities Cash receipt for project financing 16,490,543 45,883,168 Issuance of other loans, net (7,012,705) (17,130,547) Loans repaid by/(provided to) municipalities ,net (3,446,872) (4,572,679) Receipt of other loans 14,693,589 Net cash from financing activities 20,724,554 24,179,942 Effect of foreign exchange rate changes on cash and cash equivalents 12,004,569 18,076,982 NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (14,704,360) 33,912,321 CASH AND CASH EQUlyAktTFS,4t beginning of the period 142,308,107 90,318,804 CASH AND CASHtQIVALENTS, at end of the period 139,608,316 142,308,107 on behalf of the an a %g, Galaktion Duad i Natalie Godzshvill Executive Dire a Head of Financial Management and Investments Unit June 30 2017 June 30 2017 The notes on pages 8-33 form an Integral part of these financial statements. 7 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in GEL) 1. GENERAL INFORMATION Municipal Development Fund of Georgia (the "Fund' or "MDF") was established on 7 lune 1997 by the Presidential Decree NO 294 "On management of funds for the development of municipal sector in Georgia.The Fund is a legal entity of public law, the objective of which is to support strengthening institutional and financial capacity of local government units, Investing financial resources in local infrastructure and services, Improving on sustainable basis the primary economic and social services for the local population and the provision of low-interest loans to legal entities and physical persons of Georgia In the framework of the Government Program. The founder and governing body of the fund is the government of Georgia. The Fund is cooperating with all large investment banks and financial institutions operating in Georgia. 2. STATEMENT OF COMPLIANCE These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). 2.1 Basis of preparation These financial statements have been prepared on the assumption that the Fund Is a going concern and will continue in operation for the foreseeable future. These financial statements are presented in GEL ("GELO), unless otherwise indicated. The financial statements are prepared on a historical cost basis. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. 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, regardless of whether that prices are directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Fund takes into account the characteristics of the asset and liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/ or disclosure purposes In these financial statements is determined on such a basis. Functional currency. Items included in the financial statements are measured using the currency of the primary of the economic environment in which the entity operates ("the functional currency"). The functional currency of the Fund is the Georgian Lari ("GEL"). The presentational currency of the consolidated financial statements of the Fund is the GEL. Offsetting. Financial assets and financial liabilities are offset and the net amount reported In the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expense Is not offset in the consolidated statement of profit or loss unless required or permitted by any accounting standard or Interpretation, and as specifically disclosed in the accounting policies of the Group. The principal accounting policies are set out below. 2.2 Interest income Interest Income on loans to municipalities is allocated to accounting periods so as to reflect a constant periodic rate of return on the Fund's net Investment outstanding in respect of the loans. Interest income is recognized based on an accrual basis. 2.3 FInancial instruments Financial assets and financial liabilities are recognised when a Fund becomes a party to the contractual provisions of the instrument, 8 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL2 Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Financial assets Financial assets are classified into the following specified categories: financial assets 'at fair value through profit or loss' (FVTPL), 'held-to-maturity' investments, 'available-for-sale' (AFS) financial assets and 'loans and receivables'. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. The principal financial assets of the Fund are cash and cash equivalents and loans disbursed to municipalities, which are classified as loans and receivables. Loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including cash and cash equivalents and loans disbursed to municipalities) are measured at amortised cost using the effective interest method, less any impairment. Interest income Is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial. The Fund derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. The difference between the carrying amount of the financial asset derecognised and the consideration received and receivable is recognised in statement of comprehensive income. Impairment of financial assets - Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. For Fund's financial assets, objective evidence of impairment could Include: * Significant financial difficulty of the issuer or counterparty; or * Breach of contract, such as default or delinquency in interest or principal payments; * Default or delinquency in interest or principal payments; or * It becoming probable that the borrower will enter bankruptcy or financial re-organisation; or * Disappearance of an active market for that financial asset because of financial difficulties. For certain categories of financial asset, such as loans and receivables, assets that are assessed not to be impaired Individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of loans and receivables could include the Fund's past experience of collecting payments, an increase in the number of delayed payments in the portfolio, as well as observable changes in national or local economic conditions that correlate with default on receivables. For financial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate. For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset's carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such Impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of loans and receivables, where the carrying amount is 9 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) reduced through the use of an allowance account. When a loan or a receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the Impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment does not exceed what the amortized cost would have been had the impairment not been recognized. Financial liabilities Financial liabilities are initially measured at fair value, net of transaction costs. Financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. The Fund derecognises financial liabilities when, and only when, the Fund's obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable Is recognised in statement of comprehensive Income. 2.4 Foreign currencies In preparing the financial statements, transactions in currencies other than the Fund's functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary Items are recognized in profit or loss in the period in which they arise. 2.S Corporate Income tax Corporate Income tax includes current and deferred taxes. Current Corporate Income tax is applied at the rate of 15% on taxable income generated by the Fund during the taxation period. Deferred Corporate Income tax arising from temporary differences In the timing of the recognition of items In the tax returns and these financial statements is calculated using the liability method. The Deferred Corporate Income tax asset and liability are determined on the basis of the tax rates that are expected to apply when the timing differences reverse. The principal temporary timing differences arise from differing rates of accounting and tax amortization and depreciation on the Fund's non-current assets, the treatment of temporary provisions and accruals. 2.6 Property Plant and Equipment Equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is recognised so as to write off the cost less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis at the following annual rates: Equipment and machinery - 5 years Motor vehicles - 5 -10 years Furniture and other - 5 -10 years Leasehold improvement - 20 years Depreciation is calculated starting with the following month after the asset is put into operation or engaged in commercial activity. The carrying values of equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. The recoverable amount of equipment is the higher of an asset's net selling price and its value in use. In assessing the value in use, the estimated future cash flows are discounted to their present 10 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL2 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. For an asset that does not generate largely Independent cash inflows, the recoverable amount Is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in the Income statement In the Impairment caption. An Item of equipment Is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the Item) Is Included in the income statement in the year the Item Is derecognized. 2.7 Cash and cash equivalents Cash and cash equivalents consist of cash on hand, unrestricted balances on corresponded and term deposits with the commercial banks and state treasury with original maturity of less or equal to 90 days and amounts due from credit Institutions with original maturity of less or equal to 90 days and are free from contractual encumbrances. 2.8 Grants related to assets Grants related to assets are recognised as deferred income when they are received. Recognition in Profit and Loss is done on systematic basis over the periods In which the entity recognises expenses for the related costs for which grants are intended to compensate. Government grants are recognised at fair value when there is reasonable assurance that the entity will comply with the conditions attaching to them and the grants will be received. Assets received for indefinite use by way of government grants are capitalised at fair value at the point of the transfer of the asset. Grants related to the transfer of assets are treated as deferred income and allocated to the income statement over the useful lives of the related assets. 2.9 Reserves Reserves are restricted if the related funds are restricted by the donors for implementation of specific projects. In the statement of changes in reserves the restricted reserves are composed of the sources of financing and the loan revolving fund, Sources of financing - Sources of financing represent the net cumulative financing received and the respective expenditures incurred for the implementation of the projects. Project financing is recognised as sources of funds in the period when the cash inflow can be reasonably estimated and they become available and measurable. Expenditure Is recognised on an accruals basis as a use of project funds when liabilities are incurred. Loan revolving fund - Loan revolving fund represents donor financing received for the purposes of providing loan financing to municipalities. In the statement of changes In reserves Increases or decreases of the loan revolving fund are presented net. 3. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSS) Amendments to IFRSs affectino amounts reported in the financial statements In the current year, the following new and revised Standards and Interpretations have been adopted and have affected the amounts reported in these financial statements: Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception; Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations; Amendments to IAS 1 Disclosure Initiative; Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation; Amendments to IAS 16 and 1AS 41 Agriculture: Bearer Plants; IFRS 14 Regulatory Deferral Accounts; Amendments to IAS 27 - Equity Method in Separate Financial Statements; 11 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) Annual Improvements to IFRSs 2012-2014 Cycle Amendments to LAS 1 Disclosure Initiative The Company has applied these amendments for the first time in the current year. The amendments clarify that an entity need not provide a specific disclosure required by an IFRS if the information resulting from that disclosure is not material, and give guidance on the bases of aggregating and disaggregating information for disclosure purposes. However, the amendments reiterate that an entity should consider providing additional disclosures when compliance with the specific requirements in IFRS is Insufficient to enable users of financial statements to understand the impact of particular transactions, events and conditions on the entity's financial position and financial performance. In addition, the amendments clarify that an entity's share of the other comprehensive income of associates and joint ventures accounted for using the equity method should be presented separately from those arising from the Group, and should be separated into the share of items that, in accordance with other IFRSs: (i) will not be reclassified subsequently to profit or loss; and (ii) will be reclassified subsequently to profit or loss when specific conditions are met. As regards the structure of the financial statements, the amendments provide examples of systematic ordering or grouping of the notes. The application of these amendments has not resulted in any impact on the financial performance or financial position of the Company. Annual Improvements to IFRSs - 2012-2014 Cycle The Company has applied these amendments for the first time in the current year. The Annual Improvements to [FRSs 2012-2014 Cycle include a number of amendments to various IFRSs, which are summarised below. The amendments to IFRS 5 Introduce specific guidance in IFRS 5 for when an entity reclassifies an asset (or disposal group) from held for sale to held for distribution to owners (or vice versa). The amendments clarify that such a change should be considered as a continuation of the original plan of disposal and hence requirements set out in IFRS 5 regarding the change of sale plan do not apply. The amendments also clarifies the guidance for when held-for-distribution accounting is discontinued. The amendments to IFRS 7 provide additional guidance to clarify whether a servicing contract is continuing involvement in a transferred asset for the purpose of the disclosures required in relation to transferred assets. The amendments to IAS 19 clarity that the rate used to discount post-employment benefit obligations should be determined by reference to market yields at the end of the reporting period on high quality corporate bonds. The assessment of the depth of a market for high quality corporate bonds should be at the currency level (I.e the same currency as the benefits are to be paid). For currencies for which there is no deep market In such high quality corporate bonds, the market yields at the end of the reporting period on government bonds denominated In that currency should be used instead. The application of these amendments has had no effect on the Company's financial statements. New and revised IFRSs in issue but not yet effective The Company has not applied the following new and revised IFRSs that have been issued but are not yet effective: * IFRS 9 Financial Instruments2; * IFRS 15 Revenue from Contracts with Customers (and the related Clarifications); * IFRS 16 Leases3 * Amendments to IFRS 2 - Classification and Measurement of Share-based Payment Transactions2; 12 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) Amendments to IFRS 10 and IAS 28 - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture4; * Amendments to IAS 7 - Disclosure Initiative'; * Amendments to IAS 12 - Recognition of Deferred Tax Assets for Unrealised Losses'; * Amendments to IFRS 4 - Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts'; * IFRIC 22 Foreign Currency Transactions and Advance Consideration2; * Amendments to IAS 40 - Transfers of Investment Property2; * Annual Improvements to IFRSS 2014-2016 Cycle. 1 Effective for annual periods beginning on or after 1 January 2017, with earlier application permitted. 2 Effective for annual periods beginning on or after 1 January 2018, with earlier application permitted. 3 Effective for annual periods beginning on or after 1 January 2019, with earlier application permitted. 4 Effective for annual periods beginning on or after a date to be determined. Earlier application is permitted. IFRS 9 Financial Instruments IFRS 9 Issued in November 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a 'fair value through other comprehensive Income' (FVTOCI) measurement category For certain simple debt instruments. The key requirements of IFRS 9 are: * Classification and measurement of financial assets. All recognised financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and Interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. Debt Instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are generally measured at FVTOC. All other debt investments and equity Investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an Irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading nor contingent consideration recognised by an acquirer in a business combination to which IFRS 3 applies) in other comprehensive income, with only dividend Income generally recognised in profit or loss. * Classification and measurement of financial liabilities. With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of a financial liability that is attributable to changes in the credit risk of that liability is presented In other comprehensive income, unless the recognition of such changes in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss, Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss. o Impairment. In relation to the impairment of financial assets, IFRS 9 requIres an expected credit loss model, as opposed to an Incurred credit loss model under [AS 39. The expected credit loss model requires an entity to account for expected credit losses and changes In those expected credit losses at each reporting date to reflect changes in credit risk since 13 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) Initial recognition, In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised. Hedge accounting. The new general hedge accounting requirements retain the three types of hedge accounting mechanisms currently available in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an 'economic relationship'. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity's risk management activities have also been introduced. IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related Interpretations when it becomes effective. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition: * Identify the contract with the customer; * Identify the performance obligations In the contract; * Determine the transaction price; * Allocate the transaction price to the performance obligations in the contracts; * Recognise revenue when (or as) the entity satisfies a performance obligation. Under IFRS 15, an entity recognises revenue when or as a performance obligation is satisfied, I.e. when 'control' of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added In IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15. In April 2016, the IASB issued Clarifications to IFRS 15 In relation to the identification of performance obligations, principal versus agent considerations, as well as licensing application guidance. IFRS 16 Leases IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. IFRS 16 will supersede the current lease guidance including IAS 17 Leases and the related interpretations when it becomes effective. IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset Is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and is replaced by a model where a right- of-use asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of low value assets. The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Furthermore, the classification of cash flows will also be affected as operating lease payments under IAS 17 are presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively. 14 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (ln GEL) In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements In IAS 17, and continues to require a lessor to classify a lease either as an operating lease or a finance lease. Furthermore, extensive disclosures are required by IFRS 16. Amendments to LAS 7 Disclosure Initiative The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendments apply prospectively for annual periods beginning on or after 1 January 2017 with earlier application permitted. The management of the Company does not anticipate that the application of these amendments will have a material impact on the Company's financial statements IFRIC 22 Foreign Currency Transactions and Advance Consideration The Interpretation clarifies that when an entity pays or receives consideration In advance in a foreign currency, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income is the date of the advance consideration, i.e. when the prepayment or liability in respect of the income received in advance was recognised, If there is more than one advance payment or receipt the date of the transaction for each payment of receipt of advance consideration should be determined. The amendments apply to annual periods beginning on or after 1 January 2018 with earlier application permitted. Entitles may elect to apply amendments either retrospectively or prospectively. The management of the Company does not anticipate that the application of this IFRIC will have a material Impact on the Company's financial statements as the Company currently uses the approach prescribed in IFRIC 22. Amendments to IAS 40 Transfers of Investment Property The amendments are intended to clarify that an entity can only reclassify a property to/ from Investment property when, and only when, there is evidence that a change in the use of the property has occurred. The amendments emphasise that a change In management's intentions alone would not be enough to support a transfer of property. The standard has a list of circumstances that evidence a change in use, which is perceived by some as being exhaustive, the amendments make it clear that they are only examples. The amendments apply to annual periods beginning on or after 1 January 2018 with earlier application permitted. Entities may elect to apply them either retrospectively (if it is possible without the use of hindsight) or prospectively. The management of the Company does not anticipate that the application of these amendments will have a material impact on the Company's financial statements as the Company does not hold any Investment property. Annual Improvements to IFRS 2014-2016 Cycle This annual improvements package amended three standards: The Amendments to IFRS 1 delete the short-term exemptions that related to disclosures about financial instruments, employee benefits and investment entitles as the reporting period to which the exemptions applied have already passed and as such, these exemptions are no longer applicable. The amendments are effective for annual periods beginning on or after 1 January 2018. The amendments to IFRS 12 clarify that concession from the requirement to provide summarised financial information In respect of Interests in subsidiaries, associates or joint ventures classified as held for sale or included in a disposal group is the only concession available for such Interests. The amendments apply retrospectively and are effective for annual periods beginning on or after 1 January 2017. 15 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) In accordance with IAS 28, a venture capital organisation and other similar entities may elect to measure investments in associates and joint ventures at FVTPL. In addition, an entity that is not an investment entity but has an interest in an associate or joint venture that is an Investment entity, may, when applying the equity method, elect to retain the fair value measurement applied by that associate or joint venture to its own interests in subsidiaries. Amendments to IAS 28 clarify that such election should be made separately for each associate or joint venture at initial recognition. The amendments apply retrospectively and are effective for annual periods beginning on or after 1 January 2018. Early application is permitted. The management does not anticipate that the application of these amendments will have a material impact on the Company's financial statements. 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Fund's accounting policies, which are described in note 4, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate Is revised If the revision affects only that period, or In the period of the revision and future periods if the revision affects both current and future periods The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Impairment allowance a) Assets carried at amortized cost The Fund assesses at each reporting date whether there is objective evidence that a group of financial assets is impaired. A group of financial assets is impaired and impairment losses are incurred only if there Is objective evidence of Impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an Impact on the estimated future cash flows of the group of financial assets that can be reliably estimated. The criteria that the Fund uses to determine that there is objective evidence of an impairment loss include: (a) adverse changes in the payment status of borrowers in the portfolio of financial assets, i.e. financial assets whose interest and principal payments are past due; (b) termination of agreement due to a breach of contract by the borrower, such as a default or delinquency in Interest, principal and/or penalty payments. The Fund assesses whether objective evidence of impairment exists collectively for a group of financial assets with similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors' ability to pay all amounts due according to the contractual terms of the assets being evaluated. The amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows 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 amount of the loss is recognized in the income statement. Future cash flows In a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Fund and historical loss experience for assets with credit risk characteristics similar to those In the Fund. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current 16 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes In related observable data from period to period (for example, levels of arrears, or other factors indicative of changes in the probability of losses and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the management to reduce any differences between loss estimates and actual loss experience. When a receivable is uncollectible, it Is written off against the related allowance for receivable impairment. Such receivables are written off after all the necessary procedures have been completed and the amount of the loss has been determined. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the accounts receivable aging), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the income statement. b) Renegotiated financial assets Financial assets that are subject to collective Impairment assessment and whose terms have been renegotiated are no longer considered to be past due but are treated as new assets. In subsequent years, the asset is considered to be past due and disclosed only if renegotiated again. Deferred income tax asset Deferred income tax is provided in full using the liability method for tax losses carried forward and on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the balance sheet. Deferred taxation relates to the future tax consequences of all events that have been recognised in the Fund's financial statements. Deferred income tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Taxation Georgian tax legislation in particular may give rise to varying interpretations and amendments. In addition, as management's interpretation of tax legislation may differ from that of the tax authorities, transactions may be challenged by the tax authorities, and as a result the Fund may be assessed additional taxes, penalties and interest. The Fund believes that it has already made all tax payments, and therefore no allowance has been made in the financial statements. Tax years remain open to review by the tax authorities for six years. 5. RESTATEMENT According to the Company's accounting policy, government grants received in a form of a free of charge transfer of non-monetary assets are accounted for at fair value at the date of transfer, Subsequent to the issuance of the Company's 2015 financial statements, the Company's management determined that certain government grant received in the form of a free of charge transfer of an administrative building was not measured and presented in accordance with the Company's accounting policy in the previously issued financial statements, Instead, the transferred asset and the related liability were shown at the nominal amount, which was zero. As a result of the departure from the accounting policy the Company's property plant and equipment, related grant liability, administrative expenses and other expenses were misstated. 17 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) The effects of the restatement and reclassifications on the financial position as at December 31, 2016 and December 31, 2015 and January 1, 2015 are presented in the table below: As Previously reotdA smnsA ettd __ 1 31 1 31 1 31 January December January December January December 2015 2015 2015 2015 2015 2015 Property, plant and equipment 1,121,672 971,712 2,051,034 1,893,261 3,172,706 2,864,973 Grants related to assets 104,186 284,704 2,051,034 1,893,261 2,155,220 2,177,966 The effect of the restatements and reclassification on the statement of comprehensive income for the year ended 31 December 2015 is as follows: As previously reported As Restated December December 31,2015 Adjustments 31.,2015 Other Income/(expense) (2,403,834) 157,772 (2,246,062) Administrative expenses (6,972,289) (157,772) (7,130,061) Restatements have no effect on the statement of cash flows for the year ended 31 December 2015. 6. INCOME FROM LOANS TO MUNICIPALITIES 31 December 31 December 2016 2015 Interest income 3,438,546 3,770,715 Penalty income 8,452 5,193 Total 3,446,998 3,775908 18 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL)J The breakdown of interest income from loans to municipalities is as follows: For the year For the year ended 31 ended S December December Municipality 2016 2015 Rustavi 377,695 457,353 Zugdidi City 333,529 400,781 Kobuletl 313,723 357,402 Kutalsi 200,478 57,674 Gurjaanl 195,245 235,221 God 180,326 80,534 Sighnaghl 157,351 85,730 BolnIst 142,722 173,074 Tsalenjikha 130,171 49,673 Telavi City 123,760 144,757 Tetritskaro 123,645 17,525 Dusheti 122,658 153,067 Mestia 95,794 22,017 Mtskheta 90,156 109,490 Kaspi 86,093 27,617 Marneull 84,656 102,535 Zestafoni 80,151 66,297 Akhalqalaqi 73,264 88,835 Batumi 72,274 110,628 Khobi 70,382 84,462 Lagodekhi 69,916 83,923 Poti 68,521 346,663 Martvill 62,429 4,229 Gardabani 51,124 60,956 Telavi 46,171 57,684 Mtskheta City 40,720 50,870 Borjoml 30,227 43,318 Lentekhi 3,024 4,529 Ozurgeti 2,880 4,399 Sagarejo 2,753 4,292 Oni 2,635 4,197 Akhaltsikhe City 2,634 4,203 Gori City 1,057 20,343 Ozurgeti City 382 32,723 Tbilisl - 223,714 Akhaltsikhe Total, 3,438,546 3,770,715 7. OTHER INCOME/(EXPENSE) 31 December 31 December 2016 2015 Income from grants related to assets 196,947 191,702 Income from bank guarantees 3,735,049 Accrual of lability to state budget related to penalties received - (1,869,862) Other 1,358,776 (567,902) Total 5,290,772 (2,246,062) 19 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) 8. ADMINISTRATIVE EXPENSE 31 December 31 December 2016 2015 Employee benefits 4,225,165 4,246,244 Depreciation and amortization 513,181 808,958 Office expenses 132,755 134,407 Trips, transportation, advertising and representation expenses 379,897 360,723 Audit and consulting 27,675 35,282 Communication costs 10,984 13,080 Insurance expenses 290,129 177,340 Representative expenses 22,948 11,315 Provision/(reversal) for doubtful receivables - (593,568) (Recovery of assets previously written off)/ write-off of assets (1,104,134) 1,678,407 Other 260,397 257,873 Total 4,758,997 7,130,061 9. INCOME TAX EXPENSE The tax rate used for the 2016 and 2015 reconciliations and assessment of deferred taxes below is the corporate tax rate of 15% payable by corporate entities in Georgia on taxable profits under the tax law in Georgia. The main components of the income tax for the year ended 31 December 2016 and period ended 31 December 2015 were as follows: 31 December 31 December 2016 2015 Current income tax expense 540,188 316,105 Deferred income tax expense (benefit) 418,878 43,939 Corporate income tax charged to the statement of profit or loss and other comprehensive Income 959,066 360,044 Actual Corporate Income tax charge, if compared with theoretical calculations: 31 December 31 December 2016 2015 Profit before tax 16,036,288 12,032,998 Tax at the applicable rate of 15% (2,405,443) (1,804,950) Tax effect of permanent differences 1,446,377 1,444,906 Actual corporate Income tax benefit/(expense) for the reporting period 959,066 360,044 Temporary differences as at 31 December 2016 and 31 December 2015 were due to: 31 December 31 December 2016 2015 Deferred corporate income tax asset Property, plant and equipment 83,456 156,989 Intangible assets 1,032 1,032 Receivables and advances (434,380)L (89035) Net deferred corporate Income tax asset (349,892) 68,986 20 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) As at 31 December 2016 and 2015, deferred tax asset was as follows: 31 December 31 December 2016 2015 Deferred tax asset at the begining of the period 68,986 112,925 Change in deferred Income tax balances recognized in profit or loss (418,878) (43,939) Deferred tax asset as at 31 December (349,892) 68,986 10. PROPERTY PLANT AND EQUIPMENT Leasehold Equipment improvem and Motor Furniture Land Buildings ent machinery Vehicles and other Total Cost As at 1 January 2015 857,519 2,367,127 1,163,652 1,229,123 1,456,593 279,235 7,353,251 Additions - 17,648 235,410 299,327 144,508 696,893 Disposals - (256,646) _221,648 (141,950) 20244 31 December 2015 857,519 2,367,127 1,181,300 1,207,889 1,534,272 281,793 7,429,900 Additions 3,955 86,000 18,460 29,850 138,265 Write-off - (108,382) - (99,767) (208,149) Disposals 31 December 2016 r57,519 2,367,127 1,105,235 1,185,507 1,552,732 211,076 7,360,016 Accumulated depreciation As at 1 January 2015 275,909 828,494 1,108,304 929,213 825,345 213,280 4,180,545 Charge for the period 39,416 118,356 59,065 156,792 293,695 109,992 777,316 Eliminated on disposal - (223,963) (82.606 365) (392,934) 31 December 2015 315,325 946,850 1,167,369 862,042 1,036,434 236,907 4,564,927 Charge for the period 39,416 118,356 13,931 173,792 88,995 73,700 508,190 Eliminated on disposal - (108,382) - (99,769) (208,150) 31 December 2016 354,741 1,065,206 1,181,300 927,452 1_125.429 210838 4,864,966 Carrying amount as at 31 December 2016 502,778 1,301,921 3,954 258,055 427,303 _ 1038 2,495,049 Carrying amount as at 31 December 2015 342,194 1,420r277 13,931 345,847 497,838 44887 2rB64,974 Carrying amount as at 1,538,63 1 January 2015 5 1,538,633 3 55,348 29,3 631,248299,912 65 955 21 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) In the year 2007, MDF received from the Ministry of Economy of Georgia an administrative building and land, located at 150 Agmashenebeli Avenue, Tbilisi, Georgia, under the terms of "usufruct". According to the agreement, MDF can use the building for the whole period of the Fund's existence. The Building together with the attached land was not recognized in entity's financial statements in previous reporting periods. The transfer of the building is the scope of [AS 20. Government grants are assistance by government in the form of transfers of resources to an entity In return for past or future compliance with certain conditions relating to the operating activities of the entity. The grants may take various forms, including a transfer of non-monetary resources for the entity's own use. Under IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors- an entity should select an accounting policy and apply it consistently to all non-monetary grants. The effect of the restatements and reclassifications on the financial position as at 31 December and 1 January 2015 Is presented in note 5 and disclosure note above. 11. LOANS TO MUNICIPALITIES 31 December 31 December 2016 2015 Current portion 6,016,231 5,527,733 Long-term portion 25,485,644 23,463,217 Total: 31,501,875 28,990,950 Current portion of loans to municipalities include the following: 31 December 31 December 2016 2015 Principal receivable 5,528,003 5,245,590 Interest receivable 480,676 280,311 Penalties receivable 7.552 1,832 Total: 6,016,231 5,527,733 Current Non-current Total Municipality Portion portion 2016 Kutalsl 317,767 3,716,545 4,034,312 Batumi 140,291 391,643 531,934 Ozurgeti 15,198 1,371 16,569 Rustavl 716,321 2,064,158 2,780,479 Gori 128,308 1,474,362 1,602,670 Poti 126,211 367,627 493,838 Zugd[di City 608,839 1,866,724 2,475,563 Zestafoni 203,539 1,159,744 1,363,283 Telavi 115,266 213,074 328,340 Telavi City 211,227 715,877 927,104 Borjoml 67,568 139,568 207,136 Dushetl 291,063 586,707 877,770 Akhalqalaqi 155,892 378,333 534,225 Khobi 140,948 376,587 517,535 Akhaltsikhe City 14,270 - 14,270 Marneull 177,572 440,281 617,853 Mtskheta 195,411 458,697 654,108 Mtskheta City 101,646 187,898 289,544 Oni 14,308 - 14,308 Sagarejo 15,392 - 15,392 Tsalenjikha 124,680 1,061,490 1,186,170 Kaspl 249,597 1,102,381 1,351,979 Boinisi 303,882 736,725 1,040,607 22 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (In GEL) Gardabani 98,408 279,482 377,890 Gurjaani 400,257 1,030,721 1,430,978 Lagodekhl 140,243 373,752 513,995 Lentekhi 28,434 2,652 31,086 Sighnaghi 125,275 1,269,668 1,394,942 Kobuled 437,334 1,962,823 2,400,157 Mestia 198,044 1,260,813 1,458,857 Martvill 69,299 823,338 892,637 Tetritskaro 83,741 1,042,603 1,126,344 Total: 6,016,231 25,485,644 31,501,875 Current Non-current Total Portion portion 2015 Municipality TbilisI 885,518 18,301 903,819 Kutalsi 59,964 75,060 135,024 Batumi 140,479 531,933 672,412 Ozurget 13,493 16,569 30,062 Ozurgeti City 30,595 30,595 Rustavi 663,585 2,780,579 3,444,164 God 129,986 1,602,670 1,732,656 Gori City 26,916 - 26,916 Poti - - - Zugdldl City 563,821 2,475,663 3,039,484 Zestafoni 118,655 366,657 485,312 Telavi 102,293 328,340 430,633 Telavi City 187,452 927,104 1,114,556 Borjomi 94,669 207,136 301,805 Dusheti 263,464 877,770 1,141,234 Akhalqalaq[ 138,344 534,225 672,569 Khobi 125,092 517,535 642,627 Akhaltsikhe City 13,926 14,270 28,196 Marneull 158,848 617,853 776,701 Mtskheta 173,419 654,107 827,526 Mtskheta City 90,205 289,544 379,749 OnI 13,877 14,308 28,185 Sagarejo 13,687 15,392 29,079 Tsalenjlkha 73,971 1,115,126 1,189,097 Kaspi 36,956 545,503 582,459 Bolnisi 269,682 1,040,608 1,310,290 Gardabani 87,332 377,891 465,223 Gurjaani 355,213 1,431,079 1,786,292 Lagodekh] 124,588 513,995 638,583 Lentekhl 18,838 17,760 36,598 Sighnaghl 120,981 1,394,943 1,515,924 Kabuleti 388,114 2,400,257 2,788,371 Mestia 22,017 609,396 631,413 Martviii 4,229 56,035 60,264 Tetritskaro 17,524 1,095,608 1,113,132 Total: 5,527,733 23,463,217 28,990,950 23 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) Current Non-current Portion portion Municipality Tbilisi 1,646,454 903,830 Kutaisi 684,797 61,860 Batun 434,853 672,415 Ozurgeti 350,538 60,652 Rustavi 685,277 3,444,164 Gori 215,364 26,210 Pod 3,179,545 589,223 Zugdidi City 577,664 3,039,484 Zestafonl 126,823 485,312 Telavi 265,811 1,545,189 Borjomi 107,294 301,805 Dusheti 243,485 1,141,234 Akhalqalaql 122,773 672,569 Khobi 111,005 642,621 Akhaltsikhe City 12,359 28,196 Marneull 140,969 776,701 Mtskheta 233,974 1,207,276 Oni 12,315 28,185 Sagarejo 12,148 29,079 Tsalenjlkha 15,223 30,027 Kaspl 12,088 29,013 Bolnisi 239,330 1,310,289 Gardabani 77,500 465,222 Gurjaani 315,231 1,786,291 Lagodekhi 110,453 638,455 Lentekhi 11,899 31,169 Sighnaghi 12,642 30,371 Kobulets 344,431 2,788,371 Total; 10,302,245 22,765,213 Loans to municipalities represent loans disbursed by MDF to Local self-governments within the scope of different projects financed by International Financial Institutions and Implemented by MDF, Loans are disbursed to municipalities for implementing the sub-projects for the rehabilitation and expansion of priority municipal services and Infrastructure needs. Loans carry an interest rate of 12% and are disbursed for an average period of 10 years. Loans issued to municipalities are unsecured. No provision for impairment of loans balances is made, as the management considers that there is no objective evidence of impairment since loans origination. There are no overdue balances as at the end of 2016 and 2015. 12. OTHER LOANS DISBURSED 31 31 December December 2016 2015 Current portion 5,558,628 8,457,676 Long-term portion 30,608,993 20,697,240 Total: 36,167,621 29,154,916 Current portion of other loans disbursed include the following: 31 December 31 December 2016 2015 Principal receivable 5,558,628 8,015,813 Interest receivable 441,863 Total: 5,558,628 8,457,676 24 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) Interest 31 December 31 December 2016 2015 Loans disbursed to Municipalities under Refinancing Solid Waste Management Project A rate +0.5% 14,693,399 Loans disbursed to Tbilisi City hall B 10.5% (Principal) 12,743,813 18,063,692 Loans disbursed to United Water Supply C 12% Company of Georgia 2,090,519 2,143,361 Loans disbursed to commercial banks 0 3% 6,639,890 8,506,000 Interest receivable from the loans to Tbilisi City hail 441,863 Total: 36,167,&21 29,154,916 A: During the year 2016 GeorgIan Government received a long-term loan from the European Bank for Reconstruction and Development (EBRD) for the execution of Solid Waste Management project. Under the subsidiary loan agreement between Georgia and MDF, the loan proceeds were received by MDF, which in its turn transferred the loan to the ultimate beneficiary municipalities. Original currency of the loan from EBRR in Euro. Long-term debt of GEL 14,693,589 is recorded In the financial position of the fund. The loan was received in Euro and further disbursed to Municipalities in Georgian lari therefore causing foreign exchange effect of GEL190. B: In 2015 MDF disbursed loan to Tbilisi City Hall based on respective government decree. The loans proceeds should be used by the City Hall for capital investments, specifically, for rehabilitation and development of city roads. C: During the previous years MDF had disbursed loans to the Poti Municipality for the infrastructure projects. The right of use of the related assets, together with the respective liability for the loan disbursed by MDF, was transferred from the municipality to the United Water Supply Company of Georgia by the Government decree. D: MDF disbursed loans to the commercial banks from the proceeds of the grant received from KfW, a German government-owned development bank. The loans were disbursed to the commercial banks for the purpose of providing financial resources to private and municipal operators of existing small scale hydro power plants and geothermal facilities. 13. RECEIVABLES AND ADVANCES 31 December 31 December 2016 2015 Financal assets Receivables from terminated contracts 3,547,258 2,721,522 Receivables from municipalities 1,171,053 3,303,211 Other receivables 1,358,458 822,450 6,076,769 6,847,183 Non-financial assets Advances to suppliers 88,381,147 52,873,952 88,381,147 52,873,952 Provision for doubtful receivable (401,904) (401,904) Total: 94,056,012 59,319,231 Advances to contractors are paid within the scope of projects signed between the Government of Georgia and Donor Organizations for which the implementing agency is MDF. Advances to 25 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) contractors include payments to construction companies in the amount of GEL 74,421,566 for the year ended 2016 (GEL 48,537,127 for the year ended 2015) for the construction and rehabilitation of the infrastructure in different regions, GEL 13,595,187 for acquisition of goods (GEL 3,840,345 for the year ended 2015), GEL 336,208 for supervision of construction works (GEL 608,730 for the year ended 2015) and GEL 28,186 for other services (GEL 45,481 for the year ended 2015). Advances are fully redeemed when the performance of works and services is 80-90% complete by the contractor. Receivables from municipalities represent the share of municipalities co-financing for the municipal projects Implemented by MDF. As at 31 December 2016 and 2015, movement in the provision for doubtful receivable was as follows: 31 December 31 December 2016 2015 Provision for doubtfull receivable at the begining of the period 401,904 995,472 Additional provision recognised during the year Reversal of provision recognised in prior periods (593.568) Provision for doubtfull receivable at the end of the period 401,904 401,904 14. OTHER CURRENT ASSETS 31 December 31 December 2016 2015 Bank Guarantee Receivable 3,308,500 - Other 137,448 21,165 Total 3,445,948 21,165 The supplier has defaulted on its performance obligations, which was secured by the bank guarantee. MDF claimed for the guarantee and recognized sum as other current asset and income in Its financial statements. The amount is restricted cash from bank as at the date of signing the financial statements. 15. CASH AND CASH EQUIVALENTS 31 December 31 December 2016 2015 Commercial bank accounts 300,001 1,907,556 State treasury accounts 139,308,315 140,400,551 Total 139,608,316 142,308,107 16. DEPOSITS IN BANK 31 December 31 December 2016 2015 Time deposits 15,000,000 12,000,000 Deposit certificates 15,000,000 10,600,000 Total 30,000,000 22,600,000 26 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) 17. GRANTS RELATED TO ASSETS 31 31 December December 1 January 2016 2015 2015 Balance at the begining of the period 2,177,966 2,155,219 2,341,701 Received during the year 91,519 214,449 - Credited to profit and loss (196,947) (191,702) (186,482) Balance at the end of the period 2072538 2,177,966 2,155,219 18. TRADE PAYABLES 31 December 31 December 2016 2015 Financial liabilities Retentions payable to contractors 15,529,704 12,765,988 Trade accounts payable 2,335,204 2,146,160 Other payables 225,602 163221 18,090,510 16,535,369 Non-financial liabilities Advances received from municipalities 950,104 704,041 Taxes other than Income tax 21,005 725,046 Total 19,040,614 17,260,415 MDF retains 5-10% of the invoice amounts for the construction works in the framework of implemented project expenditures for possible future losses, These amounts are subject to payment to constructors one year after the construction works are completed. 19. SOURCE OF FINANCING 31 December 31 December 2016 2015 World Bank 741,797 22,777,477 Asian Development Bank 412,677 22,498,364 European Bank for Reconstruction and Development 2,996,002 (538,908) Government of Georgia 12,110,589 20,746,769 United States Agency for International Development (959,515) 6,310,631 KfW 938,894 (875,720) Government of France (875,581) Government of Netherlands (328,384) European investment Bank (15,464,270) (28,788,745) European Union 27,234,598 4,566,362 Swedish International Development Agency 2,096,186 856,452 Municipalities (3,247,768) 3,601,934 MDF (9,164,682) (5,271,449) Net financing of Implemented projects 16,490,543 45,883ri67 27 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) {in GEL) 20. RELATED PARTIES TRANSACTION AND OUTSTANDING BALANCES Related parties may enter into transactions, which unrelated parties might not, and transactions between related parties may not be effected on the same terms and conditions as transactions between unrelated parties. The fund is owned by State of Georgia. It has transactions with entities owned by the state of Georgia, referred as government related entities below. These transactions are conducted In the ordinary course of the fund's business on terms comparable to those with other entities that are non-government related entities. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. The Fund had the following balances and transactions with related parties: December 31, 2016 December 31, 2015 Total category Total category as per the as per the financial financial Related party statements Related party statements balances caption balances caption NON-CURRENT ASSETS Loans to munIcipalities 25,485,644 25,485,644 23,463,217 23,463,217 CURRENT ASSETS Loans to municipalities 6,016,231 6,016,231 5,527,733 5,527,733 Receivables and advances 4,632,620 94,056,012 6,750,855 59,319,231 Cash and cash equivalents 139,608,316 139,608,316 140,400,551 142,308,107 CURRENT LIABILITIES Trade payables 950,104 19,040,614 704,041 17,260,415 The total number of headcount of hirectors and other member of key managment amounted to 14 in both reporting periods December 31,2016 and December 31,2015. The remuneration of directors and other members of key management members were as follows: 31 December 2016 31 December 2015 Total Total category as category per the as per the Related financial financial party statements Related party statements transactions caption transactions caption Key management personnel compensation 231,514 4,225,165 287,830 4,246,244 Included in the statement of profit or loss for the years ended December 31, 2016 and 2015 are the following amounts which were recognized in transactions with related parties: 2016 2015 Total category Total category as per the as per the financial financial Related party statements Related party statements transactions caption transactions caption Source of financing 67,055,579 16,490,543 62,714,914 45,883,167 Interest income from loans to 3,446,998 3,446,998 3,775,908 3,775,908 municipalities Other interest income 1,875,194 1,907,323 441,863 718,293 28 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) 21. FINANCIAL RISK MANAGEMENT The Fund's principal financial instruments comprise loans to municipalities, bank balances and accounts payables. The main purpose of these financial instruments is to ensure financing for the fund's operations. Financial risks The main financial risks arising from the Fund's financial instruments are Foreign currency risk, interest rate risk, liquidity risk, and credit risk. Foreign currency risk The currency risk is defined as the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Fund is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Fund undertakes certain transactions denominated in foreign currencies, including the receipt of financing from International financial institutions for the Implementation of projects. The financing is, in most cases, received in USD and EUR. The funds received are converted In GEL on periodic basis and the fluctuation in exchange rates between the date of funds received and converted results in foreign exchange gain/losses. The Fund does not use any derivatives to manage foreign currency risk exposure. The Fund's exposure to foreign currency exchange rate risk is presented in the table below: USD EUR 31 December USD = EUR 1 2016 GEL GEL 2.6468 GEL 2.7940 Total FINANCIAL ASSETS Cash and cash equivalents 4,551,074 83,307,633 51,749,609 139,608,316 Loans to banks 30,000,000 - 30,000,000 Receivables and advances 5,674,865 - 5,674,865 Loans to municipalities 31,501,875 - 31,501,875 Other loans disbursed 29,527,731 - 61639,890 36,167,621 TOTAL FINANCIAL ASSETS 101,255,545 83,307,633 58,389,499 242,952,677 FINANCIAL LIABILITIES Trade Payables 18,090,510 18,090,510 Long-term debt - 14,693,589 14,693,589 TOTAL FINANCIAL LIABILITIES 18.090,510 - 14,693,589 32,784,099 OPEN POSITION 83,165,035 83,307,633 43,695,910 29 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) USD EUR 31 December USD1= EUR1= 2015 GEL GEL 2.3949 GEL 2.6169 Total FINANCIAL ASSETS Cash and cash equivalents 1,748,624 113,744,626 26,814,857 142,308,107 Loans to banks 22,600,000 - - 22,600,000 Receivables and advances 6,847,183 - 6,847,183 Loans to municipalities 28,990,950 - 28,990,950 Other loans disbursed 20,648,916 - 8,506,000 29,154,916 TOTAL FINANCIAL ASSETS 80,835,673 113,744,626 35,320,857 229,901,156 FINANCIAL LIABILITIES Trade Payables 16,535,368 - - 16,535,366 TOTAL FINANCIAL LIABILrIES 16,535,368 - - 16,535,368 OPEN POSITION 64, ,305 4626 35,320,857 213,365,788 The table below details the Fund's sensitivity to strengthening/weakening of functional currency against foreign currencies by 15 per cent as at 31 December 2016 and 31 December 2015. The analysis was applied to monetary items at the balance sheet date denominated In EUR. As at 31 December 2016 As at 31 December 2016 USD/GEL USD/GEL EUR/GEL EUR/GEL + 15% - 15%M +150/ - 15% Profit/(loss) before tax 12,496,145 (12,496,145) 6,554,387 (6,554,387) Impact of equity 10,621,723 (10,621,723) 5,571,229 (5,571,229) As at 31 December 2015 As at 31 December 2015 USD/GEL USD/GEL EUR/GEL EUR/GEL + 15% - 15% +15% - 15% Profit/(loss) before tax 17,061,694 (17,061,694) 4,022,228 (4,022,228) Impact of equity 14,502,440 (14,502,440) 3,418,894 (3,418,894) Interest rate risk Interest-bearing financial assets and liabilities of the Fund have fixed interest rate. Therefore, Fund is not exposed to any Interest rate risk. Liquidity risk Liquidity risk refers to the availability of sufficient funds to enable repayment of borrowings and other financial commitments as they actually fall due. The table below presents the cash flows payable by the Fund and to the Fund under non- derivative financial liabilities and assets held for managing liquidity risk by remaining contractual maturities at the date of the statement of financial position. The amounts disclosed in the table are the contractual undiscounted cash flow. 30 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) Contractual cash flows As at 31 December Carrying Up to I More than 2016 value On demand year 1-5 years eyars Total Financial Assets Loans to banks 30,000,000 7,383,717 31,161,425 38,545,142 Loans to municipalities 31,501,875 488,228 9,558,223 25,986,047 10,227,760 46,260,259 Other loans disbursed 36,167,621 8,039,330 23,306,636 13,681,469 45,027,455 Bank balances 139,608,316 139,608,316 - - 139,608,316 Receivables and advances 6,076,769 6,076769 6,076,769 Total financial assets 243,354,581 146,173,313 24981270 80,454 10B 23,909,249 275,517,94 Financial Liablittles Accounts payable 18,090,510 5,805,158 B,864,653 3,420,699 - 18,090,510 Long-term debt 14,693,589 73,677 5,542,351 9,635,512 15,251,540 Total financial liabilities 32r784,099 5,805,158 8,938,330 8,963,050 9,635,512 33,342,850 Liquidity gap 140,368,155 16,042,940 71,491,858 14,273,737 Cumulative liquidity gap 140 155 156,411,095 227,902,153 242,175,890 Contractual cash flows As at 31 December Carrying Up to I More than 2015 value On demand year 1-5 years 5 years Total Financial Assets Loans to banks 22,600,000 - 13,557,986 17,167,603 - 30,725,589 Loans to municipalities 28,990,950 282,142 12,009,025 25,276,516 5,082,407 42,650,090 Other loans disbursed 29,154,916 441,863 B,671,780 19,721,874 109,375 28,944,892 Bank balances 142,308,107 142,308,107 - - 142,308,107 ReceIvables and advances 6,847,183 6,847,183 - 6,847,183 Total financial assets 229,901,156 149,879,295 34,238,791 62,165,993 5,191,782 251,475,861 Financial Liabilities Accounts payable 16,535,369 16,535,369 - _- 16,535,369 Total financial liabilities 16,535,368 16,535,369 - - - 16,535,369 Liquidity gap 215,044,194 133,343,927 34,238,791 62,165,993 5,191,782 Cumulative liquidity gap 2 0 194 346,709,714 380,948,505 448,306,280 Credit risk The Fund is exposed to credit risk through Its receivables and advances, loans to municipalities and other loans disbursed. The Fund operates by applying a clear set of loan granting criteria to the municipalities. Each municipality is assessed for creditworthiness using the data provided by the Ministry of Finance. The Fund takes into consideration both quantitative and qualitative factors when assessing the creditworthiness of the borrower. Based on this analysis, the Fund sets the credit limit for each and every borrower. When the loan agreement has been signed, the Fund monitors the loan and borrower's solvency. The Fund has developed loan monitoring process so that it helps to quickly spot any possible non- compliance with the provisions of the agreement. The receivable balances are monitored on an 31 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (In GEL) ongoing basis to ensure that the Fund's exposure to bad debts is minimized, and, where appropriate, provisions are being made. Fair value Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price. The estimated fair values of financial instruments have been determined by the Fund using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. Georgia continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market Information in estimating the fair value of financial instruments. Financial assets carried at amortised cost - The estimated fair value of fixed interest rate instruments Is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on credit risk of the counterparty. Liabilities carried at amortised cost - The estimated fair value of fixed interest rate instruments with stated maturity was estimated based on expected cash flows discounted at current Interest rates for new instruments with similar credit risk and remaining maturity. Management of the Fund considers that the carrying amounts of financial liabilities recorded in the financial statements approximate to their fair values, 22. COMMITMENTS AND CONTINGENCIES Commitments - The Fund receives financing from donors for the completion of different projects. The fund is committed to use the proceeds received for the purposes defined In loan, credit or grant agreements. Total amount of the commitment for the year ended 2016 amounts to the balance of Source of Financing in entity's financial statements. Legal proceedings - As at 31 December 2016 the Fund was not engaged in any significant litigation proceedings. Management is of the opinion that no material unaccrued losses will be incurred and accordingly no provision has been made in these financial statements. Taxes - Georgian tax legislation in particular may give rise to varying interpretations and amendments. In addition, as management's Interpretation of tax legislation may differ from that of the tax authorities, transactions may be challenged by the tax authorities, and as a result the Fund may be assessed additional taxes, penalties and interest. The Fund believes that it has already made all tax payments, and therefore no allowance has been made in the financial statements. Tax years remain open to review by the tax authorities for six years. Operating environment - The entity's principal business activities are within Georgia. Since laws and regulations affecting the business environment in Georgia are subject to rapid changes, the entity's assets and operations could be at risk due to negative changes in the political and business environment. Emerging markets such as Georgia are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Tax, currency and customs legislation within Georgia are subject to varying interpretations, and other legal and fiscal impediments contribute to the challenges faced by entities currently operating In Georgia. The future economic direction of Georgia is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment. 32 MUNICIPAL DEVELOPMENT FUND OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (CONTINUED) (in GEL) In 2015 and 2016, economies of the CIS countries experienced political and economic turmoil which significantly affected Georgian economy as well. Currency exchange market was unstable and the Georgian Lari depreciated by 11%, substantially against the United States of Dollar. Economic situation in Georgia depends, to a large extent, upon success of the Georgian government's efforts, future condition of the Georgian economy and political developments in the CIS. Outcome of these efforts and developments is at this stage difficult to determine. 23. EVENTS AFTER THE REPORTING PERIOD There were no significant events subsequent to the balance sheet date that require adjustment to, or disclosure in, these special purpose financial statements. 24. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved by the Board of Directors and authorized for issue on 30 June 2017. 33