Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697752928282.pdf (Georgia)
JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT Financial Statements Together with the Independent Auditor’s Report For the year ended 31 December 2020 CONTENT: INDEPENDENT AUDITOR’S REPORT ........................................................................................... 3 FINANCIAL STATEMENTS STATEMENT OF COMPREHENSIVE INCOME................................................................................... 5 STATEMENT ON FINANCIAN POSITION ....................................................................................... 6 STATEMENT ON CHANGES IN EQUITY ........................................................................................ 7 STATEMENT OF CASH FLOWS ................................................................................................. 8 NOTES TO THE FINANCIAL STATEMENTS 1.
GENERAL INFORMATION .................................................................................................. 9 BASIS OF PREPARATION .................................................................................................. 9 2.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS .............................................................. 12 3.

4.

FINANCIAL INSTRUMENTS – RISK MANAGEMENT ..................................................................... 13 5.
NET INTEREST INCOME ................................................................................................. 18 PROVISION FOR LOAN IMPAIRMENT ................................................................................... 19 6.

FEE AND COMMISSION INCOME ........................................................................................ 20 7.

ADMINISTRATIVE AND OTHER OPERATING EXPENSES ............................................................... 21 8.

9.
9.

INCOME TAX BENEFIT (EXPENSE) ...................................................................................... 21 10.

CASH AND CASH EQUIVALENTS ........................................................................................ 22 11.

AMOUNTS DUE FROM CREDIT INSTITUTIONS ......................................................................... 22 12.

LOANS TO CUSTOMERS ................................................................................................. 22 13.
OTHER ASSETS........................................................................................................... 26 14.

DEFERRED TAX ASSET .................................................................................................. 27 15.

INTANGIBLE ASSETS .................................................................................................... 28 16.

LEASES ................................................................................................................... 28 17.
PROPERTY AND EQUIPMENT ........................................................................................... 29 18.

BORROWINGS ............................................................................................................ 30 19.

SUBORDINATED BORROWINGS ......................................................................................... 31 20.

OTHER LIABILITIES ...................................................................................................... 31 21.
SHARE CAPITAL AND SHARE PREMIUM ................................................................................ 32 22.

CONTINGENCIES AND COMMITMENTS ................................................................................. 32 23.

TRANSACTIONS WITH RELATED PARTIES ............................................................................. 33 24.

EVENTS AFTER THE REPORTING PERIOD ............................................................................. 33 25.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ................................................................. 34 Page 2 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2O2O (ln GEL) Interest income Interest expense Net interest income Changes in expected credit losses Net interest income (expense) after expected credit losses Fee and commission income Staff costs inctuding sataries and bonuses GeneraI and administrative exoenses Depreciation and amortization Other income Change in repossessed cottaterals, net Loss from exchange rate differences Loss before income tax Income tax benefit (expense) Total comprehensive loss Note 2020 2019 5 5 7 d 15,16,17 16 13 g, g1 4,91 6 11,403,642 (5,964,577) (5,861,974) 2,850,239 5,541,668 (2,850,281 ) (42) (813,705) 4,727,963 297,736 551 ,1 56 (2,736,697) (3,366,474) (876,233) (967,528\ 728,662 216,047 (3 1 4,8ss) (4,152,91O1 3,3 55 (4,149,555' (990,555) (1,150,157) 7,304 249,451 (89,438) (60,750) (737,687) (298,437) FinanciaI Statements August 7021 by: Director FinanciaI Director for the year ended 31 December 2020 were approved on behalf of the Management on 13 G. Naskidashviti l. Khorava Notes on pages 9-44 are the integral part of these financiaI statements.
Page 5 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT STATEMENT ON FINANCIAN POSITION AS AT 31 DECEMBER 2020 (In GEL) Assets Cash and cash equivalents Amounts due from credit institutions Loans to customers Other assets Deferred tax asset Intangible assets Right of use assets Property and equipment Total assets Liabilities and equity Liabilities Borrowings Subordinated borrowings Financial instruments at fair value through profit or loss Lease liabilities Other liabilities Total liabilities Equity Share capital Share premium Accumulated loss Total equity Total liabilities and equity Note 31 December 2020 31 December 2019 2,727,013 5,554,207 26,049,138 5,982,124 326,180 330,330 1,457,836 339,584 1,629,671 - 34,647,010 5,172,357 322,825 377,834 2,208,617 409,281 42,766,412 44,767,595 35,840,434 1,759,064 - 1,852,042 268,420 33,987,783 1,008,230 583,167 2,416,781 175,627 39,719,960 38,171,588 1,815,568 5,827,501 (4,596,617) 1,515,568 5,527,501 (447,062) 3,046,452 6,596,007 42,766,412 44,767,595 Notes on pages 9-44 are the integral part of these financial statements.
Page 6 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT STATEMENT ON CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) Balance at 31 December 2018 Share capital 1,136,346 Share premium 2,493,750 Accumulated loss (148,625) Total 3,481,471 Issue of shares 379,222 3,033,751 - 3,412,973 Total comprehensive loss - - (298,437) (298,437) Balance at 31 December 2019 1,515,568 5,527,501 (447,062) 6,596,007 Issue of shares 300,000 300,000 - 600,000 Total comprehensive loss - - (4,149,555) (4,149,555) Balance at 31 December 2020 1,815,568 5,827,501 (4,596,617) 3,046,452 Notes on pages 9-44 are the integral part of these financial statements.
Page 7 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) CASH FLOWS FROM OPERATING ACTIVITIES: Loss before income tax Adjustments for: Provision for loan impairment Depreciation and amortization Foreign exchange rate differences Change in repossessed collaterals, net Interest income Interest expense 2020 2019 (4,152,910) (60,750) 2,850,281 967,528 314,855 (216,047) (8,814,816) 5,964,577 813,705 1,150,157 89,438 (249,452) (11,403,642) 5,861,974 Cash outflow from operating activities before changes in operating assets and liabilities (3,086,532) (3,798,570) Decrease/(increase) in operating assets: Loans to customers Other assets Increase/(decrease) in operating liabilities: Financial instruments at fair value through profit or loss Other liabilities 4,915,848 274,997 (6,137,374) 92,793 2,108,334 (114,471) 651,037 (34,240) Cash outflow from operating activities before interest and taxation (3,940,268) (1,187,910) Interest paid on lease liabilities Interest paid on borrowings Interest received Net cash inflow (outflow) from operating activities (169,634) (6,126,724) 8,219,871 (2,016,755) (163,452) (6,232,369) 11,741,969 4,158,238 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment Purchase of repossessed collaterals Proceeds from sale of repossessed collaterals Purchase of intangible assets Net cash inflow from investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Received borrowings, net Proceeds from share issue Principal paid on lease liabilities Net cash inflow (outflow) from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Effect of exchange rate fluctuations on the cash and cash equivalents held in foreign currencies (71,702) (87,690) - 202,601 (14,589) 116,310 - 326,558 (10,412) 228,456 3,005,088 (10,314,344) 151,388 (663,873) 1,575,000 (847,124) 2,492,603 (9,586,468) 592,158 (5,199,774) 1,629,671 4,461,782 505,184 2,367,663 Cash and
 cash equivalents at the end of the year 2,727,013 1,629,671 Notes on pages 9-44 are the integral part of these financial statements.
Page 8 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 1.

GENERAL INFORMATION Microfinance Organisation Georgian Credit (hereinafter – the Company) is a Joint Stock Company which was established on 12 September 2006 in Tbilisi, Georgia, in accordance with the Georgian legislation.

The Company is registered by Tbilisi Tax Inspection Department, under identification number 206238800.
The Company conducts its business under the Law on Microfinance Activity and is supervised by the National Bank of Georgia (“NBG”).

The main business activity of the Company is lending (up to GEL100,000).

The Company’s financial products are: agro loans, business loans, consumer loans and pawnshop loans.

The Company had 12 and 14 branches as at 31 December 2020 and 2019.

The legal address of JSC MFO Georgian Credit is located on 7 Sandro Euli Str., Saburtalo district, Tbilisi, Georgia.
As at 31 December 2020 the following shareholders owned the Company’s shares: Shareholders Eastern Capital AS Frauenfinanztroihand LTD Thomas Schiffler Wulfken Jorg Other shareholders owning less than 10% Number of shares in 2020 591,525 307,175 287,283 248,640 Type Ordinary Ordinary Ordinary Ordinary 380,945 Ordinary 1,815,568 31 December 2020, % Share capital GEL 24.31% 12.62% 11.81% 10.22% 41.04% 100% 591,525 307,175 287,283 248,640 380,945 1,815,568 As at 31 December 2019 the following shareholders owned the Company’s shares: Shareholders Eastern Capital AS Frauenfinanztroihand LTD Thomas Schiffler Other shareholders owning less than 10% Number of shares in 2019 440,785 175,000 163,667 Type Ordinary Ordinary Ordinary 736,116 Ordinary 31 December 2019, % Share capital GEL 29.13% 11.57% 10.82% 48.48% 440,785 175,000 163,667 736,116 1,515,568 100.00% 1,515,568 For more information about the Company’s share capital, refer to Note 21.
2.

BASIS OF PREPARATION Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs) issued by the International Accounting Standards Board (IASB).

Basis of measurement These financial statements have been prepared under the historical cost convention except for derivative financial instruments which are measured at fair value.
The Company maintains its records and prepares financial statements in Georgian Lari (GEL) in accordance with International Financial Reporting Standards (IFRS) as required by Georgian legislation.

Page 9 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 2.

BASIS OF PREPARATION (CONTINUED) The reporting period for the Company is the calendar year from January 1 to December 31.
The principal accounting policies adopted in the preparation of the financial statements are set in the Note 25.

The preparation of financial statements in compliance with IFRSs requires the use of certain critical accounting estimates.

It also requires Company’s management to exercise judgment in the most appropriate application in applying the Company's accounting policies.
Going concern These financial statements have been prepared on the assumption that the Company is a going concern and will continue its operations for the foreseeable future.

The Management and shareholders have the intention to further develop the business of the Company in Georgia.
Despite these circumstances, the Company is facing financial difficulties, which is as follows: - - - - The Company has accumulated deficit amounting GEL4,596,617 and GEL447,062 as at 31 December 2020 and 2019, respectively; The Company has total comprehensive loss of GEL4,149,555 and GEL298,437 for the years ended 2020 and 2019, respectively; The Company has borrowed funds with the amount 37,599,498 (borrowings and subordinated borrowings) classified as on demand due to the fact that as at 31 December the restructuring agreement was still in progress and there was clear uncertainty in regards of the outcome of the ongoing negotiations.
Due to the specific business segment of the Company COVID-19 global pandemic had significant adverse effect.

The vital disruption of the Country’s economy distorted the solvency of the Company’s customers’ and their segments (Agro, Business) due to which the expected credit losses of the Company grew significantly in 2020 year.

Nevertheless, the Management believes that using going concern assumption is appropriate for the Company despite of the circumstances mentioned above.
The reasons are as follows: - Main cause of the loss for the 2020 reporting period was due to the COVID-19’s economic disruption of the Company which subsequently distorted the solvency of the clients.

The payment holidays connected with the COVID-19 support measures also adversely affected the total comprehensive loss of the Company.
- Under the agreements signed between the Company and the lenders, the Company hired professional consultant to create the financial projection for the 2021-2023 financial years.

These projections included monthly and quarterly milestones, as well as detailed targets and KPIs for different departments as well as the PAR handling to reduce the expected credit losses and improve the cashflow.
Management believes that these projection will help the Company to cope with the on-going distress and manage the portfolio sustainably; - In 2021 the Company signed final restructuring agreement with the institutional non-resident funds and shareholders.

The agreement has the conditions as described in Note 24.

Effect of COVID-19 pandemic The COVID-19 global pandemic outbreak in 2020 year spread and related to wide range of industries throughout the country.
Additionally, the Government of Georgia imposed various restrictions to cope with the outbreak, these included lockdowns and quarantines, closures of businesses, restrictions on consumers’ ability to move freely.

These affected nearly every sector by reduced demand for goods and services, lack of investment in capital improvements and construction, reduction in market prices for commodities and financial assets, including equity and debt instruments and disruption of global supply chains.
On this basis, the Government of Georgia, subsequently, introduced support measures which included subsidized lending to affected individuals and industries, payment holidays from the lending entities (mostly, the commercial banks) and other measures which would ease the damage of the outbreak to the economy of Georgia.

The Company continually assesses the effect of outbreak of COVID-19 pandemic on its financial position and performance.
Page 10 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 2.
BASIS OF PREPARATION (CONTINUED) Adoption of new or revised standards and interpretations a) New standards, interpretations and amendments effective from 1 January 2020 New standards impacting the Company that have been adopted in the financial statements for the year ended 31 December 2020 are: • COVID-19-Related Rent Concessions (Amendments to IFRS 16) Effective 1 June 2020, IFRS 16 was amended to provide a practical expedient for lessees accounting for rent concessions that arise as a direct consequence of the COVID-19 pandemic and satisfy the following criteria: (a) The change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change; (b) The reduction is lease payments affects only payments originally due on or before 30 June 2021; and (c) There is no substantive change to other terms and conditions of the lease.
Rent concessions that satisfy these criteria may be accounted for in accordance with the practical expedient, which means the lessee does not assess whether the rent concession meets the definition of a lease modification.

Lessees apply other requirements in IFRS 16 in accounting for the concession.

The Company has elected to utilize the practical expedient for all rent concessions that meet the criteria.
The practical expedient has been applied retrospectively, meaning it has been applied to all rent concessions that satisfy the criteria, which in the case of the Company, occurred from March 2020 to June 2020.

Accounting for the rent concessions as lease modifications would have resulted in the Company remeasuring the lease liability to reflect the revised consideration using a revised discount rate, with the effect of the change in the lease liability recorded against the right-of-use asset.
By applying the practical expedient, the Company is not required to determine a revised discount rate and the effect of the change in the lease liability is reflected in profit or loss in the period in which the event or condition that triggers the rent concession occurs.

The effect of applying the practical expedient is disclosed in Note 16.
Other standards There has been adoption of some new standards and interpretations after 1 January 2020 neither of which have material effect in the Company’s separate financial statements: • Definition of a Business (Amendments to IFRS 3); • • Interest Rate Benchmark Reform – IBOR ‘phase 2’ (Amendments to IFRS 9, IAS 39 and IFRS 7); and IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (Amendment – Disclosure Initiative - Definition of Material); and • Revisions to the Conceptual Framework for Financial Reporting.
b) New standards, interpretations and amendments not yet effective There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB that are effective in future accounting periods that the Company has decided not to adopt early.
The following amendments are effective for the period beginning 1 January 2022: • Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37); • Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16); • Annual Improvements to IFRS Standards 2018-2020 (Amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41); and • References to Conceptual Framework (Amendments to IFRS 3).
Page 11 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 2.

BASIS OF PREPARATION (CONTINUED) In January 2020, the IASB issued amendments to IAS 1, which clarify the criteria used to determine whether liabilities are classified as current or non-current.
These amendments clarify that current or non-current classification is based on whether an entity has a right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period.
The amendments also clarify that ‘settlement’ includes the transfer of cash, goods, services, or equity instruments unless the obligation to transfer equity instruments arises from a conversion feature classified as an equity instrument separately from the liability component of a compound financial instrument.

The amendments were originally effective for annual reporting periods beginning on or after 1 January 2022.
However, in May 2020, the effective date was deferred to annual reporting periods beginning on or after 1 January 2023.

The Company is currently assessing the possible impact of these new accounting standards and amendments on its financial statements.

Other standards The Company does not expect any other standards issued by the IASB, but not yet effective, to have a material impact on the Company’s financial statements.

3.
3.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The Company makes certain estimates and assumptions regarding the future.

Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

In the future, actual experience may deviate from these estimates and assumptions.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: Measurement of expected credit losses.
The following are key estimations that the Management have used in the process of applying the Company’s accounting policies and that have the most significant effect on the loss allowances for expected credit losses: • • • Probability of default: PD constitutes a key input in measuring ECL.

PD is an estimate of the likelihood of default over a given time horizon, the calculation of which includes historical data, assumptions and expectations of future conditions.
Loss Given Default: LGD is an estimate of the loss arising on default.

It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from collateral and integral credit enhancements.
Establishing forward-looking scenarios: When measuring ECL the Company uses reasonable and supportable forward-looking information, which is based on assumptions for the future movement of different economic drivers and how these drivers will affect each other.

As at 31 December 2020, the Company considered the effect of on-going COVID-19 global pandemic outbreak on expected credit losses of their financial assets.
The Company took part in the Government support measures which included different kinds of payment holidays were offered to its clients.

These included grace periods on interest payments and renegotiation of loan terms, but substantial part only included first several months of payment holidays on interest and non-significant part the maturity date deferral.
The Company revised these modifications and considered that they have not significantly increased the credit risk of a loan due to the reason that most of these loans have already been repaid as at 31 December 2020 as well as assessed the ageing analysis on individual basis and did not find any indications of “SICR” for significant part of those loans.
The effect of non-substantial modification of these loans were recognized in the statement of comprehensive income with the amount of GEL164,321 thousand for the year ended 31 December 2020.

Page 12 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 3.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (CONTINUED) Lease term, incremental borrowing rate (IBR) and lease payments.
The lease term is defined as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease (including the renewal option implied through customary business practices) if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease if it is reasonably certain not to be exercised.

Management applies judgement to determine the lease term when lease contracts include renewal options that are exercisable only by the Company.
It considers all relevant factors that create an economic incentive to exercise the renewal option.

After the commencement date, the Company reassesses the lease term if there is a significant event or a change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew, or to terminate the lease.

The Management applies judgement to estimate the IBR.
The Management uses an observable information to determine the base rate and adjustments for the lessee specific factors and the asset factors (the adjustment for security).

In Georgia it is customary that lease renewal option is implied through customary business practices and not all renewal options are documented within the lease agreements.
In such cases, the initial measurement of the lease liability assumes the payments for renewal periods equal to the contractual amount and will remain unchanged throughout the lease term.

Determination of collateral value.

Management monitors market value of collateral on a regular basis.

Management uses its experienced judgment to adjust the fair value to reflect current circumstances.

The amount and type of collateral depends on the assessment of credit risk of the counterparty.

Taxes.
Taxes.

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain.

As a result, the Company recognizes tax liabilities based on estimates of whether additional taxes and interest will be due.
These tax liabilities are recognized when, despite the Company’s belief that its tax return positions are supportable, the Company believes that certain positions are likely to be challenged and may not be fully sustained upon review by tax authorities.

As a result the Company minimizes the risks related to this fact.
The Company believes that its accruals for tax liabilities are adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law.

This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events.

To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact tax expenses in the period in which such determination is made.

4.
4.

FINANCIAL INSTRUMENTS – RISK MANAGEMENT The Company is exposed to the different kind of risks that arise from its use of financial instruments.

This note describes the Company's objectives, policies and processes for managing those risks and the methods used to measure them.

Further quantitative information in respect of these risks is presented throughout these financial statements.
Principal financial instruments The principal financial instruments used by the Company, from which financial instrument risk arises, are as follows: Cash and cash equivalents Amounts due from credit institutions Loans to customers Borrowings Subordinated borrowings Financial instruments at fair value through profit or loss Lease liabilities Other liabilities 31 December 2020 2,727,013 5,554,207 26,049,138 35,840,434 1,759,064 - 1,852,042 130,304 31 December 2019 1,629,671 - 34,647,010 33,987,783 1,008,230 583,167 2,416,781 112,637 Page 13 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 4.
FINANCIAL INSTRUMENTS – RISK MANAGEMENT (CONTINUED) General objectives, policies and processes The Supervisory Board has overall responsibility for the determination of the Company’s risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Company’s finance function.
The Supervisory Board and appropriate committees receive monthly reports from the Company Managers through which they review the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets.

The Company’s internal auditor also reviews the risk management policies and processes and reports its findings to the Management.
The overall objective of the Supervisory Board is to set polices that seek to reduce risks as far as possible without unduly affecting the Company’s competitiveness and flexibility.

Further details regarding these policies are set out below.

• • Credit risk Liquidity risk • Market risk: - - Interest rate risk Currency risk Credit Risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.
Exposure to credit risk arises as a result of lending and other transactions with counterparties giving rise to financial asset.

The main business of the Company is to provide micro-loans.

Respectively credit risk is of crucial importance in the Company’s risk management.

To avoid significant financial damage caused by this the Company uses various methods to identify and manage effectively the credit risks.
Based on experience the Company uses an established credit policy which establishes the following basic stages of credit risk management: • Tasks of the Credit Committee • Monitoring of issued loans • Ways of working on delinquent loans.

The Credit Committee is the body responsible for analyzing the information contained in loan applications and assessing and reducing the credit risks as far as possible.
The Committee is an independent body authorized to make the final decision about approving or rejecting a loan application.

Accuracy and correctness of information presented to the Committee is the responsibility of the credit officer, who fills in the initial application after due scrutiny of the applicant’s business and its credit risks.

Committee members assess the application against established criteria (applicant’s credit history, financial condition, competitive ability, etc.)
and will frequently ask the credit officer for more information about the applicant before making a decision.

Mitigation of credit risk is also achieved in some cases through securing loan with real estate or other material assets.

Assessment of the applicant’s creditworthiness through careful analysis of its business reduces the risk of financial loss.

Monitoring is performed by credit officers who report the results to the Management.
The Company does not maintain a strictly determined schedule for monitoring.

Page 14 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 4.

FINANCIAL INSTRUMENTS – RISK MANAGEMENT (CONTINUED) The carrying amount of financial assets represents the maximum credit exposure.
The maximum exposure to credit risk at the reporting date was: Cash and cash equivalents (excluding cash on hand) Amounts due from credit institutions Loans to customers 31 December 2020 31 December 2019 2,612,297 5,554,207 26,049,138 1,074,823 - 34,647,010 34,215,642 35,721,833 The Company’s credit department reviews aging analysis of outstanding loans and takes action to recover past due balances.
Management therefore considers it to be appropriate to provide aging and other information about credit risk as disclosed in Note 12.

Market Risk Market risk is the risk that the fair value of a financial instrument will decrease because of changes in market factors.

Market risk arises from the Company’s use of interest bearing, tradable and foreign currency financial instruments.
It is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates (interest rate risk) and foreign exchange rates (currency risk).

Interest rate risk Interest rate risk arises from potential changes in market interest rates that can adversely affect the fair values of the financial assets and liabilities of the Company.
This risk can arise from maturity mismatches of assets and liabilities, as well as from the re-pricing characteristics of such assets and liabilities.

All interest-bearing assets and liabilities of the Company have fixed interest rate as at 31 December 2020 and 2019.

Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates, which can have adverse effects if there are mismatches by currency of financial assets and liabilities.
The Company is exposed to the risks of fluctuations in prevailing foreign currency exchange rates on its financial position and cash flows.
The Company’s exposure to foreign currency exchange rate risk as at 31 December 2020 is presented in the table below: Financial assets Cash and cash equivalents Loans to customers Amounts due from credit institutions Total financial assets Financial liabilities Borrowings Subordinated borrowings Lease liabilities Other liabilities GEL 2,627,708 24,628,347 USD 90,711 1,404,853 EUR 8,594 16,336 2,727,013 26,049,536 - - 5,554,207 5,554,207 27,256,055 1,495,564 5,579,137 34,330,756 389,107 605,000 7,698 130,304 19,420,552 16,030,775 35,840,434 1,154,064 1,844,344 - - - - 1,759,064 1,852,042 130,304 Total financial liabilities 1,132,109 22,418,960 16,030,775 39,581,844 Open balance sheet position 26,123,946 (20,923,396) (10,451,638) (5,251,088) Page 15 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 4.
FINANCIAL INSTRUMENTS – RISK MANAGEMENT (CONTINUED) * GEL USD EUR Restricted cash in banks Borrowings collateralised with restricted cash in banks Forward contracts ** Loans to customers including impairment allowance Impairment allowance - 10,538,993 - - - 19,659,600 10,538,993 10,538,993 - - 10,538,993 19,659,600 28,896,085 2,091,172 41,067 31,028,324 4,268,136 686,319 24,731 4,979,186 The Company’s exposure to foreign currency exchange rate risk as of 31 December 2019 is presented in the table below: Financial assets Cash and cash equivalents* Loans to customers** Total financial assets Financial liabilities Borrowings* Subordinated borrowings Lease liabilities Other liabilities GEL 958,169 32,442,755 33,400,924 USD 70,045 2,187,496 2,257,541 EUR Total 601,457 16,759 1,629,671 34,647,010 618,216 36,276,681 290,614 20,722,482 12,974,687 33,987,783 - 116,264 112,636 1,008,230 2,300,517 - - - - 1,008,230 2,416,781 112,636 Total financial liabilities 519,514 24,031,229 12,974,687 37,525,430 Open balance sheet position 32,881,410 (21,773,688) (12,356,471) (1,248,749) * GEL USD EUR Total Restricted cash in banks Borrowings collateralized with restricted cash in banks ** Loans to customers without impairment allowance Impairment allowance - 18,577,692 12,838,000 31,415,692 31,833,190 - - 31,833,190 36,109,995 3,039,328 32,671 39,181,994 (3,667,240) (851,832) (15,912) (4,534,984) * For details about bank deposits and borrowings collateralized with bank deposits refer to Note 11.
CURRENCY RISK SENSITIVITY The following table details the Company’s sensitivity to a 20% increase and 20% decrease in the exchange rate of GEL per USD and per EUR.

20% is the sensitivity rate used when reporting foreign currency risk internally to key Management personnel and represents Management’s assessment of the possible change in foreign currency exchange rates.
The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the end of the period for a 20% change in foreign currency exchange rates.
Impact on net profit and equity based on asset values including collateralized borrowings and restricted cash affect as well as impairment allowance can be presented as follows: Currency rate sensitivity USD impact EUR impact 31 December 2020 31 December 2019 +20% (252,759) 17,471 (235,288) -20% 252,759 (17,471) 235,288 +20% (513,965) 53,712 (460,253) -20% 513,965 (53,712) 460,253 Page 16 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 4.
FINANCIAL INSTRUMENTS – RISK MANAGEMENT (CONTINUED) Liquidity Risk Liquidity risk refers to the availability of sufficient funds to meet loan repayments and other financial commitments associated with financial instruments as they actually fall due.
Liquidity of financial liabilities as at 31 December 2020 can be presented as follows: Financial liabilities 1 month 1-3 months Borrowings Subordinated borrowings Lease liabilities Other liabilities 35,840,434 1,759,064 83,543 130,302 - - 128,951 - 37,813,343 128,951 3 months-1 year - - 500,304 - 500,304 1-2 years 2- 5 years Total - - - - 35,840,434 1,759,064 667,728 667,728 2,048,254 - - 130,302 667,728 667,728 39,778,054 As at 31 December 2020 the Company was in the process of negotiating restructuring conditions with borrowers, thus it was uncertain on which conditions the parties would agree and the Company classified their borrowings as on-demand, accordingly.
Liquidity of financial liabilities as at 31 December 2019 can be presented as follows: Financial liabilities Borrowings* Subordinated borrowings Lease liabilities Other liabilities 1 month 1-3 months 3 months-1 year 1-2 years 2-5 years 5 year > Total 345,186 34,646 95,863 112,637 3,313,978 26,226,431 3,672,033 430,155 - 191,727 - - 747,261 - 973,584 996,349 - - 996,349 - - - - - 33,987,783 1,008,230 3,027,549 112,637 506,497 3,328,007 26,424,199 5,245,972 1,286,343 734,413 37,525,431 The Company presents part of its borrowings from non-resident financial institutions as current due to breach of some covenants.
The Company does not expect that these financial institutions will use their right to demand all the principal as well as accrued balance.

Fair value measurement IFRS 7 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement.
The fair value hierarchy has the following levels: • • • Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e.

as prices) or indirectly (i.e.

derived from prices); Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The level in the fair value hierarchy within which the financial asset or financial liability is categorised is determined based on the lowest level input that is significant to the fair value measurement.

Financial assets and financial liabilities are classified in their entirety into only one of the three levels.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The best evidence of fair value is price in an active market.

An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the quantity held by the entity.
Page 17 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 4.

FINANCIAL INSTRUMENTS – RISK MANAGEMENT (CONTINUED) The Company has financial liabilities measured at fair value – “Financial instruments at fair value through profit or loss”; accordingly, they are presented under the IFRS 7 fair value measurement hierarchy on level 2.

Fair value of cash and cash equivalents is measured based on level 1.
Fair values of all other financial assets and financial liabilities are measured on level 3.

Capital disclosures The Company’s objectives when maintaining capital are: • • • To safeguard the Company’s ability to continue as a going concern, so that it can continue to provide returns for shareholders; To comply with the capital requirements set by NBG and borrowers; and To provide an adequate return to shareholders by pricing services commensurately with the level of risk.
The Company sets the amount of capital it requires in proportion to risk.

The Company manages its capital structure and adjusts it in the light of changes in economic conditions and the risk characteristics of the underlying assets.

In order to maintain or adjust the capital structure, the Company may adjust the amount of capital distributed to shareholders, return capital to shareholders, increase its capital, or sell assets to reduce debt.
The Company is in compliance with minimum statutory capital requirements of GEL1,000,000 as defined by the National Bank of Georgia as at 31 December 2020 and 2019, respectively.

5.
NET INTEREST INCOME Net interest income can be presented as follows: Interest income on financial assets recorded at amortized cost comprise: Loans to customers Bank accounts Total interest income Interest expense on financial liabilities recorded at amortized cost comprise: Borrowings Subordinated borrowings Swap expenses Lease liabilities Total interest expense Net interest income 2020 2019 8,782,135 11,373,545 32,681 30,097 8,814,816 11,403,642 (3,973,063) (5,488,924) (123,811) (1,698,069) (169,634) (209,598) - (163,452) (5,964,577) (5,861,974) 2,850,239 (5,541,668) Page 18 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 6.
PROVISION FOR LOAN IMPAIRMENT Movements in the loan impairment allowance for the year ended 31 December 2020 are as follows: Balance at 1 January 2020 New loans issued Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Repaid loans Write off for the year Recoveries of previously written off Changes due to change in credit- risk Balance at 31 December 2020 Stage 1 12 month ECL 598,415 867,899 39,787 (1,497,307) Stage 2 Lifetime ECL- not credit- impaired 1,251,184 - (36,592) 1,547,036 - (1,947,208) (532,846) (532,536) Stage 3 Lifetime ECL- credit- impaired 2,685,385 - (3,195) (49,729) 1,947,208 (512,068) Total 4,534,984 867,899 - - - (1,577,450) - - - - (2,492,864) (2,492,864) 86,785 86,785 1,036,157 889,604 1,633,674 3,559,435 512,105 1,171,488 3,295,593 4,979,186 Movements in the loan impairment allowance for the year ended 31 December 2019 are as follows: Stage 1 Stage 2 Stage 3 Balance at 1 January 2019 New loans issued Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Repaid loans 12 month ECL 756,976 1,788,137 92,484 (1,946,064) Lifetime ECL - not credit- impaired Lifetime ECL- credit- impaired 771,691 2,212,932 - (60,419) 2,173,248 - (32,065) (227,184) 2,758,752 - (2,758,752) Total 3,741,599 1,788,137 - - - (660,467) (902,326) (1,412,063) (2,974,856) Write off for the year Changes due to change in credit- risk Balance at 31 December 2019 - 567,349 598,415 - (20,320) (20,320) 2,027,742 (594,667) 2,000,424 1,251,184 2,685,385 4,534,984 Page 19 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 6.
PROVISION FOR LOAN IMPAIRMENT (CONTINUED) Movements in the gross amount of issued loans for the year ended 31 December 2020 are as follows: Stage 1 Stage 2 Stage 3 12 month ECL Lifetime ECL- not credit- impaired Lifetime ECL- credit- impaired Balance at 1 January 2020 23,999,882 9,528,714 5,653,398 New loans issued Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Repaid loans Write off for the year Recoveries of previously written off FX Movement Balance at 31 December 2020 27,486,820 1,061,103 (8,145,963) - (26,987,560) - - - (934,589) 8,455,865 (3,181,602) (6,017,979) - - 12,821 160,531 Total 39,181,994 27,486,820 - - - (33,535,360) - (126,514) (309,902) 3,181,602 (529,821) (2,492,865) (2,492,865) 86,785 127,598 86,785 300,950 17,427,103 8,010,940 5,590,679 31,028,722 Movements in the gross amount of issued loans for the year ended 31 December 2019 are as follows: Stage 1 Stage 2 Stage 3 12 month ECL Lifetime ECL- not credit-impaired Lifetime ECL- credit-impaired Total Balance at 1 January 2019 29,525,558 9,459,944 4,721,083 43,706,585 New loans issued Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Repaid loans Write off for the year Currency movement Balance at 31 December 2019 37,694,127 2,662,330 (12,484,970) - (33,422,072) - 24,909 - (1,149,979) 14,193,480 (5,719,905) (7,405,577) - 150,751 - 37,694,127 (1,512,351) (1,708,510) 5,719,905 - - - (1,696,641) (42,524,290) (20,320) 150,232 (20,320) 325,892 23,999,882 9,528,714 5,653,398 39,181,994 7.
FEE AND COMMISSION INCOME Fee and Commission income includes penalties on early payments, actual penalties on overdue days and other service commission fees, which in 2020 and 2019 amounted GEL297,736 and GEL542,186, respectively.

Page 20 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 8.
ADMINISTRATIVE AND OTHER OPERATING EXPENSES Administrative and other operating expenses can be presented as follows: Professional services* Impairment of prepayments Office maintenance Utilities Communication expenses Software maintenance Court related expenses Taxes other than income tax Stationary Fuel Business trips Bank fees Advertising and marketing expenses Other *Audit fee in the year 2020 amounted GEL44,664 (2019: GEL49,677) 9.
INCOME TAX BENEFIT (EXPENSE) Income tax benefit can be presented as follows: Current tax Unrecognized tax loss carry-forward Effect of temporary differences 2020 (152,800) (138,533) (104,261) (81,409) (88,028) (71,865) (46,208) (36,503) (28,847) (26,982) (20,133) (13,507) (6,180) (60,977) 2019 (195,443) - (72,387) (128,146) (79,844) - (111,400) (17,360) (22,476) (49,860) (105,809) (47,756) (81,750) (78,324) (876,233) (990,555) 2020 2019 - - (237,967) (281,840) 241,322 44,153 3,355 (237,687) Reconciliation of income tax benefit based on statutory rate with actual income tax is as follows: Loss before income tax Applicable tax rate Theoretical income tax Unrecognized tax loss carry-forward Effect of permanent differences 2020 (4,152,910) 15% 622,937 (237,967) (381,615) 2019 (60,750) 15% 9,113 (281,840) 35,040 3,355 (237,687) Page 21 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 10.
CASH AND CASH EQUIVALENTS Cash and cash equivalents can be presented as follows: Cash on hand Cash on current accounts with banks in GEL Cash on current accounts with banks in other currencies 31 December 2020 31 December 2019 114,716 2,521,643 90,654 2,727,013 554,848 478,593 596,230 1,629,671 Cash and cash equivalents are recognized under Stage 1 ECL assessment and their expected credit losses are not material.
As at 31 December 2020 and 2019, cash and cash equivalents are placed at commercial banks with credit ratings are B (Short-term) and BB-/B+ (Long-term), respectively.

11.
11.

AMOUNTS DUE FROM CREDIT INSTITUTIONS The Company aggregates non-derivative transactions of back-to-back loans from banks guaranteed by foreign currency deposits placed at the same banks as derivative instruments (foreign currency contracts), due to the fact that the transactions (placement of deposit and receiving of the loan) result, in substance, in a derivative.
The conclusion is based on the following indicators: - They are entered into at the same time and in contemplation of one another; - They have the same counterparty; - They relate to the same risk; - There is no apparent economic need or substantive business purpose for structuring the transactions separately that could not also have been accomplished in a single transaction; - There is an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors, and future settlement.
Financial instruments at fair value through profit or loss as at 31 December 2019 comprise foreign currency contracts with the amount of GEL583,167 (liability).

In 2020, the Company repaid borrowing but left its respective cash at bank since it was going to take a new loan.

The cash is restricted, original maturity is more than three months and the Company is not able to use it on its own discretion.

As such, The Company classified GEL5,554,207 as amounts due from credit institutions.

12.
12.

LOANS TO CUSTOMERS Loans to customers can be presented as follows: Principal Interest Impairment allowance 31 December 2020 28,690,388 31 December 2019 37,439,003 2,337,936 1,742,991 (4,979,186) (4,534,984) 26,049,138 34,647,010 Page 22 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 12.
LOANS TO CUSTOMERS (CONTINUED) Portfolio distribution as at 31 December 2020, by loan type is as follows: 31 December 2020 Agro Loan Business Loan Consumer Loan Pawnshop Loan Gross Amount Stage 1 16,034,458 11,828,452 3,056,502 108,912 (212,064) (245,089) (54,952) - ECL Stage 2 (657,206) (441,377) (72,905) - Stage 3 (1,778,365) (1,210,680) (306,548) - Total ECL (2,647,635) (1,897,146) (434,405) - Net Amount 13,386,823 9,931,306 2,622,097 108,912 ECL % 16.51% 16.04% 14.21% 0.00% 31,028,324 (512,105) (1,171,488) (3,295,593) (4,979,186) 26,049,138 16.05% Portfolio distribution as at 31 December 2019, by loan type is as follows: 31 December 2019 Agro Loans Business Loans Consumer Loans Pawnshop Loans Gross Amount 19,024,097 16,103,874 3,921,107 132,916 Stage 1 (225,232) (283,468) (89,715) - ECL Stage 2 (749,473) (427,232) (74,479) - Stage 3 (1,044,451) (1,279,517) (360,198) (1,219) Total ECL (2,019,156) (1,990,217) (524,392) (1,219) Net Amount 17,004,941 14,113,657 3,396,715 131,697 39,181,994 (598,415) (1,251,184) (2,685,385) (4,534,984) 34,647,010 ECL % 10.61% 12.36% 13.37% 0.92% 11.57% Information about movements in provision for loan impairment is given in Note 6.
In January 2020 the Company hired external debt collection agency.

The Company handed over the loans with the gross amount GEL1,775,440 to the agency for collection for which it would pay the commission fee amounted 25 % of recovered amount.

There were no material collections from the agency thus the Company decided to write these loans off.

For further information refer to Note 6.

Currency analysis of loans to customers is given in Note 4.
Analysis by credit quality of loans outstanding at 31 December 2020 is as follows: Agro Loan 31 December 2020 Principal -no overdue -overdue less than 31 days -overdue 31-60 days -overdue 61-90 days -overdue more than 90 days Business Loan 31 December 2020 -no overdue -overdue less than 31 days -overdue 31-60 days -overdue 61-90 days -overdue more than 90 days ECL % 5.91% 11.12% 21.62% 17.70% 56.54% 10,902,672 1,099,662 125,026 150,079 Interest 454,844 97,738 13,860 44,985 Gross Amount 11,357,516 1,197,400 138,886 195,064 ECL Net Amount (671,544) (133,175) (30,029) (34,522) 10,685,972 1,064,225 108,857 160,542 2,374,799 770,793 3,145,592 (1,778,365) 1,367,227 14,652,238 1,382,220 16,034,458 (2,647,635) 13,386,823 16.51% Principal 8,537,562 859,863 33,790 43,431 1,587,733 11,062,379 Interest 290,944 61,302 2,667 3,914 407,246 766,073 Gross Amount 8,828,506 921,165 36,457 47,345 ECL Net Amount (536,128) (134,988) (8,827) (6,523) 8,292,378 786,177 27,630 40,822 1,994,979 (1,210,680) 784,299 ECL % 6.07% 14.65% 24.21% 13.78% 60.69% 11,828,452 (1,897,146) 9,931,306 16.04% Page 23 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 12.
LOANS TO CUSTOMERS (CONTINUED) Consumer Loan 31 December 2020 Principal Interest -no overdue -overdue less than 31 days -overdue 31-60 days -overdue 61-90 days -overdue more than 90 days 2,271,703 220,686 11,391 8,293 358,985 Gross Amount 2,354,902 230,645 12,280 8,849 ECL Net Amount ECL % (99,984) (20,117) (3,551) (4,205) 2,254,918 210,528 8,729 4,644 4.25% 8.72% 28.92% 47.52% 83,199 9,959 889 556 90,841 449,826 (306,548) 143,278 68.15% 2,871,058 185,444 3,056,502 (434,405) 2,622,097 14.21% Pawnshop Loan 31 December 2020 Principal Interest -no overdue -overdue less than 31 days 98,690 6,023 4,050 149 Gross Amount 102,740 6,172 ECL Net Amount ECL % - - 102,740 6,172 0.00% 0.00% Analysis by credit quality of loans outstanding at 31 December 2019 is as follows: Agro Loan -no overdue -overdue less than 31 days -overdue 31-60 days -overdue 61-90 days -overdue more than 90 days Business loans -no overdue -overdue less than 31 days -overdue 31-60 days -overdue 61-90 days -overdue more than 90 days 5.35% 10.67% 14.35% 18.85% 43.21% 4.30% 11.34% 17.49% 11.90% 48.70% Principal Interest 14,867,605 526,297 849,449 103,551 173,311 36,284 17,763 32,643 Gross Amount 15,393,902 885,733 121,314 205,954 ECL Net Amount ECL % (823,934) 14,569,968 (94,544) (17,407) (38,820) 791,189 103,907 167,134 2,002,079 415,115 2,417,194 (1,044,451) 1,372,743 17,995,995 1,028,102 19,024,097 (2,019,156) 17,004,941 10.61% Principal Interest 11,569,835 1,518,006 123,689 52,890 164,466 40,762 4,233 2,908 Gross Amount 11,734,301 ECL Net Amount ECL % (504,925) 11,229,376 1,558,768 (176,768) 1,382,000 127,922 55,798 (22,369) (6,638) 105,553 49,160 2,268,728 358,357 2,627,085 (1,279,517) 1,347,568 15,533,148 570,726 16,103,874 (1,990,217) 14,113,657 12.36% Page 24 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 12.
LOANS TO CUSTOMERS (CONTINUED) Consumer Loan -no overdue -overdue less than 31 days -overdue 31-60 days -overdue 61-90 days -overdue more than 90 days Pawnshop Loans -no overdue -overdue less than 31 days -overdue 31-60 days -overdue more than 90 days Principal Interest ECL Net Amount ECL % Gross Amount 2,900,338 333,906 15,669 73,917 41,921 9,957 636 7,448 2,858,417 323,949 15,033 66,469 514,990 (120,134) 2,780,204 (33,164) (2,643) (8,254) 4.14% 9.93% 16.87% 11.17% 60.31% 300,742 13,026 65,663 237,080 82,287 597,277 (360,197) 3,778,858 142,249 3,921,107 (524,392) 3,396,715 13.37% Principal Interest Gross Amount 118,063 1,109 119,172 4,364 540 8,035 85 20 700 4,449 560 8,735 ECL Net Amount ECL % - - - 119,172 4,449 560 0.00% 0.00% 0.00% (1,219) 7,516 13.96% 131,002 1,914 132,916 (1,219) 131,697 0.92% Loans with collaterals and without collaterals outstanding at 31 December 2020 can be presented as follows: 31 December 2020 Gross Amount ECL Collateralized Loans Uncollateralized Loans 26,004,144 5,024,180 (4,208,698) (770,488) 31,028,324 (4,979,186) Net Amount 21,795,446 4,253,692 26,049,138 ECL % 16.18% 15.33% 16.05% Loans with collaterals and without collaterals outstanding at 31 December 2019 can be presented as follows: 31 December 2019 Gross Amount ECL Collateralized Loans Uncollateralized Loans 32,922,728 6,259,266 (3,790,607) (744,377) Net Amount 29,132,121 5,514,889 ECL % 11.51% 11.89% 39,181,994 (4,534,984) 34,647,010 11.57% Loans with collaterals by collateral’s type can be presented as follows: Collateral Type Real Estate Personal Machinery Jewelry 31 December 2020 15,378,586 31 December 2019 14,386,039 10,382,664 18,103,106 133,982 108,912 300,667 132,916 26,004,144 32,922,728 Page 25 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 13.
OTHER ASSETS Other assets can be presented as follows: Repossessed collaterals* Prepayments Derivative financial instrument** Tax asset*** Other Impairment of prepayments 31 December 2020 5,837,170 31 December 2019 4,833,744 138,424 64,872 - 80,082 (138,424) 5,982,124 217,920 - 54,873 65,820 - 5,172,357 * As at 31 December 2020 the movements of the balance of repossessed collaterals can be presented as follows: 1 January Additions Disposals Impairment 31 December 4,833,744 1,341,773 (253,771) (84,576) 5,837,170 In 2019, because of change in Georgian legislation, the Company was able to repossess and sell its collaterals more effectively.
As such, the Company terminated the recognition of investment properties and transferred these assets to other assets as repossessed collaterals at the end of 2019.
As at 31 December 2019 the movements of the balance of repossessed collaterals can be presented as follows: 1 January Additions Disposals Loss on revaluation of investment property Transfer to other assets* 31 December 2,444,057 3,057,502 (326,558) (341,257) (4,833,744) - Changes that are presented in the statement of total comprehensive income can be presented as follows: Gain at initial recognition Impairment of repossessed collaterals Loss on revaluation of investment property Net loss on sale of repossessed collaterals 2020 351,793 (84,576) 2019 590,709 - - (341,258) (51,170) 216,047 - 249,451 As at 31 December 2019 repossessed collaterals with the value GEL1,414,350 were pledged as collateral for borrowings from JSC TBC bank.
As at 31 December 2020 the Company fully repaid borrowings from JSC “TBC Bank”.

** Forward contract balance as at 31 December 2020 amounted USD6,000,000 which means that the Company has to repurchase GEL19,659,600 as the contract matures.

*** According to the Georgian Tax Legislation, the Company should pay taxes on unified treasury code applicable for all taxes.

As a result, as at 31 December 2020 and 2019 the Company presents tax assets and liabilities on a net basis.
Page 26 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 14.
DEFERRED TAX ASSET Deferred tax asset can be presented as follows: At 1 January Recognized in profit and loss Income tax benefit/(expense) At 31 December 31 December 2020 31 December 2019 322,825 560,512 3,355 326,180 (237,687) 322,825 Temporary differences as at 31 December 2020 can be presented as follows: Loans to customers Right of use asset Other assets Property and equipment and intangible assets Borrowings and subordinated borrowings Lease liabilities Other liabilities Tax loss carry-forward Total temporary differences Unrecognized deferred tax assets Tax loss carry-forward Total unrecognized deferred tax assets Asset 2020 303,009 - - - 40,350 277,806 5,432 519,807 Liability 2020 - (218,675) (30,804) (50,938) - - - - 1,146,404 (300,417) Net 2020 303,009 (218,675) (30,804) (50,938) 40,350 277,806 5,432 519,807 845,987 (519,807) (519,807) - - (519,807) (519,807) Net tax assets/(liabilities) 626,597 (300,417) 326,180 Temporary differences as at 31 December 2019 can be presented as follows: Loans to customers Right of use asset Other assets Property and equipment and intangible assets Borrowings and subordinated borrowings Lease liabilities Other liabilities Investment property Tax loss carry-forward Total temporary differences Unrecognized deferred tax assets Tax loss carry-forward Total unrecognized deferred tax assets Tax asset (liabilities) Set off of tax Net tax assets (liabilities) Asset 2019 378,174 - - - 24,931 362,517 6,583 - 281,840 1,054,045 (281,840) (281,840) 772,205 (449,380) 322,825 Liability 2019 - (331,293) - (61,392) - - - (56,695) - (449,380) - - (449,380) 449,380 Net 2019 378,174 (331,293) - (61,392) 24,931 362,517 6,583 (56,695) 281,840 604,665 (281,840) (281,840) 322,825 - (Charged)/ credited to profit or loss 2020 (75,165) 112,618 25,891 10,454 15,419 (84,711) (1,151) 237,967 241,322 (237,967) (237,967) 3,355 (Charged) credited to profit or loss 2019 (208,085) (331,293) (8,504) 17,162 (32,919) 362,517 853 (37,418) 281,840 44,153 (281,840) (281,840) (237,687) - - 322,825 (237,687) Page 27
 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 15.
INTANGIBLE ASSETS Intangible assets can be presented as follows: Historical cost Historical cost 31.12.2018 Additions Disposals Historical cost 31.12.2019 Additions Disposals Historical cost 31.12.2020 Accumulated amortization Accumulated amortization 31.12.2018 Amortization Accumulated amortization of disposals Accumulated amortization 31.12.2019 Amortization Accumulated amortization of disposals Accounting and other software Other intangible assets 321,310 133,896 - 455,206 14,589 - 469,795 - - (71,342) (38,891) - (110,233) (60,154) - Total 350,599 144,308 - 494,907 14,589 - 29,289 10,412 - 39,701 - - 39,701 509,496 - - (5,205) (1,635) - (6,840) (1,939) - - - (76,547) (40,526) - (117,073) (62,093) - Accumulated amortization 31.12.2020 (170,387) (8,779) (179,166) Net book value Net book value 31.12.
2019 Net book value 31.12.

2020 16.

LEASES 344,973 299,408 32,861 30,922 377,834 330,330 The Company leases a head office and 12 (2019: 14) service centres around Georgia.

Rent for these spaces is fixed over the lease term and are denominated in USD and GEL.

The lease term is defined as 3 years (2019: 3 years and less).

The incremental borrowing rate for 2020 was 7.45%-12.51% per annum in terms of lease terms and currency (2019: 7.88%-12.51%).
Right-of-use assets can be presented as follows: At 1 January 2019 Addition due to changes in estimate Depreciation At 31 December 2019 Addition Effect of modification to lease terms Depreciation At 31 December 2020 Head office and branches 2,381,734 734,412 (907,529) 2,208,617 392,761 (379,506) (764,036) 1,457,836 Page 28 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 16.
LEASES (CONTINUED) Lease liabilities can be presented as follows: At 1 January 2019 Addition due to changes in estimate Interest expense Lease payments Currency movement difference At 31 December 2019 Addition Effect of modification to lease terms Interest expense Lease payments Rent concessions* Currency movement difference At 31 December 2020 Head office and branches 2,381,734 734,412 163,452 (1,010,576) 147,759 2,416,781 392,761 (425,297) 170,108 (833,507) (178,736) 309,932 1,852,042 * Due to government restrictions imposed in the country aiming prevention of COVID-19 spread, the Company's usage of office and branch space significantly reduced.
To reflect this, the Company received rent concession from a lessor in the form of rent forgiveness (reductions in rent contractually due under the terms of lease agreement) From April of 2020 to June of 2021.

Terms of rent concession satisfied all criteria for applying practical expedient introduced by the amendments to IFRS 16.

The application of the practical expedient has resulted in the reduction of total lease liabilities of GEL178,736.
The effect of this reduction has been recorded in profit or loss as other income in the period in which the event or condition that triggers those payments occurred.

17.
PROPERTY AND EQUIPMENT Property and equipment can be presented as follows: Historical cost 31 December 2018 Additions 31 December 2019 Additions Disposals 31 December 2020 Accumulated depreciation 31 December 2018 Depreciation for the year 31 December 2019 Depreciation for the year Disposals 31 December 2020 Net book value Leasehold improvements Furniture and office equipment Computer and communication equipment 261,976 42,656 304,632 - (36,153) 268,479 (88,209) (42,259) (130,468) (30,662) 36,153 413,164 14,775 427,939 50,805 (43,960) 434,784 (255,596) (56,774) (312,370) (49,481) 43,960 771,366 30,259 801,625 20,897 (32,064) 790,458 (645,068) (97,771) (742,839) (55,957) 32,064 Vehicles Total 88,233 1,534,739 - 87,690 88,233 1,622,429 - - 71,702 (112,177) 88,233 1,581,954 (22,172) (1,011,045) (5,299) (202,103) (27,471) (1,213,148) (5,299) - (141,399) 112,177 (124,977) (317,891) (766,732) (32,770) (1,242,370) Net book value 31.12.2019 Net book value 31.12.2020 174,164 143,502 115,569 116,893 58,786 23,726 60,762 55,463 409,281 339,584 Page 29 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 17.
PROPERTY AND EQUIPMENT (CONTINUED) The Company has fully depreciated assets with the amount GEL560,118 and GEL601,789 for the year ended 31 December 2020 and 2019, respectively.

18.
BORROWINGS Borrowings can be presented as follows: Resident financial institutions Interest rate 7%-14.50% Non-resident financial institutions 5.5% - 12% Currency GEL-USD USD-EUR Shareholders 5% - 15% GEL-USD-EUR 31 December 2020 31 December 2019 - 27,652,473 8,187,961 865,966 24,974,416 8,147,401 35,840,434 33,987,783 Details for borrowings from non-resident financial institutions can be presented as follows: HANSAINVEST Finance I GmbH & Co. geschlossene Investmentkommanditgesellschaft Bank Im Bistum Microfinance Enhancement Facility SA GLS ALTERNATIVE INVESTMENTS Triple Jump Innovation Fund SME Finance Loans for Growth INVEST IN VISION EMF Microfinance Fund MCE Social Capital Accrued interest and principal balances can be presented as follows: Principal balance Accrued interest 31 December 2020 31 December 2019 5,731,411 3,206,047 4,903,367 4,073,293 3,293,644 3,311,687 2,993,174 2,540,954 804,943 - 3,868,243 3,194,551 2,930,610 2,927,642 2,619,644 3,321,818 1,460,170 1,445,691 27,652,473 24,974,416 31 December 2020 35,397,669 31 December 2019 33,317,430 442,765 670,353 35,840,434 33,987,783 Currency and maturity analysis of borrowings is given in Note 4.
Current and non-current portions of borrowings can be presented as follows: Current* Non-current 31 December 2020 35,840,434 31 December 2019 29,882,151 - 4,105,632 35,840,434 33,987,783 *The Company has financial as well as non-financial covenants regarding the borrowings from non-resident financial institutions.

In 2019 the Company was in breach with some financial covenants.

As a result, in 2019 the Company presented 21,708 thousand as current.
The Company does not expect that these financial institutions will use their right to demand all the principal as well as accrued balance.

Page 30 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 18.
BORROWINGS (CONTINUED) Changes in borrowings (including subordinated borrowings) arising from financing activities, including both changes arising from cash flows and non-cash flows can be presented as follows: 1 January Cash flow Received (paid) loans, net Interest paid Non-cash flows Interest accrual Transfer to share capital Translation differences 31 December 19.
SUBORDINATED BORROWINGS Subordinated borrowings can be presented as follows: Principal balance Accrued interest 31 December 2020 31 December 2019 34,996,013 44,960,564 (3,005,088) (4,259,021) (10,314,344) (6,232,369) 4,096,874 (448,612) 6,219,332 5,698,522 (1,751,593) 2,635,233 37,599,498 34,996,013 31 December 2020 31 December 2019 1,715,809 43,255 973,584 34,646 1,759,064 1,008,230 The Company's subordinated borrowings are denominated in USD with equivalent value of GEL1,154,064 (2019: 1,008,230) and GEL denominated with the value of GEL605,000.
As at 31 December 2020 subordinated loans are classified as on-demand since there were no agreement in regards of restructuring borrowings, for details refer to Note 3.

As at 31 December 2019 subordinated loans had to be repaid in 2021-2023 years.

Interest rate varied between 11%-12% (2019: 11%-12%) In the event of a bankruptcy principal payments as well as interest payments rank junior to any claim senior creditors are entitled to.
The payments shall rank pari passu among subordinated debts and to other claims of junior creditors but remain senior to equity.

Subordinated borrowings amounted GEL448,612 (2019: GEL1,751,593) were converted into the share capital.

20.
20.

OTHER LIABILITIES Other liabilities can be presented as follows: Received advances* Taxes payable** Accounts payable to employees Other accounts payable 31 December 2020 31 December 2019 138,116 42,446 36,214 51,644 268,420 62,990 - 43,885 68,752 175,627 *Received advances presents amounts received from owners of repossessed assets.

Page 31 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 20.
OTHER LIABILITIES (CONTINUED) **According to the Georgian Tax Legislation, the Company should pay taxes on unified treasury code applicable for all taxes.

As a result, as at 31 December 2020 and 2019 the Company presents tax assets and liabilities on a net basis.

21.

SHARE CAPITAL AND SHARE PREMIUM The Company's share capital as at 31 December 2020 and 2019 comprise of 1,815,568 and 1,515,567 ordinary shares in issue with a value of GEL1 each, respectively.
On 28 April 2020 the company issued in additional 300,000 shares with nominal value of GEL1 per share.

Placement price was defined as GEL2 per share and the share premium has increased with GEL300,000.

On 26 May and 20 August 2019, the company issued in addition 381,655 shares with nominal value of GEL1 per share.

Placement price was defined as GEL9 per share and the share premium has increased with GEL3,053,240.

Information about Shareholders is disclosed in Note 1.

22.
22.

CONTINGENCIES AND COMMITMENTS Litigation In the ordinary course of business, the Company is subject to legal actions and complaints.

However, the Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of the Company.
NBG regulations On 5 July 2018 the president of the National Bank of Georgia has approved regulation on assets classification and the creation of reserves for possible losses by Microfinance Organisations.

The Management states that the Company is in compliance with the requirements of NBG for the years 2020 and 2019, except the following ratios - Supervisory capital ratio and liquidity ratio.
The Company got waiver from the NBG, according to which the Company is obliged to meet these ratios by 31 December 2022.

It should be noted that this assessment relies on estimates and assumptions and may involve a series of complex judgments about future events and could be different from the judgments of regulators.
Management report In accordance with the Law on accounting, reporting and auditing (article 7) the Company has an obligation to prepare and submit Management Report to the State Regulatory Authority, together with Independent Auditors’ Report no later than 1 October of the year following the reporting period.

The Company has fulfilled this obligation at the date of issue of the financial statements.
Taxes Georgian tax legislation is subject to varying interpretations, and changes, which can occur frequently.

Management’s interpretation of such legislation as applied to the transactions and activity of the Company may be challenged by the relevant authorities.

As per currently effective tax legislation in Georgia fiscal periods remain open to review by the authorities in respect of taxes for 3 calendar years preceding the period of review.
Provisions for tax liabilities are recognised when the amount can be measured reliably.

No provision is recognised for uncertain tax positions if no reliable estimate can be made.

The Company’s Management believes that Georgian tax legislation does not give raise to any further obligation other than already recorded and the Company’s tax positions will be sustained.
Page 32 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 23.
TRANSACTIONS WITH RELATED PARTIES Related parties or transactions with related parties, as defined by IAS 24 “Related party disclosures”, represent: a) Parties that directly, or indirectly through one or more intermediaries: control, or are controlled by, or are under common control with, the Company (this includes parents, subsidiaries and fellow subsidiaries); have an interest in the Company that gives them significant influence over the Company; or that have joint control over the Company; b) Members of key management personnel of the Company or its parent; c) Close members of the family of any individuals referred to in (a) or (b); d) Parties that are entities controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (b) or (c); In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.
Details of transactions between the Company and related parties are disclosed below.
Related party balances and transactions as and for the year ended 31 December 2020: Financial statement caption Shareholders Key management personnel Other related parties Borrowings Subordinated borrowings Interest expense Staff costs including salaries and bonuses General and administrative expenses 8,187,961 1,759,064 (378,580) - - - (336,000) - Related party balances and transactions as and for the year ended 31 December 2019: - - - - - Financial statement caption Shareholders Borrowings Subordinated borrowings Interest expense Staff costs including salaries and bonuses General and administrative expenses 8,147,401 745,861 (674,798) - - Key management personnel - - - (336,000) (38,986) Other related parties - 233,054 (31,247) - - 24.
EVENTS AFTER THE REPORTING PERIOD In 2021 the Company signed final restructuring agreement on borrowings.

Details were as follows: - - - - - Shareholder senior loans amounting GEL3,230,000 shall be converted into equity until the target date of no later than 30th of May 2021; Shareholder subordinated loans amounting GEL1,100,000 shall be converted into equity within 20 business days after the execution of the “term-sheet”.

The target shall be delivered no later than 30th of May 2021.
40% of contractual interest rate shall be waived during 2021 and 2022 for all senior loans starting from April 2021; Each remaining lender shall receive from the Company an early partial pay-out of at least 28% of it outstanding exposure as of 31 December 2020, no later than by 30 August 2021; The repayments of the remaining principal outstanding amounts under each of the credit facilities (amounts due after partial early pay-out is executed) shall be resumed in June 2024 and no later than 31 March 2025, all senior debt shall be paid in full.
Accordingly, from 31 December 2020 until the issuance of these financial statements the share capital was increased by GEL4,330,000 with the conversion of the borrowings from the Company’s shareholders.

Other milestines are still in progress and the Management believes it will not have any problems delivering them.

Page 33 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 25.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principal accounting policies applied in the preparation of these financial statements are set out below.

These policies are consistently applied to all the years presented, unless otherwise stated.

FOREIGN CURRENCY TRANSLATION The functional currency of the Company is the currency of the primary economic environment in which the entity operates.

The Company’s functional and presentation currency is the national currency of Georgia, Lari.
Monetary assets and liabilities are translated into functional currency at the official exchange rate for the respective balance sheet dates.

Foreign exchange gains and losses resulting from the settlement of transactions and from the translation of monetary assets and liabilities at year-end official exchange rates are recognized in statement of comprehensive income.

Translation at year-end rates does not apply to nonmonetary items.
The closing exchange rates used for translating foreign currency balances to Georgian Lari were: Exchange rate as at 31 December 2020 Exchange rate as at 31 December 2019 FINANCIAL INSTRUMENTS Official rate of the National Bank of Georgia USD 3.2766 2.8677 EUR 4.0233 3.2095 In according to IFRS 9 the Company classifies all of its financial assets based on the business model.
IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL).

Financial liabilities are measured at amortized cost or at fair value through profit or loss (FVTPL).

All derivative instruments are measured at fair value through profit or loss (FVTPL).
Initial recognition of financial instruments Financial assets and financial liabilities are recognised in the Company’s financial position when the Company becomes a party to the contractual provisions of the instrument.

When financial instruments are recognised initially, they are measured at fair value, adjusted, in the case of instruments not at fair value through profit or loss, for directly attributable fees and costs.
If the transaction price differs from fair value at initial recognition, the Company accounts for such difference as follows: • • if the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e., a Level 1 input) or based on a valuation technique that uses only data from observable markets, the Company recognises the difference between the fair value at initial recognition and the transaction price as a gain or loss; in all other cases, the initial measurement of the financial instrument is adjusted to defer the difference between the fair value at initial recognition and the transaction price.
After initial recognition, the Company recognises that deferred difference as a gain or loss only when the inputs become observable, or when the instrument is derecognised.

FINANCIAL ASSETS Classification and subsequent measurement On initial recognition, a financial asset is classified into one of the following measurement categories: amortised cost; fair value through other comprehensive income (FVOCI); or fair value through profit or loss (FVTPL).
FINANCIAL ASSETS AT AMORTIZED COST Financial asset at amortised cost is the most relevant measurement category to the Company.

The Company measures financial assets at amortised cost if both of the following conditions are met: Page 34 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 25.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) • • The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding.

Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment.
Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.
FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME A financial asset is measured at fair value through other comprehensive income if it meets both of the following conditions and is not designated as at fair value through profit or loss: • • The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL.

This includes all derivative financial assets.

The Company’s all financial assets are measured at amortised cost, except Derivative financial assets.
BUSINESS MODEL ASSESSMENT There are three business models available under IFRS 9: • Hold to collect: It is intended to hold the asset to maturity to earn interest, collecting repayments of principal and interest form the counterparty.

• Hold to collect and sell: this model is similar to the hold to collect model, except that the entity may elect to sell some or all of the assets before maturity as circumstances change or to hold the assets for liquidity purposes.
• Other: all those models that do not meet the ‘hold to collect’ or ‘hold to collect and sell’ qualifying criteria.

The assessment of business model requires judgment based on facts and circumstances at the date of the assessment.

The business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios per instrument type and is based on observable factors.
The Company has considered quantitative factors and qualitative factors such as how the performance of the business model and the financial assets held within that business model are evaluated and reported to the key management personnel; the risks that affect the performance of the business model and, in particular, the way those risks are managed; and how managers of the business are compensated.
Financial assets that are held for trading or are managed and whose performance is evaluated on a fair value basis are measured at FVTPL, because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.
SOLELY PAYMENTS OF PRINCIPAL AND INTEREST (SPPI) If a financial asset is held in either to a Hold to Collect or a Hold to Collect and Sell business model, then assessment to determine whether contractual cash flows are solely payments of principal and interest on the principal amount outstanding at initial recognition is required to determine the classification.

The SPPI test is performed on an individual instrument basis.
Contractual cash flows, that represent solely payments of principal and Interest on the principal amount outstanding, are consistent with basic lending arrangement.

Interest is consideration for the time value of money and the credit risk associated with the principal amount outstanding during a particular period of time.

It can also include consideration for other basic lending risks (e.g.

liquidity risk) and costs (e.g.


administrative costs) associated with holding the financial asset for a particular period of time, and a profit margin that is consistent with a basic lending arrangement.

Page 35 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 25.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In assessing whether the contractual cash flows are SPPI, the Company considers whether the contractual terms of the financial asset contain a term that could change the timing or amount of contractual cash flows arising over the life of the instrument which could affect whether the instrument is considered to meet the SPPI test.
If the SPPI test is failed, such financial assets are measured at FVTPL with interest earned recognised in other interest income.
DERECOGNITION OF FINANCIAL ASSETS A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Company’s statement of financial position) when: • • The rights to receive cash flows from the asset have expired, or The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
IMPAIRMENT OF FINANCIAL ASSETS Bases for ECL principles In according to IFRS 9 requirements the Company records an allowance for expected credit loss (ECL) on all of its debt financial assets at amortised cost or FVOCI.

Equity instruments are not subject to impairment under IFRS 9.
The allowance is based on the ECL associated with the probability of default in the next 12 months unless there has been a significant increase in credit risk since origination, in which case the allowance is based on the ECL over the life of the asset.

If the financial asset meets the definition of purchased or originated credit impaired, the allowance is based on the change in the lifetime ECL.
Under IFRS 9, the Company first evaluates individually whether objective evidence of impairment exists for loans that are individually significant.

It then collectively assesses loans that are not individually significant and loans which are significant but for which there is no objective evidence of impairment available under the individual assessment.

Collectively assessesed loans are grouped based on shared credit risk characteristics, collateral type and product type.
Three stage approach IFRS 9 introduces a three-stage approach to impairment for Financial Instruments that are performing at the date of origination or purchase.

This approach is summarised as follows: Stage 1: The Company recognizes a credit loss allowance at an amount equal to 12-month expected credit losses.
This represents the portion of lifetime expected credit losses from default events that are expected within 12 months of the reporting date, assuming that credit risk has not increased significantly after initial recognition.

For those financial assets with a remaining maturity of less than 12 months, a PD is used that corresponds to the remaining maturity.
Stage 2: The Company recognizes a credit loss allowance at an amount equal to lifetime expected credit losses for those Financial Instruments which are considered to have experienced a significant increase in credit risk since initial recognition.

This requires the computation of ECL based on lifetime probability of default that represents the probability of default occurring over the remaining lifetime of the Financial Instrument.
Allowance for credit losses is higher in this stage because of an increase in credit risk and the impact of a longer time horizon being considered compared to 12 months in Stage 1.

Financial Instruments in stage 2 are not yet deemed to be credit-impaired.

Stage 3: If the Financial Instrument is credit-impaired, it is then moved to stage 3.
The Company recognizes a loss allowance at an amount equal to lifetime expected credit losses, reflecting a Probability of Default (PD) of 100 % for those Financial Instruments that are credit-impaired.

Page 36 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 25.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Allocating issued loans on stages based on overdue days are as follows: Business Profile Agro Loans Business Loans Consumer Loans Pawnshop Loans Stage 1 Stage 2 Stage 3 0-30 0-30 0-30 0-30 31-90 31-90 31-90 31-90 >90 >90 >90 >90 The Company automatically assigns stage 1 to the loan when it is issued.
The loan is transferred to stage 2 if one of the following events occur: Initiation of legal proceedings on collateral by third party; a) 31 days past due; b) Loan restructuring; c) d) Criminal case against debtor or co-debtor; e) Loss of job by the borrower; f) Liquidation of a large part of the borrower's business; g) Significant deterioration of the sector in which the borrower operates.
The loan is transferred from stage 2 to stage 1 if following events occur: h) Overdue days are between 0 and 30; i) Improvement of the circumstances for which the loan was moved to stage 2.

Restructured loans aren’t transferred back to stage 1.

Defaulted loans are immediately moved to stage 3 and could be transferred to the previous stages.
Definition of default Default status is assigned/applied to the loan if one of the following events occur: a) 91 days past due; b) Death or disappearance of the debtor or co-debtor; c) Destruction or disappearance of collateral; d) Bankruptcy or liquidation of the business (Relevant in case of business loans).

The definition of default is in line with relevant regulations taking into account the 90 days past due cap presumption of IFRS 9.
The loans for which the Company recognizes default are credit-impaired loans.

Loan Restructuring Restructuring operation/transaction is made within current liability.

The agreement about changes in loan term is formed between the Company and borrower and the recalculation of loan schedule is done afterwards.

Loan restructuring is considered as change in credit risk for the Company.
Restructured loans are not moved directly to stage 3 because such modification does not lead to material losses for the Company.

Accordingly, restructured loans are moved to Stage 2.

Restructured loans aren’t transferred back to stage 1.
Significant increase in credit risk When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Company considers reasonable and supportable information that is relevant and available without undue cost or effort.

This includes both quantitative and qualitative information and analysis, based on the Company's historical experience and expert credit assessment and including forward-looking information.
Page 37 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 25.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The quantitative information is a primary indicator of significant increase in credit risk and is based on the change in lifetime PD by comparing: • • The remaining lifetime PD at the reporting date; with The remaining lifetime PD for this point in time that was estimated based on facts and circumstances at the time of initial recognition of the exposure.
As a backstop, the Company considers that a significant increase in credit risk occurs no later than when an asset is more than 30 days past due.
The Company monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that: • • The criteria are capable of identifying significant increases in credit risk before an exposure is in default; The criteria do not align with the point in time when an asset becomes 30 days past due; and There is no unwarranted volatility in loss allowance from transfers between 12-months PD (probability of default) and lifetime PD.
Forward-looking information Under IFRS 9, the allowance for credit losses is based on reasonable and supportable forward looking information obtainable without undue cost or effort, which takes into consideration past events, current conditions and forecasts of future economic conditions.

The Company incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL.
The Company has identified and documented the key drivers of credit risk and credit losses for the portfolio using an analysis of historical data, has assessed impact of macro-economic variables on probability of default and recovery rate.

The following macro-economic variables were analyzed: • • Real growth rate of GDP of Georgia; Inflation rate.
Forecasting of forward-looking information The Company uses last 4 years statistics (in case of existence) updated annually to estimate correlation between default rates and macroeconomic variables (GDP growth, inflation) and when calculating expected credit loss, specific macroeconomic forecast scenarios are considered if only correlation with inflation and GDP growth is more than 0.3 and less than -0.5, accordingly.
The Company uses baseline, upside and adverse scenarios provided by National Bank of Georgia.

Based on the recommendation of National Bank of Georgia, probability of 50% is assigned to the baseline scenario, while the upside and adverse scenarios are given probability of 25%.

The Company uses Vasicek model to adjust probability of default for forward-looking information.
As at 31 December 2020 the correlation between Company’s default rates and macroeconomic variables was not enough to consider them for expected credit loss’ calculation.
2020 2021 2022 GDP Growth, % Baseline scenario Upside scenario Adverse scenario Inflation rate, % Baseline scenario Upside scenario Adverse scenario (4.00)% (3.00)% (9.00)% 4.50% 5.50% 7.00% 4.50% 6.00% 2.50% 1.50% 4.00% 2.00% 5.00% 5.00% 4.00% 2.50% 3.00% 2.50% Page 38 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 25.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company presented sensitivity analysis of how expected credit losses would change if significant assumptions used in the calculations will change by 15%.

The table below shows the expected credit losses for each type of loan if the assumptions used will be consistent and correlated with the macroeconomic scenarios.

These includes changes of positive and negative 15% for the assumptions used in the calculations.
These scenarios are used for the weighted average probabilities and will change in accordance with the real scenarios in the future.

In case of 15% adverse scenario the expected credit losses will approximate GEL5,300 thousand and in case of 15% upside scenario it will approximate GEL4,700 thousand.

Measurement of ECL The key inputs into the measurement of ECL are the term structure of the following variables: • • • Probability of default (PD); Loss given default (LGD); Exposure at default (EAD).
Expected credit loss is measured separately for all segments.

These parameters are generally derived from internally developed statistical models and other historical data.

They are adjusted to reflect forward-looking information as described above.

The variables (excluding EAD) are calculated annually.

EAD is updated every time the loan loss provision is calculated.

Probability of default (PD) PD estimates are estimates at a certain date, which are calculated based on statistical rating models.
If a counterparty or exposure migrates between ratings classes, then this will lead to a change in the estimate of the associated PD.

PDs are estimated considering the contractual maturities of exposures.

The Company uses last 4 years statistics in case of existence (but not less than 2 years) to determine probability of default.
This figure is calculated separately for all segments by applying migration matrix to the loan portfolio, which shows the probability that the loan portfolio will move from one bucket to another.

Migration matrix is divided into following buckets: Bucket Days overdue Restructuring status Stage Closed 0 1-30 31-60 61-90 0-90 >90 >90 No No No No Yes Yes No I I II II II III III In case of default, default probability of 100% is assigned to the loan.
Loss given default (LGD) LGD is is used to determine the amount of losses that may arise in case of default.

In order to calculate loss given default, the Company uses loan amounts that were defaulted during last 4 years (in case of existence) and related cash inflows from default moment till reporting date.
The determination of the LGD considers expected future cash flows from collateral and other credit enhancements or expected pay-outs from bankruptcy proceedings for unsecured claims and where applicable time to realisation of collateral and the seniority of claims.

Recovery through collateral is further considered in LGD calculations individually for each Financial Instrument.
Page 39 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 25.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash inflows are discounted by the weighted average effective interest rate that must not exceed the limits set by the legislation.

Loss given default is calculated separately for all segments.
Exposure at default (EAD) Exposure of default (EAD): The EAD represents an estimate of the exposure to credit risk at the time of a potential default occurring during the life of a financial asset.

It represents the cash flows outstanding at the time of default, considering expected repayments, interest payments and accruals discounted at the EIR, that must not exceed the limits set by the legislation.
EAD is calculated separately for all segments and is used to determine the amount of portfolio that may be subjected to credit risk at the moment of default.

This figure is measured from outstanding loan amount considering expected changes and assuming that default occurs in the mid-year.

Expected changes are the scheduled principal repayments till the forecasted overdue date and interest accrued from overdue date till the date when the loan becomes default.
Prepayment rate calculated on historical data is also considered and it reduces outstanding balance till the default date (It is used in calculations if only the average maturity of the loan exceeds 12 months).

Exposure at default is calculated for each year during the weighted average contractual maturity of the portfolio.
INTEREST INCOME RECOGNITION For Financial Instruments in Stage 1 and Stage 2, the Company calculates interest income by applying the Effective Interest Rate (EIR) to the gross carrying amount.

Interest income for financial assets in Stage 3 is calculated by applying the EIR to the amortised cost (i.e., the gross carrying amount less credit loss allowance).
For Financial Instruments classified as purchased or originated credit-impaired only, interest income is calculated by applying a credit adjusted EIR to the amortised cost of these purchased or originated credit-impaired assets.

FINANCIAL LIABILITIES In according to IFRS 9 financial liabilities could be classified for one of these categories – “Financial liability at fair value through profit or loss” and “Other financial liabilities”.
The Company has estimated which business model was sufficiant to the Company’s financial liabilities and has classified them as “Other financial liabilities”.

The Company's other financial liabilities comprise of other liabilities and borrowings.

Other financial liabilities are initially recognised at fair value plus transaction costs that are directly attributable to their release.
The liabilities of such interest are subsequently recorded at amortized cost using the effective interest rate method which ensures accrual of interest on the carrying amount of the financial liability at constant rate.

Interest expenses for any financial liability include the initial transaction costs and any additional charges for the redemption of the obligation.
Offsetting of financial assets and liabilities Financial assets and 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 either settle on a net basis, or to realise the asset and settle the liability simultaneously.
Derecognition of financial assets and liabilities The Company derecognises financial assets when, and only when, when the rights to receive cash flows from the contract expires or these rights shall be transferred to the other party along with all risks and benefits related to the right of ownership.

Any share in the financial asset which is retained by the Company shall be recognized as a separate asset or liability.
The Company derecognises financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability.
The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in other comprehensive income.

Page 40 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 25.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE MEASUREMENT IFRS 13 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement.
The fair value hierarchy has the following levels: • • • Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities; Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; and Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
The level in the fair value hierarchy within which the financial asset or financial liability is categorised is determined on the basis of the lowest level input that is significant to the fair value measurement.

Financial assets and financial liabilities are classified in their entirety into only one of the three levels.

CASH AND CASH EQUIVALENTS Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Cash and cash equivalents include cash on hand, and all bank placements or receivables with original maturities of less than three months.

Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents.

DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments included in financial assets at fair value through profit or loss or loss in the statement of financial position comprise foreign currency forward contracts and currency swaps.
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value.

All derivatives are carried as financial assets when their fair value is positive and as financial liabilities when their fair value is negative.

Changes in the fair value of derivatives are recognised immediately in profit or loss.

BORROWED FUNDS Borrowed funds are initially recognised at fair value.
Subsequently they are stated at amortised cost and any difference between net proceeds and the redemption value is recognised in the statement of comprehensive income over the period of the borrowings, using the effective interest method.

LEASES All leases are accounted for by recognising a right-of-use asset and a lease liability except for: • Leases of low value assets; and • Leases with a duration of 12 months or less.
Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the Company’s incremental borrowing rate on commencement of the lease is used.
Right of use assets are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for: • Lease payments made at or before commencement of the lease; • Initial direct costs incurred; and • The amount of any provision recognised where the Company is contractually required to dismantle, remove or restore the leased asset.
Page 41 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 25.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Subsequent to initial measurement lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made.
Right-of-use assets are amortised on a straight-line basis over the remaining term of the lease or over the remaining economic life of the asset if, rarely, this is judged to be shorter than the lease term.
When the Company revises its estimate of the term of any lease (because, for example, it re-assesses the probability of a lessee extension or termination option being exercised), it adjusts the carrying amount of the lease liability to reflect the payments to make over the revised term, which are discounted at the updated discount rate that applied on lease commencement.
The carrying value of lease liabilities is similarly revised when the variable element of future lease payments dependent on a rate or index is revised.

In both cases an equivalent adjustment is made to the carrying value of the right-of-use asset, with the revised carrying amount being amortised over the remaining (revised) lease term.

SHARE CAPITAL, SHARE PREMIUM AND DIVIDENDS Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.

When share capital is increased, any difference between the registered amount of share capital and the fair value of actual consideration received is recognized as share premium.

Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared.
REPOSSESSED COLLATERAL Repossessed collateral represents non-financial assets acquired by the Company in settlement of overdue loans.

The assets are initially recognised at fair value when acquired and included in property and equipment, investment property or inventories within other assets depending on their nature and the intention in respect of recovery of these assets and are subsequently remeasured and accounted for in accordance with the accounting policies for these categories of assets.
PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS All property and equipment are stated at historical cost less depreciation.

Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably.
The carrying amount of the replaced part is derecognized.

All other repairs and maintenance are charged to the statement of comprehensive income during the financial period in which they are incurred.

Property and equipment are depreciated on a straight-line basis over expected useful lives.

Residual values are not considered.

Company’s intangible assets primarily include capitalized computer software.

They are stated at historical cost less accumulated amortization.
Intangible assets are amortized on a straight-line basis over expected useful lives.

Below are given relevant useful lives of property, equipment and intangible asset, which are used for depreciation/amortization calculations purposes.

Group Leasehold improvements Furniture IT equipment Vehicles Furniture Intangible Assets Useful life (year) 3-9 3-7 1-7 5 7-10 7-10 Page 42 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 25.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPAIRMENT OF TANGIBLE AND INTANGIBLE ASSETS OTHER THAN GOODWILL At each reporting date, the Company reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss.

If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of the impairment loss (if any).
Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest Company of cash-generating units for which a reasonable and consistent allocation basis can be identified.
Recoverable amount is the higher of fair value less costs to sell and value in use.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount.

An impairment loss is recognized immediately in statement of comprehensive income.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years.

A reversal of an impairment loss is recognized immediately in statement of comprehensive income.
CURRENT AND DEFERRED INCOME TAX The tax expense for the year comprises current and deferred tax.

Tax is recognized in the statement of comprehensive income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity.

In this case the tax is also recognized in other comprehensive income or directly in equity, respectively.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in Georgia and generates taxable income.

Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation.

It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.

However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit and loss.
Deferred income tax is determined using tax rate (and laws) that has been enacted or substantially enacted by the balance sheet date and is expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity where there is an intention to settle the balances on a net basis.
RECOGNITION OF INTEREST INCOME AND EXPENSE Interest income and expense are recorded in the statement of comprehensive income for all debt instruments on an accrual basis using the effective interest method.

This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
Page 43 of 44 JSC MICROFINANCE ORGANIZATION GEORGIAN CREDIT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (In GEL) 25.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents.
All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion of the specific transaction assessed based on the actual service provided as a proportion of the total services to be provided.

Additional information for recognition of interest income is disclosed above, in the article “INTEREST INCOME RECOGNITION”.
STAFF COSTS AND RELATED CONTRIBUTIONS Wages, salaries, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Company.

RECOGNITION OF OPERATING AND ADMINISTRATIVE EXPENSES Operating and administrative expenses are recognized in the statement of comprehensive income if there arises any decrease of future economic profit related to the decrease of an asset or increase of a liability that can be reliably assessed.
Operating and administrative expenses are recognized in the statement of comprehensive income immediately, if the expenses do not result in future economic profit anymore, or if future economic profit do not meet or stop to meet the requirements of recognition as an asset in the balance sheet.
EVENTS AFTER THE REPORTING PERIOD Events after the reporting period are events before the date of financial statements authorization for issue that provide additional information about the Company’s financial statements are reported in the financial statements.

Events after the reporting period that do not affect the financial position of the Company at the balance sheet date are disclosed in the Notes to the financial statements when material.
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS Contingent liabilities are not reflected in the financial statements, except for the cases when the outflow of economic benefits is likely to begin and the amount of such liabilities can be reliably measured.

The information on contingent liabilities is disclosed in the Notes to the financial statements except for cases when the outflow of economic benefits is unlikely.
Contingent assets are not reflected in the financial statements, but the information on them is disclosed when inflow of economic benefits is possible.

If economic benefits are sure to occur, an asset and related income are recognized in the financial statements for the period, when the evaluation change occurred.

A provision is a liability of uncertain timing or amount.
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.
A legal obligation is an obligation that derives from: (a) A contract (through its explicit or implicit terms); (b) Legislation; or (c) Other operation of law.
A constructive obligation is an obligation that derives from an entity's actions where: (a) By an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) As a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities Page 44 of 44