Georgia Healthcare Group PLC Annual Report 2018 Financial Statements Notes to Consolidated Financial Statements continued (Thousands of Georgian Lari unless otherwise stated) 3. Summary of significant accounting policies continued Hedge accounting The Group has adopted fair value hedge accounting in accordance with IFRS 9 for foreign exchange component of two of its fixed assets. Due to a strong correlation between real estate prices in Lari terms and US$:GEL exchange rates published by the National Bank of Georgia, holding other factors constant, we designated US$-denominated borrowings as a hedging instrument and the foreign exchange component of the fixed asset price change as the hedged item. The Group continues to assess hedge effectiveness on a quarterly basis. If hedge effectiveness conditions will hold and the hedge is found to be effective any increase (decrease) in the value of hedged real estate caused by changes in US$ exchange rate will be offset by an equivalent increase (decrease) of US$-denominated borrowing. If the hedge is found to be partially ineffective, to the extent these amounts differ, a net amount is recognised in profit or loss, in net (losses)/gains from foreign currencies. The recognition of the latter difference is commonly referred to as the measurement of hedge ineffectiveness. As at 31 December 2018 fair value of financial instruments designated as hedging instruments equalled GEL 15,307 (2016: GEL 15,629). Investments in subsidiaries For the purposes of Parent Company Financial Statements investments in subsidiaries are carried at cost less any provision for impairment. Dividends from subsidiaries are recognised in the Parent Company Financial Statements when the Parent’s right to receive the dividend is established. Investment in associates The Group’s investment in its associate is accounted for using the equity method. The aggregate of the Group’s share of profit or loss of an associate is shown on the face of the statement of profit or loss outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the associate. The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, and then recognises the loss within “Share of profit of an associate” in the Statement of Profit or Loss. Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss. Inventory Inventory comprises medical supplies and non-medical supplies and is valued at the lower of cost and net realisable value. The cost of inventory is determined on a weighted average basis in the healthcare services segment and first in first out basis (“FIFO”) in the pharma segment and includes expenditure incurred in acquiring inventory and bringing it to its existing location and condition. Borrowings Borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the consolidated profit or loss when the borrowings are derecognised as well as through the amortisation process. Borrowing costs Borrowing costs comprise interest expense calculated using the effective interest method and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of such asset. All other borrowing costs are expensed in the year in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. Taxation The current income tax expense is calculated in accordance with the regulations in force in Georgia. Deferred tax assets and liabilities are calculated in respect of temporary differences using the liability method. Deferred income taxes are provided for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes, except where the deferred income tax arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted at the reporting date. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Georgia also has various operating taxes that are assessed on the Group’s activities. These taxes are included as a component of general and administrative expenses. 134