Georgia Healthcare Group PLC Annual Report 2018 Financial Statements Notes to Consolidated Financial Statements continued (Thousands of Georgian Lari unless otherwise stated) 39. Risk management continued Operational risk Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to operate effectively, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Group cannot expect to eliminate all operational risks, but through a control framework and by monitoring and responding to potential risks, the Group is able to manage the risks. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, including the use of Internal Audit. Operating environment The Group’s business is concentrated in Georgia. As an emerging market, Georgia does not possess a well-developed business and regulatory infrastructure that would generally exist in a more mature market economy. Operations in Georgia may involve risks that are not typically associated with those in developed markets (including the risk that the Georgian Lari is not freely convertible outside the country and undeveloped debt and equity markets). However, over the last few years the Georgian Government has made a number of developments that positively affect the overall investment climate of the country, specifically implementing the reforms necessary to create banking, judicial, taxation and regulatory systems. This includes the adoption of a new body of legislation (including new Tax Code and procedural laws). In the view of the Board, these steps contribute to mitigate the risks of doing business in Georgia. The existing tendency aimed at the overall improvement of the business environment is expected to persist. The future stability of the Georgian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the Government. However, the Georgian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. 40. Fair value measurements Fair value hierarchy For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability. The Group uses the following hierarchy for determining and disclosing the fair value: • Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; • Level 2: techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and • Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. The following tables show analysis of assets and liabilities measured at fair value or for which fair values are disclosed by level of the fair value hierarchy. They also include a comparison by class of the carrying amounts and fair values of the Group’s financial instruments that are carried in the Financial Statements. During 2018 and 2017 there have been no transfers between the levels. Total Carrying Unrecognised fair value value gain (loss) 31 December 31 December 31 December Level 1 Level 2 Level 3 2018 2018 2018 Assets measured at fair value Property and equipment – – 470,247 470,247 470,247 – Other assets: call option – – 16,969 16,969 16,969 – Liabilities measured at fair value Payables for share acquisitions: put option – – 71,668 71,668 71,668 – Payables for share acquisitions: holdback for business acquisitions – – 19,806 19,806 19,806 – Assets for which fair values are disclosed Cash and cash equivalents – 36,154 – 36,154 36,154 – Amounts due from credit institutions – – 11,807 11,807 11,807 – Receivables from healthcare services – – 106,841 106,841 106,841 – Insurance premiums receivable – – 23,643 23,643 23,643 – Receivables from sales of pharmaceuticals – – 20,440 20,440 20,440 – Other assets: loans issued and lease deposit – – 3,284 3,284 3,284 – Other assets: non-medical receivables – – 170 170 170 – Liabilities for which fair values are disclosed Borrowings – – 293,229 293,229 296,817 3,588 Debt securities issued – – 93,434 93,434 93,573 139 Payable for share acquisition – – 91,474 91,474 91,474 – Finance lease liabilities – – 8,697 8,697 8,676 (21) 172