Accounting principles

BASIS OF PRESENTATION OF CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AND ACCOUNTING POLICIES APPLIED

 1.1     Basis of Presentation

 1.1.1      Accounting standards

The consolidated financial statements of the Group have been prepared in accordance with the accounting and reporting principles published by the CMB, namely “CMB Financial Reporting Standards”.

CMB regulated the principles and procedures of preparation, presentation and announcement of financial statements prepared by the entities with the Communiqué No: XI-29, “Principles of Financial Reporting in Capital Markets” (“the Communiqué”). The Communiqué is effective for the annual periods starting from 1 January 2008 and supersedes the Communiqué No: XI–25, “The Accounting Standards in the Capital Markets”. According to the Communiqué, entities shall prepare their financial statements in accordance with International Financial Reporting Standards (“IAS/IFRS”) endorsed by the European Union. Until the differences of the IAS/IFRS as endorsed by the European Union from the ones issued by the International Accounting Standards Board (“IASB”) are announced by Turkish Accounting Standards Board (“TASB”), IAS/IFRS issued by the IASB shall be applied. Accordingly, Turkish Accounting Standards/Turkish Financial Reporting Standards (“TAS/TFRS”) issued by the TASB which are in line with the aforementioned standards shall be considered.

With the decision taken on 17 March 2005, the CMB announced that, effective from 1 January 2005, the application of inflation accounting is no longer required for companies operating in Turkey and preparing their financial statements in accordance with CMB Financial Reporting Standards. Accordingly, IAS 29, “Financial Reporting in Hyperinflationary Economies”, issued by the IASB, has not been applied in the financial statements for the accounting year commencing from 1 January 2005.

As the differences of the IAS/IFRS endorsed by the European Union from the ones issued by the IASB have not been announced by TASB as of the date of preparation of these consolidated financial statements, the condensed interim consolidated financial statements have been prepared within the framework of Communiqué XI, No: 29 and related promulgations to this Communiqué as issued by the CMB, in accordance with the CMB Financial Reporting Standards which are based on IAS/IFRS. The consolidated financial statements and the related notes to them are presented in accordance with the formats recommended by the CMB, with the announcement dated 2008/16, 2008/18, 2009/2, 2009/4 and 2010/6, including the compulsory disclosures. Accordingly, necessary reclassifications have been made in the comparative financial statements.

All material items in terms of content and amount are disclosed separately even though they are similar by nature. Immaterial items which are similar in terms of basis and function are disclosed collectively. As a result of presentation after offsetting due to nature of transaction and the substance of the matter, presentation of these transactions with their net book value or presentation of assets after deducting impairment are not considered as breaching of offsetting rule. As long as it is consistent with the substance of transaction or event, revenues generated during normal course of business are disclosed on net basis.

Financial statements are prepared according the functional and reporting currency of the Group, Turkish lira (“TL”), based on historical cost except for the financial assets and liabilities measured at their fair values.

 1.1.2.     Consolidation principles

 (i)     Subsidiaries

Subsidiaries are the enterprises which the Group has direct or indirect control over. The Group has interest in the results of its subsidiaries due to its power to govern the financial and operational policies of the enterprises.

In determining the control power, actual and realizable voting rights are taken into consideration. The results of operations of a subsidiary are included in the consolidated financial statements as from the date of acquisition, which is the date on which control of the acquired subsidiary is effectively transferred to the buyer, until the date of disposal which is the date on which the parent ceases to have the control of the subsidiary.

All the subsidiaries of the Group and the percentage of shares in them by 31 December 2010 are given below:

						31 December 2010	31 December 2009
						Ownership interest	Ownership interest
Componenta UK Ltd.						100%	100%

 
All assets and liabilities of Componenta UK Ltd., which is operating in England, are translated into TL using foreign exchange rate as of balance sheet date whereas income statement accounts are translated into TL using yearly average foreign exchange rate. Exchange differences arising from the translation of opening net assets and current year income statement of Componenta UK Ltd. are included in “translation reserves” under shareholders’ equity.

 (ii)     Investments in associates 

Investments in associates, on which the Group has significant influence but does not have control over, are accounted using the equity method during the period that significant influence exists. Consolidated financial statements involve the income and expenses of associates to the extent of Group’s share as associates are accounted for using the equity method.

The table below sets out investments in associates and the ownership interests of the Group: 

1.1.2.   Consolidation principles (Continued)

						31 December 2010	31 December 2009
					Ownership interest		Ownership interest
Kumsan Döküm Malzemeleri Sanayi ve  Ticaret A.Ş.(“Kumsan”)						25,10%	25,10%

(iii)      Elimination of transactions in consolidation

All the balances and transactions due to intercompany transactions and unrealized gains are eliminated during the consolidation. Unrealized losses resulting from intercompany transactions, in the absence of evidence for impairment, are eliminated using the same method as unrealized gains. The cost of, and dividends arising from, shares held by the Group are eliminated from the related shareholders’ equity and income statement line items respectively. 

1.2.    Changes in Accounting Policies

There are no accounting policies that have been or are considered to be changed; all accounting policies apply in conformity with the previous periods.

1.3.    Comparative information and restatement of prior period financial statements

The consolidated financial statements of the Group include comparative financial information to enable determination of the trends in the financial position and performance. The Group has prepared the consolidated balance sheet as of 31 December 2010 comparatively with the balance sheet at 31 December 2009, and consolidated statement of comprehensive income, consolidated statement of cash flow and consolidated statement of change in shareholders’ equity for the period between 1 January and 31 December 2010 comparative to the period between 1 January and 31 December 2009.

Adjustments performed on financial statements of 2009 and 2008.

Because of the errors the Group has noticed and which are related to past periods, the Group has restated the past period consolidated financial statements retrospectively by 31 December 2010.

The Group has conducted a reconciliation study over the balances on 31 May 2010 concerning the foreign reconciliations which had not come to an end in the previous periods, and it has adjusted its consolidated financial statements dated 31 December 2009 as the result of non-reconciliation arising from past years. Trade receivables arising from commercial transactions run with clients abroad have been adjusted on the financial statements of 2009 by being reduced by TL 2.180.328 following the said reconciliation studies conducted.

The company has changed the software it was using to record the fixed assets and amortization schedules at the beginning of the accounting period 2010 and has started using a software, within an accounting software. As a result of the studies performed, differences arising from past years have been discovered in fixed assets’ costs and accumulated depreciations. After having those differences adjusted, the net book value of property, plant and equipment has been increased by TL 2.178.863 , and the net book value of intangible assets has been reduced by TL 23.060.

The company has found out that employees’ ages of retirement have been miscalculated due to an error in the personnel software being used. After the ages of retirement and accordingly the years left to retirement have been corrected, less provision for severance pay of TL 815.268 has occured.

As a result of the adjusting entries explained above, all temporary differences in deferred tax calculation have been determined again and the deferred tax effect has been recalculated.

The mentioned points have been identified as an accounting error in scope of “IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors” and they have been corrected in financial statements of 2009.

The effects of the aforementioned changes on the financial statements are as follows:

 

	31 December 2009 (reported in the past)	31 December 2009 (adjusted)	Difference
Trade receivables	24.149.593	21.969.265	-2.180.328
Property, plant and equipment	147.492.214	149.671.077	2.178.863
Intangible assets	733.033	709.973	-23.060
Provision for severance pay	12.496.334	11.681.066	-815.268
Deferred tax liability	2.243.181	2.837.395	594.214
Retaioned profit/loss	46.648.196	47.641.556	993.360
Deferred tax income/expense	316.997	-28.875	-345.872
Net period loss	-5.933.107	-6.729.947	-796.840

 

The effects of the adjustments explained above have been taken into account in past period consolidated statement of cash flow and statement of changes in shareholders equity.

 

	31 December 2008 (reported in the past)	31 December 2008 (adjusted)	Difference
Plant, property and equipment	138.065.069	139.328.881	1.263.812
Intangible assets	375.502	353.399	-22.103
Deferred tax liability	2.560.178	2.808.520	248.342
Deferred tax income	184.734	-63.608	-248.342
Net period income	17.938.002	18.931.369	993.367

 

Pursuant to IAS 8, consolidated financial statements for the year ended on 31 December 2008 have been adjusted and presented as well as the consolidated financial statements for the year ended on 31 December 2009 which include the effects of the adjustments.

In order to create conformity with the presentation of the consolidated financial statements of the current peroid, comparative information is reclassified, if found necessary. The company has performed the following classification entries in its past period financial statements retrospectively as per 31 December 2010.

The Group has classified its Deposits and Guarantees Given, which are already classified in “Other Current Assets” and “Other Non-Current Assets” TL 12.743 and TL 2.611 respectively, in “Other Receivables”, the Fonds of TL 881.992  provided by banks for payments of Social Security, tax etc. in “Other Payables”, which are already classified in “Other Current Liabilities”, and Share Premium of TL 161.041 in a diverse item in equity, which is already classified in “Retained Earnings/(Losses)”.

1.4.    Changes in International Financial Reporting Standards

The accounting policies that are taken as a base for the preparation of the consolidated financial statements for the accounting period ended on 31 December 2010 have been adopted consistently with the consolidated financial statements provided on 31 December 2009 except the new standards and IFRIC interpretations summarized below. Whether the aforementioned standards and interpretations have an effect on company’s performance and financial status, has been noted in related paragraphs.

New standards, changes and interpretations, that are valid for financial statements dated 31 December 2010

IFRS 3 (revised), “Business Combinations”, IAS 27, “Consolidated and Separate Financial Statements”, IAS 28, “Investments in Associates” and UMS 31, “Interests in Joint Ventures” – Changes in those standards are effective for business combinations beginning in financial periods on and after 1 July 2009. Because the company has no interests on which it has no control power, there is no expectation for an effect of the revised standart on financial statements.

IFRIC 17, “Distributions of Non-cash Assets to Owners” – Effective for financial periods on or after  1 July 2009. The Company has not performed any distributions of non-cash assets, so there is no expectation for an effect on financial statements.

IFRIC 18, “Transfers of Assets from Customers” – Effective for assets that have been transferred on or after 1 July 2009. The company has not performed any asset transfers from its clients, so there is no expectation for an effect on financial statements.

“The First-time Adoption of IFRS – Other Exceptional Cases” (Change in IFRS 1) has been promulgated in July, 2009. These changes are obligated to be adopted for financial periods beginning on or after 1 January 2010. Because of the fact that the company has not been adopting IFRS for the first time, this change is not expected to have any effect on financial statements.

IFRS 2, “Share-based Payment – Share-based Agreements The Company Paid In Cash” – Effective for financial periods beginning on and after 1 January 2010.

IFRS 5, “Non-Current Assets Held For Sale and Discontinued Operations” - Effective for financial periods on or after 1 January 2010, however this change is not expected to have any effect on financial statements.

IAS 1, “Presentation of Financial Statements” - Effective for financial periods on or after 1 January 2010.

IAS 36 (Change), “Impairment of Assets” - Effective for financial periods on or after 1 January 2010, however this change is not expected to have any effect on financial statements.

IAS 38, (Revised) “Intangible Assets” - Effective for financial periods on or after 1 January 2010, however this change is not expected to have any effect on financial statements.

IFRIC 9, “Reassessment of Embedded Derivatives”, Effective for financial periods on or after 1 July 2010.

“Changes in International  Financial Reporting Standards”, published on May 2010

Standards, that are not yet effective and the early adoption of which are not embraced by the Company, Amendments and Interpretations concerning the existing previous standards:

Interpretations and amendments concerning the standards, that are not expected to have an effect on the Company’s financial statements, and that will be effective for financial periods beginning on and after 31 December 2010 are noted below.

IFRS 9 (Revised), “Financial Instruments”. This revised standard, which will be effective in accounting periods beginning on and after 1 January 2013, is not expected to have an effect on the financial statements of the company.

IAS 24 (Revised), “Related Party Disclosures”. Amendments made to clarify the desription of the term related party and to make related party term explanations for public affiliates easier, will be effective for accounting periods beginning after 31 December 2010 provided that they will be disclosed in footnotes. This revised standard is not expected to have an effect on the financial statements of the company.

IAS 32 (Revised), “Financial Instruments: Presentation”. Amendments have been made in this standard about the financial instruments of the concern based on equity, financial statements that are related to liquidation and the classification of liabilities. Those amendments are effective for accounting periods beginning from 1 February 2010 with the option of early adoption provided that they will be disclosed in footnotes. This revised standard is not expected to have an effect on the financial statements of the company.

IFRIC 14 (Revised), “Prepayments of a Minimum Funding Requirement” – Effective for accounting periods beginning on or after 1 January 2011. Early adoption is granted. It is not expected to have an effect on the financial statements of the company.

IFRIC 19, “Extinguishing Financial Liabilities with Equity Instruments” – Effective for accounting periods beginning on or after 1 July 2010. Early adoption is granted. It is not expected to have an effect on the financial statements of the company.

1.5.    Summary of significant accounting policies

Significant accounting policies considered during the preparation of consolidated financial statements are summarized below:

1.5.1.     Cash and cash equivalents

Cash and due from banks comprise cash in hand, bank deposits and highly liquid, readily convertible into cash investments, whose maturity at the time of purchase is less than three months with insignificant risk of change in value .The cash and cash equivalents are considered to approximate their respective carrying values due to their short-term nature and shown by their fair values in the financial statements.

1.5.2.     Trade receivables and valuation allowance 

Trade receivables that are originated by the Group by providing goods or services directly to a debtor are carried at amortized cost using the effective yield method. Short-term trade receivables with no stated interest rate are measured at original invoice amount unless the effect of imputing interest is significant.

A credit risk provision for trade receivables is established if there is objective evidence that the Group will not be able to collect all amounts due. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of all cash flows, including amounts recoverable from guarantees and collateral, discounted based on the original effective interest rate of the originated receivables at inception.

If the amount of the impairment subsequently decreases due to an event occurring after the write-down, the release of the provision is credited to other operating income.

1.5.3.     Credit finance income/ charges

Credit finance income/charges represent imputed finance income/charges on credit sales and purchases. Such income/charges are recognized as financial income or expenses over the credit term period of credit sales and purchases.

1.5.4.     Inventories

Inventories are valued at the lower of cost or net realizable value. Cost elements included in inventories are materials, labor and an appropriate amount for factory overheads. Unit cost of inventory is calculated at monthly moving weighted average method. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses

1.5.5.     Property, plant and equipment

Property, plant and equipment acquired before 1 January 2005 are carried at cost and restated to the equivalent purchasing power at 31 December 2004 less accumulated depreciation. Items which are acquired after 1 January 2005 are carried at cost less accumulated depreciation and impairment; if any. Depreciation is provided using the straight-line method based on the estimated useful lives of the assets.

In context of IAS 16 “Property, plant and equipment”, entities are allowed to determine depreciation charge according to production units. In accordance with IAS 16, the Group has accounted depreciation expense for property, plant and equipment for the period 1 January – 31 December 2010 in its consolidated financial statements by taking into consideration the capacity utilization rates. Capacity utilization rates for the period between 1 January – 31 December 2010 for gray cast iron, aluminium casting and wheel plants are respectively 48%, 40% and 65%. As a result, depreciation expense of machinery and equipment for the period between 1 January – 31 December 2010 was realized as  TL 8.824.569 (1 January – 31 December 2009: TL 4.347.226).

Useful lives for the tangible assets of the Group are also presented below:

 

							Useful lives (year)
Buildings							30-50
Land improvements							30
Machinery and equipment							6-15
Furniture and fixtures							2-8
Motor vehicles							3-4

 

Land is not depreciated as it is deemed to have an indefinite life

Expenses for repair and maintenance of property, plant and equipment are capitalized only if they result in an enlargement or substantial improvement in the economic benefits of the respective assets. All other costs are normally accounted in statement of income as an expense.

Property, plant and equipment is reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount. Recoverable amount is the higher of asset’s net selling price or value in use.

Gains or losses on disposals of property, plant and equipment are determined by comparing proceeds against carrying amounts and are included in operating profit

 1.5.6.     Intangible assets

Intangible assets comprise acquired rights. They are recorded at acquisition cost, in each case intangible assets acquired before the date of 1 January 2005 have been restated to equivalent purchasing power at 31 December 2004, and amortized on a straight-line basis over their estimated useful lives for a period not exceeding 5 years from the date of acquisition. Where an indication of impairment exists, the carrying amount of any intangible asset including goodwill is assessed and written down immediately to its recoverable amount (Note 19).

 1.5.7.     Factoring arrangements

The Group collects a portion of its trade receivables through factoring arrangements. In accordance with the factoring agreements, in case the collection risk lies with the Group the related amount is carried under both trade receivables and financial liabilities until the collection of the trade receivable. The translation of foreign currency balances is performed using the ask rates announced by the Central Bank of Turkey prevailing at the balance sheet date.

 1.5.8.     Bank borrowings

Bank borrowings are recognised initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective yield method; any difference between proceeds, net of transaction costs, and the redemption value is recognised in the income statement over the borrowing period. Borrowing costs are charged to income statement when they incur.

 1.5.9.   Changes in the fair value of financial assets/liabilities recognized in statement of income

Since forward foreign exchange purchase and sale contracts do not met the conditions for hedge accounting, such contracts are classified as financial assets/liabilities at fair value through profit or loss and the changes in the fair value of the contracts are recognized in the income statement.  

 1.5.10.   Share capital and dividends 

Ordinary shares are presented in equity. Dividends on ordinary shares are recognized in equity in the period in which they are declared. Dividends receivable are recognized as income in the period in which they are declared

 1.5.11.   Taxes on Income

Taxes include current period income taxes and deferred taxes. Current year tax liability consists of tax liability on period income calculated based on currently enacted tax rates as of balance sheet date and according to tax legislation in force and includes adjustments related to previous years’ tax liabilities.

Deferred income tax is provided, using the liability method, for temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Tax bases of assets and liabilities comprise of the amounts that will affect the future period tax charges based on the tax legislation. Currently enacted tax rates, which are expected to be effective during the periods when the deferred tax assets will be utilised or deferred tax liabilities will be settled, are used to determine deferred income tax.

Deferred tax liabilities are recognised for all taxable temporary differences, where deferred tax assets resulting from deductible temporary differences are recognised to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilised. Carrying value of deferred tax assets are decreased to the extent necessary, if future taxable profits are not expected to be available to utilise deferred tax assets partially or fully.

Deferred tax assets and deferred tax liabilities related to income taxes levied by the same taxation authority are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities

 1.5.12.   Revenue recognition

Revenues are recognised at the fair value of the consideration received or receivable on an accrual basis when delivery has occurred, the amount of revenue can be measured reliably, and it is probable that the economic benefits associated with the transaction will flow to the Group. Considering the principle of transfer of risks and rewards, the Group recognizes revenue on export transactions, where the goods are delivered to foreign customers or warehouses of logistics partners of foreign customers when the goods are received by the customer or logistics partner of the customer. Net sales represent the invoiced amount less sales returns, discounts and commissions

The interest income earned by the Group is recognised on accrual basis using the effective yield method.

The Group sells scrap aluminium to its suppliers in return for purchase of liquid aluminium. The sales of scrap aluminium are not presented as sales revenue; instead they are offset against the cost of scrap aluminium under the cost of sales.

 1.5.13.   Foreign currency transactions and balances 

Transactions in foreign currencies during the period have been translated using the ask rates announced by the Central Bank of Turkey prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rates prevailing at the balance sheet date. Exchange gains or losses arising due to translation of foreign currency denominated items are included in the consolidated statement of income.

1.5.14.   Financial instruments and risk management policy

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.

1.5.15.   Fair value of financial instruments

Fair value is the amount for which an asset could be exchanged, or a liability settled between knowledgeable, willing parties during an arm’s length transaction, other than in a forced sale or liquidation, and is best evidenced through a quoted market price, if one exists.

The estimated fair value of financial instruments has been determined by the Group using available market information and appropriate valuation methods. However, the market information and valuation methods need to be evaluated properly in order to make reliable forecasts. Therefore, the estimates presented herein are not necessarily indicative of the amounts the Group could realize in a current market exchange.

The following methods and assumptions were used to estimate the fair value of the financial instruments for which it is practicable to estimate fair value: 

Monetary assets

The fair values of balances denominated in foreign currencies, which are translated at period-end exchange rates, are considered to approximate their carrying values, also due to their short-term nature. The cash and cash equivalents are presented at their fair values (Note 6). The carrying values of trade receivables along with any allowances are estimated to be their fair values.

Monetary liabilities

The fair values of balances denominated in foreign currencies, which are translated at period-end exchange rates, are considered to approximate their carrying values, also due to their short-term nature. The fair values of short-term bank borrowings and other monetary liabilities are considered to approximate their carrying values due to their short-term nature. The fair values of long-term borrowings denominated in foreign currencies and liabilities due to factoring transactions are disclosed in Note 8.

1.5.16.   Provisions, contingent assets and liabilities 

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made.

Should the time value of money is significant, the expected amounts to settle a liability are discounted to their present value. The discount rate used to measure the present value of the liabilities is determined based on the market rates and the risk in relation to the liability. The discount rate is a pre-tax rate. Such discount rate does not include the estimation risk in relation to future cash flows.

Possible assets or obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group are not included in the consolidated financial statements and treated as contingent assets or liabilities.

The provision for employment termination benefits represent the present value of the estimated future probable obligation of the Group arising due to retirement of its employees calculated in accordance with the Turkish Labour Law.

1.5.17.   Research and development

Research expenditure is recognised as expense as incurred. Costs incurred on development projects (relating to the design and testing of developed products) are recognised as intangible assets when it is probable that the project will be completed satisfactorily considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other development expenditures are recognised as expense as incurred. If the Group has research and development related incentive revenue, research and development costs are offset against the incentive revenue. Development costs previously recognised as expense are not recognised as an asset in subsequent periods.

1.5.18.   Related parties

For the purpose of these consolidated financial statements, shareholders, key management personnel and members of the Board, their family members and companies, subsidiaries and partnerships managed or controlled by them are considered and referred to as related parties (Note 37). The related party transactions with companies and individuals during the period are disclosed in the notes even if such parties are not considered to be related parties as of period-end.

1.5.19.   Business combinations

Business combinations are accounted for by applying the purchase method. Excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over the business combination cost is recorded as goodwill. The goodwill acquired in a business combination is not amortised and instead tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.

If the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the difference is recorded as profit.

1.5.20.   (Loss) /Earnings per share

(Loss)/ earnings per share disclosed in the statement of income are determined by dividing net earnings by the weighted average number of shares that have been outstanding during the financial period concerned.

Companies can increase their share capital by making a pro-rata distribution of shares ("bonus shares") to existing shareholders from retained earnings. For the purpose of earnings per share computations, the weighted average number of shares in issue during the period are adjusted in respect of bonus shares issued without a corresponding change in resources, by giving them retrospective effect for the period in which they were issued and each earlier period, as if the event had occurred at the beginning of the earliest period reported.

Earnings per share calculation in case of a dividend payment will be based on the weighted average number of shares.

1.5.21.   Reporting of cash flow 

In the consolidated statement of cash flows, cash flows during the period are classified under operating, investing or financing activities.

The cash flows raised from operating activities indicate cash flows due to the Group’s operations.

The cash flows due to investing activities indicate the Group cash flows that are used for and obtained from investments (investments in property, plant and equipment and financial investments).

The cash flows due to financing activities indicate the cash obtained from financial arrangements and used for redemption.

Cash and cash equivalents include cash and bank deposits and the investments that are readily convertible into cash and highly liquid with less than 3 months to maturity

1.5.22.   Segment reporting

Since management reporting is based on three industrial segments, as gray iron cast iron, aluminium casting and wheel; the Group applies segmental reporting in accordance with the requirements of the accounting framework used

1.5.23 Accounting policies, changes in accounting estimates and errors

Material changes in accounting policies or material errors are corrected, retrospectively; restating the prior period financial statements Effects of changes in accounting estimates are recognized prospectively; i.e. the effects of such changes on current and future periods are recognized in the current and future periods.

 1.6   Significant accounting estimates and assumptions

Preparation of consolidated financial statements requires use of estimates and assumptions that may affect the amount of assets and liabilities recognized as of balance sheet date, contingent assets and liabilities disclosed and amount of revenue and expenses reported. Although, these estimates and assumptions rely on the Group management’s best knowledge about the current events and transactions, actual outcome may vary from those estimates and assumptions. Group’s significant accounting estimate is as follows:

 a) Income taxes

There are many transactions and calculations whose effects’ are not definite to the ultimate tax liability during the ordinary course of business and such situations requires significant judgement in determining the provision for income taxes. The Group recognizes possible additional tax liabilities as a result of taxable situations . Where the final tax liability that has to be recognized is different from the liability that was initially recognized, such differences will impact the income tax and deferred tax income/loss in the current period.

As of 31 December 2010, the Group has tax loss amounting to total TL 1.461.632 which could be carried forward until 2014. Since utilization of the tax loss is considered as highly probable according to taxable income projections performed, the Group accounted deferred tax asset amounting to         TL 292.326 in the financial statements, which is calculated over the total amount of tax loss.

 b) Depreciation of machinery and equipment

In context of IAS 16 “Property, plant and equipment”, entities are allowed to determine depreciation charge according to production units. In accordance with IAS 16, the Group has accounted depreciation expense for property, plant and equipment for the period 1 January – 31 December 2010 in its consolidated financial statements by taking into consideration the capacity utilization rates. Capacity utilization rates for the period between 1 January – 31 December 2010 for gray cast iron, aluminium casting and wheel plants are respectively 48%, 40% and 65%. As a result, depreciation expense of machinery and equipment for the period between 1 January – 31 December 2010 was realized as  TL 8.824.569 (1 January – 31 December 2009: TL 4.347.226).

 c) Impairment of assets

 i)        The Group reviews the assets at each balance sheet date whether there is any indicator regarding the impairment of assets. When an indication of impairment exists, the Group estimates the recoverable values of such assets. Impairment exists if the carrying value of an asset or a cash generating unit is greater than its recoverable amount which is the higher of value-in-use or fair value less costs to sell. Value-in-use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit. Losses of impairment are included in income statement. An impairment loss is recognized immediately in profit or loss. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash flows from other assets or group of assets

In this context, the Group performed impairment test for gray cast iron segment in order to determine possible impairment. As a result of the test performed, it is concluded that carrying value of tangible assets for gray cast iron segment does not exceed their recoverable amounts and impairment loss provision has not been accounted for in the consolidated financial statements. The Group has applied value in use method in recoverable amount calculation for gray cast iron industrial segment and discounted 10 years of free cash flows by annual weighted average cost of capital; 6,5%.

 ii)       There is a goodwill amounting to TL 1.933.575 in consolidated financial statements at
31 December 2010 of the Group derived from acquisition of shares of Componenta UK Ltd. in 2006.

The Group reviews the goodwill at each balance sheet date in the context of IAS 36 “Impairment of Assets” and the goodwill is measured at its costs less any accumulated impairment losses.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period.

 In this context, the Group performed impairment test by 31 December 2010 for the goodwill which has derived from acquisition of shares of Componenta UK Ltd. in 2006. As a result of the test performed, it is concluded that recoverable amount of cash generating unit is not lower than the carrying amount and impairment loss provision has not been accounted for in the consolidated financial statements. The Group has applied value in use method in recoverable amount calculation for goodwill and discounted 5 years of free cash flows by annual weighted average cost of capital; 6,4%.