Trigon Agri A/S Annual Report 2007

Trigon Agri A/S

Annual Report 2007

Contents

Director’s report 2007... 4

Consolidated balance sheet ... 9

Consolidated Income Statement - by nature of expense ... 10

Consolidated Statement of changes in equity... 11

Consolidated Cash flow statement... 12

Notes to the consolidated financial statements... 13

1 General information... 13

1.1 Group structure ... 13

2 Summary of significant accounting policies ... 13

2.1 Basis of preparation ... 13

2.2 Consolidation ... 16

2.3 Foreign currency translation ... 16

2.4 Property, plant and equipment... 17

2.5 Impairment of non-financial assets ... 18

2.6 Financial assets ... 18

2.7 Agriculture ... 19

2.8 Government grants ... 20

2.9 Inventories ... 20

2.10 Trade receivables... 21

2.11 Cash and cash equivalents ... 21

2.12 Share capital ... 21

2.13 Trade payables... 21

2.14 Borrowings ... 22

2.15 Current and deferred income tax ... 22

2.16 Employee benefits... 23

2.17 Provisions... 23

2.18 Revenue recognition ... 23

2.19 Leases ... 24

2.20 Dividend distribution ... 25

2.21 Segment reporting... 25

2.22 Share-based payments ... 25

3 Financial risk management ... 25

3.1 Financial risk factors ... 25

3.2 Capital risk management ... 29

3.3 Fair value estimation... 29

4 Critical accounting estimates and judgments... 29

4.1 Critical accounting estimates and assumptions... 29

5 Cash and cash equivalents ... 30

6 Trade and other receivables ... 31

7 Inventories... 31

8 Biological assets ... 32

9 Deferred income tax... 32

10 Property, plant and equipment ... 33

11 Long-term land lease prepayments... 34

12 Trade and other payables... 34

13 Borrowings... 35

14 Provisions for other liabilities and charges ... 36

15 Deferred income from EU subsidies... 36

16 Share capital... 37

17 Other reserves ... 39

18 Revenue ... 39

19 Other income ... 40

20 Raw materials and consumables used... 41

21 Employee benefit expense ... 41

22 Operating lease payments... 41

23 Other expenses ... 42

24 Other (losses)/gains – net ... 42

25 Finance costs – net ... 42

26 Earnings/loss per share... 43

27 Operating cash-flow... 43

28 Segment reporting ... 43

29 Contingencies ... 44

30 Commitments ... 44

31 Business combinations... 45

32 Group structure... 47

33 Related party transactions... 48

34 Fees to the auditors appointed by the shareholders ... 49

35 Events after the balance sheet date... 49

Financial statements of the parent company for December 11, 2006 to December 31, 2007... 50

Balance sheet of the parent company ... 50

Income Statement of the parent company... 50

Statement of changes in equity for the parent company ... 51

Cash flow statement of the parent company ... 51

36 Notes to the financial statements of the parent company... 52

36.1 Cash and cash equivalents of the parent company ... 52

36.2 Long-term financial investments in subsidiaries ... 52

36.3 Share capital of the parent company ... 53

36.4 Fees to the auditors appointed by the shareholders... 53

Management’s Statement on the Annual Report ... 54

Independent Auditor’s Report... 55

Director’s report 2007

General overview

A/S Trigon Agri (together with its subsidiaries hereinafter the ’Group’) is a leading integrated cereal and dairy commodities company, established by the Eastern European asset manager Trigon Capital in May 2006, which owns its own storage facilities and has cereal and dairy farming operations in Ukraine, Russia and Estonia. The Group’s activities commenced in 2006 when a Group of Scandinavian high-net-worth individuals committed a total of Euro 19.6 million as start-up equity capital for the development of the Group’s business activities. Following this initial round of financing, in April 2007 the Group carried out an international private placing securing Euro 50 million in new equity capital, simultaneously with a share listing on the First North alternative marketplace of OMX Nordic Exchanges on May 18, 2007 in Stockholm.

As of March 31, 2008, the Group controlled a total of approximately 120,798 hectares of farmland in Russia, Ukraine and Estonia. Most of the new land came under Group control during first quarter 2008, facilitated by preparatory work putting management teams in place and developing local contacts and relationships, carried out by the Group during second half of 2007. The Group’s farming operations are organised in clusters close to major population centers. As of March 31, 2008 the Group operated four cereal clusters within the Black Earth region with a combined total area of land under control of

approximately 118,260 hectares. To complement these operations the Group owned or had agreed to acquire five grain storage elevators in Ukraine close to the Group’s farm clusters with a combined storage capacity of 322,000 tonnes, all with direct access to the railway network. The Group also owned two fully operational dairy farms in Estonia totalling more than 1,420 hectares of land and a newly-built dairy farm with 1,118 hectares of land in Pskov Oblast, Russia.

To date the equity capital raised by the Group has been invested in two primary areas. Approximately 90 per cent of the Group’s assets are devoted to cereal farming in the Black Earth Region, while the remaining 10 per cent are used in dairy farming. As the Group’s revenues increase, the Group anticipates that its future revenue breakdown will follow its current asset allocation between cereal and dairy farming. Cereal and dairy farming are complementary, with cereal production being a higher margin business but with greater seasonality while dairy farming offers a lower margin but more stable cash flow. Combining the two businesses allows for a more environmentally sustainable approach to farming. Dairy farms act as a source for natural fertilizers in the form of manure. Dairy is also an efficient way to use ‘rested’ land in the Group’s crop rotation policy. While the Group’s current expansion in Ukraine and Russia is focused on cereal production, a longer term goal of the Group is to combine dairy and cereal farming in all of its clusters. In addition, in order to maximize its return on investment, the Group aims to develop economies of scale and place land in production as soon as possible.

The parent company of the Group is incorporated in Denmark. The principal assets are in Ukraine, Russia and Estonia. Due to relatively recent establishment of its activities in August 2006 and its subsequent rapid expansion, the Group’s 2006 and 2007 financials are not directly comparable.

Recent developments

The Group’s first full year of operations was 2007. The 2007 harvest was the first harvest for the Group, where it farmed a total of 27,096 hectares of land, out of which 22,658 hectares was in its Harkov cereal production cluster in eastern Ukraine. Despite extreme weather conditions last summer, where 97.3 per cent of the Group’s fields in Ukraine received no rainfall during the 2007 growing season and only 615 hectares received minimal rainfall of no more than 35 mm (against a normal level of 200 mm), the Group completed the year with strong operational results. For the deep root-system crops, sunflower and corn, the Group out-performed its first year’s production target by 26 per cent and 5 per cent respectively, due to the ability of these crops to access moisture from the soil’s deeper levels. For the shallow root-system crops, wheat and barley, the results were below target in fields which did not receive any rainfall, while in the 615 hectares of wheat fields, which received at least a minimal level of rainfall, the production target was outperformed by around 13 per cent with a production yield of 4.51 tonnes of wheat per hectare. Detailed results of the 2007 harvest are provided in the table below:

Hectares farmed

Crop yields (tonnes per hectare)

Gross harvest (tonnes)

Clean harvest for

sale (tonnes)

Percentage price increase throughout

the storage period (September 2007 to

March 2008)*

Winter wheat 7,212 3.08 22,221 20,744 33%**

Barley 4,650 1.44 6,693 6,299 6%

Corn 2,883 5.26 15,177 13,513 16%

Sunflower 2,937 2.52 7,398 6,815 91%

Other 4,976 1.03 5,118 4,146 n/a

Total 22,658 2.50 56,607 51,518

* Source: APK Inform, EXW prices

** Average across different classes of wheat

Good productivity results, with the exception of wheat and barley production which were affected by poor rainfall, and a strong increase in agricultural commodity prices enabled the Group to outperform its first year’s financial targets. This was facilitated by the Group’s ability to hold all of its produce in its own storage facilities, allowing it to sell its produce throughout second half of Q4 2007 and during first quarter 2008, benefiting from cyclically higher annual commodity prices, which enabled the Group to substantially increase its margins in the period between harvest and sale. Sales of the 2007 harvest in 1Q 2008 amounted to a total of 2,270 thousand Euros contributing an additional gross profit of 597 thousand Euros to the Group’s 2008 income statement, while as of March 27, 2008 8,612 tonnes of 2007 harvest was still in inventory to be sold over April. In addition, over 2007 the Group’s operating costs were kept in line with budget, which also contributed to the favorable margin levels achieved during this period.

In addition to the cereals production operations in the eastern part of Ukraine in the Kharkov cluster, in fourth quarter 2007 and first quarter 2008 the Group established three new cereals production clusters in the Black Earth Region: one nearby

Kirovograd region Ukraine, one nearby Penza in Russia and one nearby Samara in Orenburg Oblast in Russia. Significant investments have been started in all three new clusters with fieldworks due to commence in all new locations in spring 2008.

Additionally, the Group acquired or agreed to acquire three additional rail-connected grain storage elevators in Kirovograd region in Ukraine adding a total new storage capacity of 272,000 tonnes. In parallel in 1Q 2008, the Group completed the first construction phase of a new large-scale dairy farming site close to St Petersburg in north-western Russia for 600 milking cows (to be expanded to 1,080 by the end of 2008 and to 1,620 by the end of 2009). Furthermore, construction was completed on two dairy farming units in Estonia for a total of 1,350 dairy cows. Production commenced at these units during December 2007.

Macro-Market Trends

The agricultural markets served by the Group are subject to important global trends affecting both costs of production and selling prices for grains and milk. From a cost perspective, the relatively recent substantial increases in energy prices have had a significant impact on the cost of inputs generally, including fuel, fertilizers and transportation costs. At the same time, demand for grains and milk continues to grow. For grains, the dramatic increases in selling prices derive from increasing global demand, driven by world population growth generally, but also changes in consumption patterns in emerging economies, particularly India and China, where local populations are increasing their consumption of meat, which in turn stimulates the demand for animal feed for livestock. Additionally, the 2007 harvest was particularly affected by poor weather conditions, further increasing prices. Increased demand for corn and sunflower seeds and correlative rising prices derive also to a notable extent from the growing demand for biofuels, itself linked to rising oil prices. This increase in demand for biofuels decreases the arable land available for food production. For dairy, while the increases in selling prices have not been as dramatic as those for wheat, barley, corn and sunflower seeds, the increases remain substantial. While local factors, discussed below, have been important contributors to the rise in milk prices, changes in global consumption patterns have also played an increasingly important role, particularly in large emerging economies. Historically, milk and dairy product consumption have been low in India and China, but as the populations in these countries develop certain immunological resistances to milk, the demand for dairy products such as butter and cheese has risen substantially. Overall, the Group believes that the net effect of rising input prices driven largely by higher fuel prices is more than offset by the increased selling prices realized for agricultural commodities.

Micro-Market Trends

A number of local trends in Ukraine and Russia have also had a significant impact on the Group’s business. There has been substantial wage pressure in both Ukraine and Russia as both countries have emerged from the depression following the collapse of the Soviet Union and are currently recording high annual GDP growth rates. This overall growth has led to increases in living standards and generally rising wage levels. In addition, in both Ukraine and Russia, rural depopulation resulting from the migration of farming populations to major urban centers has led to a shortage of manpower in traditional farming regions, thus increasing local wage pressures. The Group’s strategy in the face of this rural depopulation has been to locate its agricultural production clusters and facilities as close as possible to major urban centers, thus enabling the Group to attract workers dissatisfied with conditions in the urban centers and to benefit from the desire of many recent migrants to the urban centers to return to agrarian communities. In addition, while global demand for milk does have an impact on dairy prices, selling prices for milk are much less strongly correlated with global trends and derive importantly from a chronic shortage of milk and dairy products in the major urban centers in Ukraine and Russia. These milk shortages can be explained in large part by a historic underinvestment in modern dairy farms and the significant capital requirements needed to upgrade existing dairy farms and develop new facilities.

Main performance indicators

Because the Group is expanding, ordinary performance indicators can not be used to analyze the Group’s performance. In 2006, the Group’s main activities were Estonian dairy farming, whereas in 2007 cereals farming in the Black Earth region ramped up and became the main revenue generator. In the previous year (2006) loss per share amounted to Euro 24.56 whereas a substantial improvement in profitability can be observed in 2007 where the Group broke even (loss per share was less than 0.01 Euros) and substantial additional profit from sales of grain produced in 2007 but sold in 2008 has been generated supporting the storage strategy put in place. The Group will remain in an intensive investment stage for the coming years expanding both cereal and dairy farming activities in Russia and Ukraine, which expansion can be expected to put pressure on margins. Nevertheless, the 2007 result gives confidence to the management that the strategy and restructuring approach used by the Group is leading to successful results and will allow the Group to achieve its longer term profitability targets.

Key Financial data

Year ended 31.12.2007

4.05.2006 - 31.12.2006

Revenue 6,620 877

Operating profit/loss 31 -1,427

Finance costs -86 -36

Profit/loss for the year -84 -1,463

Total assets 71,410 15,238

Total shareholders’ equity 64,280 11,816

Total investment in PP&E 16,142 2,347

Total land lease prepayments 2,613 999

Hectares of land farmed 27,096 12,248

Research and development

Currently the Group is not conducting research or development projects for its products as the main focus is on building up the management team and adding to the Group’s land under control. However, the Group’s strategy is to implement the best practices in production technology with operational development concentrated on efficient implementation of the Group’s technological process skill base. Due to the relative underdevelopment of the agricultural sector in the locations where the Group is active, its technology implementation knowledge base plays important part in the overall technological development of these locations. The Group’s management team is actively working on training the Group’s work-force and spreading ‘best- practice’ know-how between the different operational clusters.

Environmental matters

The Group operates in an environmentally sensitive business, and in a legal environment of increasingly strict environmental restrictions and requirements. The principal environmental concerns in cereal farming relate to the use of chemical fertilizers

and pesticides as well as genetically modified crops. The corresponding concerns in dairy farming are the disposal of manure and the use of antibiotics and other pharmaceutical substances in treating dairy animals.

The Group’s operations in Estonia are subject to EU environmental rules. The environmental rules on agriculture are less developed in Ukraine and Russia, where a lack of financial resources prevents the large majority of farms from engaging in the wide-spread use of chemical fertilizers and pesticides or pharmaceutical substances.

The Group is committed to sustainable farming. Its six-year crop rotation policy in cereal farming is designed to ensure that Group soil is not exhausted. Changing the crops grown in each field in a six-year rotation also encourages biodiversity in the surrounding areas. Additionally, the Group’s medium to long term plans to combine dairy farming and cereal production in each of its clusters offers significant environmental advantages, as the manure produced in the dairy farm can be utilized to fertilize the cereal fields, thus reducing the use of chemical fertilizers. Moreover, instead of leaving a field to lie fallow for one year out of six due to crop rotation, it can be seeded with clover or similar crops for silage for the dairy farm to improve soil quality.

Employee matters

The Group currently employs a total of 713 employees broken down as follows:

Ukraine Russia Estonia

Number of employees 598 31 84

Management believes the key to efficient operations is the hiring of qualified regional managers and the addition of a local co- manager to support operations. Regional managers are normally expected to be educated professionals with a strong agricultural background and extensive sector specific experience from the Baltic States combined with a thorough

understanding of financing. This knowledge mitigates the risk of mismanagement of the farms as managerial know-how remains one of the main hindrances to productivity in Russia and Ukraine.

The Group believes that finding well-qualified farming specialists (e.g. agronomists, animal husbandry specialists) is not difficult in the regions of operation in Ukraine and Russia. Specialists in rural areas have many years of sector specific experience as well as local know-how. The main benefits offered by the Group include a competitive salary as well as the opportunity to work with modern technology and farming methods.

Financial discussion – the year ended on December 31, 2007

Because the Group is in an expansion phase and the operations in 2006 were limited to only dairy farming in Estonia for part of the year, the discussion below does not include comparatives and is limited to 2007 only.

Revenue

Total revenue amounted to 6,620 thousand Euros. 35 per cent of the revenue was earned from the sale of milk and the remaining 65 per cent was earned from sale of self-produced grains in Ukraine and from other minor sales.

Other income

Other income amounted to 1,111 thousand Euros. Other income includes EU subsidies related to agricultural production and environmental incentives received in Estonia and minor income from other sources (e.g. rent of transport vehicles to local farmers).

Change in agricultural produce and work in progress

Change in agricultural produce and work in process amounted to 2,868 thousand Euros and include the difference between the carrying value of agricultural produce and work in progress in the Group’s balance sheet as of December 31, 2006 and 2007.

The change in agricultural produce reflects the fair value of the unsold portion of the 2007 harvest at the price prevailing at the 2007 harvest date. The change in work in progress reflects the difference between costs incurred in 2006 in respect of the 2007 harvest and the costs incurred in 2007 in respect of the 2008 harvest. As the remaining produce from the 2007 harvest is sold in 2008, revenue is recorded at the actual price obtained for such harvest and the year-end carrying value of the agricultural produce is reduced by the amount of produce sold and appears as change in inventory of agricultural produce in the 2008 income statement.

Gain arising from changes in fair value of biological assets

The gain arising from the changes in the fair value of biological assets amounted to 1,759 thousand Euros. In the income statement only the net effect of various changes with the Group’s biological assets (living plants and animals) is presented. The net effect includes the effect of purchases, sales and all changes in fair value due to the biological transformation (e.g. growth or death of plants and animals). The change also includes changes in the value of the seeded fields compared to their values in the opening balances.

Raw materials and consumables used.

Raw materials and consumables include cost of fuel, fertilizers, seeds etc. used in 2007 for production of the 2007 harvest and preparation of fields in autumn 2007 for the 2008 harvest in the amount of 6,797 thousand Euros.

Employee benefits expense

Employee benefits in the amount of 2,450 thousand Euros include salaries and related employer’s taxes paid in 2007. The Group does not have pension plans. The pension contributions paid in Estonia under the mandatory pension insurance scheme are part of social security taxes and accordingly are included in total employee benefits expense.

Depreciation and amortisation

Depreciation in the amount of 873 thousand Euros includes the depreciation of property, plant and equipment during 2007 in accordance with management’s estimate of the useful lifetimes of items in property, plant and equipment. The Group recorded no goodwill or related impairment charges during 2007.

Other net gains

Other net gains in the total amount of 913 thousand Euros include gains in foreign exchange rates attributable to operational items in the balance sheet; interests received on time deposits of cash which is not considered part of the financial activities of the Group and minor gain from sales of fixed assets in Estonia.

Other expenses

Other expenses in the total amount of 3,120 thousand Euros include management fees paid to Trigon Capital in the amount of 1,089 thousand Euros and various operating expenses in all subsidiaries of the Group. These expenses include consultations, legal, auditing, office rent and stationary, travel and general and administrative costs. Part of the travel and consultation expense was due to the preparatory work carried out for the Group’s expansion in new locations. However, because these are indirect expenses, they can not be capitalized in the cost of new acquisitions. These expenses are likely to remain high while Group expands and acquires new land and other assets in Ukraine and Russia.

Finance costs

Finance costs in the amount of 86 thousand Euros include interests paid on borrowings and leases of equipment in Estonia.

Follow-up on previous announcements regarding the Group’s performance and outlook 2008

Management is satisfied with the operational result for 2007, achieving a break-even result as previously targeted. Given that a significant part of the 2007 harvest was sold only in 2008 (i.e. the corresponding revenue was recorded only in 2008), the Group was actually profitable in 2007 on an adjusted cash basis. The Group has also performed better than originally expected in terms of adding new land areas under control, as the strategy of building up a local management team and contact networks prior to land acquisition has started to yield the results in first quarter 2008.

For 2008 the Group’s focus will remain on the expansion of its existing farm clusters through a further increase of land under control and a parallel investment program for ramping up land productivity. Management expects the active investment program to depress margins for 2008 but the impressive 2007 result gives further confidence that the strategy and restructuring approach used by the Group yields encouraging results and will allow for the achievement of the Group’s long term profitability targets.

Consolidated balance sheet

(in thousands of Euros)

As at December 31

Note 2007 2006

ASSETS Current assets

Cash and cash equivalents 5 35,702 2,358

Trade and other receivables 6 2,388 1,174

Inventories 7 5,664 2,451

Biological assets 8 766 25

44,520 6,008

Non-current assets

Long-term lease prepayments 11 2,613 999

Available-for-sale financial assets 13 13

Property, plant and equipment 10 21,744 6,672

Biological assets 8 2,520 1,546

26,890 9,230

Total assets 71,410 15,238

LIABILITIES

Current liabilities

Trade and other payables 12 2,251 1,107

Borrowings 13 384 120

Provisions for other liabilities and charges 14 97 273

2,732 1,500

Non-current liabilities

Trade and other payables 12 61 107

Borrowings 13 3,698 1,392

Provisions for other liabilities and charges 14 138 56

Deferred income from EU subsidies 15 501 367

4,398 1,922

Total liabilities 7,130 3,422

EQUITY

Capital and reserves attributable to equity holders of the Group

Ordinary shares 16 59,627 972

Share premium 16 7,020 -

Other reserves 17 -831 12,296

Retained earnings -1,584 -1,479

64,232 11,789

Minority interest in equity 48 27

Total equity 64,280 11,816

Total equity and liabilities 71,410 15,238

The notes on pages 13 to 49 are an integral part of these consolidated financial statements.

Consolidated Income Statement - by nature of expense

(in thousands of Euros)

Note 2007 4.05.2006 -

31.12.2006

Revenue 18 6,620 877

Other income 19 1,111 263

Gain arising from changes in fair value less estimated point-of-sale costs of

biological assets 8 1,759 286

Changes in inventories of agricultural produce and work in process 2,868 381

Raw materials and consumables used 20 -6,797 -1,021

Employee benefits expense 21 -2,450 -363

Depreciation, amortization 10 -873 -99

Other expenses 23 -3,120 -1,688

Other (losses)/gains − net 24 913 -63

Operating profit/loss 31 -1,427

Finance costs 25 -86 -36

Profit/loss before income tax -55 -1,463

Corporate income tax -29 -

Profit/loss for the year -84 -1,463

Attributable to:

Equity holders of the Group -105 -1,479

Minority interest 21 16

-84 -1,463

Earnings/loss per share for profit attributable to the equity holders of

the Company during the year (expressed in Euros per share) 26 -0.00 -24.56

The notes on pages 13 to 49 are an integral part of these consolidated financial statements.

Consolidated Statement of changes in equity

(in thousands of Euros)

Attributable to equity holders of the Group

Note Share capital

Share premium

Other reserves

Retained earnings

Total Minority interest

Total Equity

Balance at May 4, 2006 26 - - - 26 - 26

Issue of share capital 16 946 - - - 946 - 946

Issue of subordinated loan-notes/subscription

notes - - 11,399 - 11,399 - 11,399

Equity-settled share-based transactions 17 - - 893 - 893 - 893

Total contributions by owners 946 - 12,292 - 13,238 - 12,238

Minority interest arising on business

combinations - - - - - 11 11

Net income recognized directly in equity

Currency translation differences - - 4 - 4 - 4

Loss for the year - - - -1,479 -1,479 16 -1,463

Total recognized income and expense

for the year - - 4 -1,479 -1,475 16 -1,459

Balance at December 31, 2006 972 - 12,296 -1,479 11,789 27 11,816

Contributions by owners

Issue of subordinated loan-notes/subscription

notes 17

- - 7,077 - 7,077 - 7,077

Share swap with Trigon Farming AS 16 18,655 - -18,476 - 179 - 179

Issue of new shares 16 40,000 7,020 - - 47,020 - 47,020

Total contributions by owners 58,655 7,020 -11,399 - 54,276 - 54,276

Net income recognized directly in equity

Currency translation differences - - -1,728 - -1,728 - -1,728

Loss for the year - - - -105 -105 21 -84

Total recognized income and expenses for

the year - - -1,728 -105 -1,833 21 -1,812

Balance at December, 31 2007 59,627 7,020 -831 -1,584 64,232 48 64,280

The notes on pages 13 to 49 are an integral part of these consolidated financial statements.

Consolidated Cash flow statement

(in thousands of Euros)

Note

2007 4.05.2006 - 31.12.2006 Cash flows from operating activities

Cash generated from operations 27 -4,712 -3,785

Net cash used in operating activities -4,712 -3,785

Cash flows from investing activities

Acquisition of subsidiary, net of cash acquired - -2,466

Purchase of biological assets -297 -75

Purchase of property, plant and equipment -17,412 -2,710

Prepayments for long-term land lease agreements 11 -1,707 -999

Net cash used in investing activities -19,416 -6,250

Cash flows from financing activities

Net proceeds from issue of share capital 47,198 972

Proceeds from subordinated loan-notes/subscription notes 7,077 11,399

Subsidies received 950 145

Proceeds from long-term borrowings 2,336 -

Repayments of borrowings and finance lease liabilities -406 -306

Interest paid 25 -86 -36

Interest received 24 1,003 77

Net cash generated from financing activities 58,072 12,251

Net increase in cash and cash equivalents 33,944 2,216

Effects of exchange rate changes on cash and cash equivalents -600 142

Cash and cash equivalents at beginning of period 2,358 -

Cash and cash equivalents at end of period 5 35,702 2,358

The notes on pages 13 to 49 are an integral part of these consolidated financial statements.

Notes to the consolidated financial statements

1 General information

Trigon Agri A/S (The Company) was established on December 11, 2006 and became the holding company of Trigon Agri Group after the owners of AS Trigon Farming (Estonia) made a non-monetary contribution with the shares and subordinated loan-notes/certificates of subscription of AS Trigon Farming in exchange for the shares of Trigon Agri A/S on March 31, 2007. The transaction was accounted for as a transaction between parties under common control and accordingly the assets and liabilities of Trigon Agri A/S remained at carrying value and no goodwill or intangible assets were recognized in this transaction. In addition, as this was a common control transaction, the consolidated financial statements have been presented as if this transaction had occurred at the inception of the Group on May 4, 2006. The Company has subsidiaries in Estonia, Russia and Ukraine and sells its production in the same countries. The Company and its subsidiaries (together “the Group”) operate in agricultural production.

The current set of consolidated financial statements is presented in thousands of Euros for the period

January 1 – December 31, 2007 and the comparative figures are given for the previous period (consisting of the AS Trigon Farming consolidated 2006 figures). The translation from functional currency Estonian kroons to presentation currency Euro is made based on Estonian Central Bank exchange rate. As the Estonian kroon is pegged to Euro, no translation differences arise in translation from functional currency to presentation currency.

The parent company is a limited liability company incorporated and domiciled in Denmark. The address of its registered office is Sundkrogsgade 5, DK-2100 Copenhagen. The company is listed on the Stockholm First North Stock Exchange since May 18, 2007. The Group’s owners are legal and physical persons and no sole shareholder has control over the Group’s activities.

These financial statements were authorized for issue by the Board of Directors on March 31, 2008.

1.1

The Group was established in May 2006 by the Eastern European asset manager Trigon Capital AS to invest in farming in Russia, Ukraine and in Estonia. Starting from April 2007 Trigon Agri A/S, a company with limited liability incorporated under the laws of Denmark, became as the parent company of the Group. Two Estonian dairy farms Kaiu LT OÜ and Kärla group are operated under an Estonian holding company Trigon Farming AS. The Group operates its activities in Russia and Ukraine through holding limited liability companies TC Farming Russia and TC Farming Ukraine registered in Cyprus. In Ukraine the Group has subsidiaries of Cyprus holding company: cereals farms Trigon Farming Kharkov OOO and Rubeznoje OOO; elevators Kovjagovskoje OOO and Vovtshanski Hlebokombinat OOO. In Russia the Cyprus holding company has a Russian holding subsidiary Russian Agro Investors OOO, which has Russian operating subsidiaries: new dairy farm development Dobruchi 2 OOO and two newly established companies in Orenburg oblast, nearby Samara. (Note 32)

2 Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below. The policies have been consistently applied to all the years presented.

2.1

The consolidated financial statements of Trigon Agri A/S have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and additional Danish disclosure requirements for annual reports. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of biological assets and available-for-sale financial assets.

The reporting period of current set of the financial statements is the calendar year as during the common control transaction via a non-monetary contribution in exchange for the shares of Trigon Agri A/S resulted in only the parent company domicile being changed from Estonia to Denmark, the control over the companies or the operational business did not change. Therefore the comparative figures are from the previous period are the financial data of AS Trigon Farming as presented as if the common control transaction had taken effect May 4, 2006, at inception of the Group. Management has recorded an additional expense in the 2006 income statement related to application of IFRS2 in the amount of 893 thousand Euros (See note 16).

Starting from January 1, 2007 the Group presents its cash-flow statement using direct method. The comparatives from 2006 are restated.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4.

(a) Standards, amendments to published standards and interpretations effective from January 1, 2007

IFRS 7, Financial instruments: Disclosures. IFRS 7 introduced new requirements for the notes in order to improve the presentation of information in the financial statements. This requires presentation of qualitative and quantitative information on the risks arising from financial instruments, containing specific minimum requirements for credit risk, liquidity risk and market risk (incl. sensitivity analysis of these risks). This replaced standard IAS 30, Disclosures in the Financial Statements and Other Financial Institutions and adds to and replaced some of the requirements in IAS 32, Financial Instruments: Disclosure and Presentation. IFRS 7 adoption did not have any impact on measurement or recognition principles. The Group made certain changes in presentation and new disclosures are made in these financial statements (comparatives provided).

IAS 1, Presentation of Financial Statements – Capital disclosures. The amended standard requires additional disclosures in the financial statements about parent company's capital and capital management. IAS 1 adoption did not have any impact on measurement or recognition principles. The Group made certain changes in presentation and new disclosures are made in these financial statements (comparatives provided).

IFRIC 8, Scope of IFRS 2. The interpretation requires consideration of transactions involving the issuance of equity instruments, where the identifiable consideration received is less than the fair value of the equity instruments issued in order to establish whether or not they fall within the scope of IFRS 2. The Group applied the interpretation in recognizing the fair value of services received in exchange for the warrants issued in 2006, see note 16 for more information.

IFRIC 10, Interim Financial Reporting and Impairment. The interpretation prohibits the impairment losses recognizeed in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. This standard does not have any impact on the Group’s financial statements.

(b) Standard early adopted by the Group

IFRS 8, 'Operating segments' was early adopted by the Group in 2007. IFRS 8 replaces IAS 14 “Segment reporting” and aligns segment reporting with the requirements of the US standard SFAS 131, ‘Disclosures about segments of an enterprise and related information’. The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. As the Group has not presented segments in prior years, the standard is applied for the first time in 2007. The segments are reported in a manner that is consistent with the internal reporting provided to the Board of Directors. In accordance with the standard the comparatives for 2006 are also presented.

Amendment to IFRS 2, Share-based Payment - Vesting Conditions and Cancellations (effective for annual periods beginning on or after January 1, 2008). The amendment clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment are not vesting conditions. The

amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group applied the amendment in recognizing the fair value of services received in exchange for the warrants issued in 2006, see note 16 for more information.

(c) Standards, amendments and interpretations effective in 2007 but not relevant

The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after January 1, 2007 but they are not relevant to the Group’s operations:

IFRS 4, 'Insurance contracts';

IFRIC 7, 'Applying the restatement approach under IAS 29, Financial reporting in hyper-inflationary economies'; and

IFRIC 9, 'Re-assessment of embedded derivatives'.

(d) New accounting pronouncements issued but not yet effective

Certain new standards and interpretations have been published that are mandatory for the Group’s accounting periods beginning on or after March 1, 2007 or later periods and which the Group has not early adopted.

Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group:

IAS 23, Borrowing Costs (effective for annual periods beginning on or after January 1, 2009). The main change to IAS 23 is the removal of the option of immediately recognizing as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalize such borrowing costs as part of the cost of the asset. The revised standard applies prospectively to borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after January 1, 2009. The Group is currently assessing the impact of the amended standard on its consolidated financial statements.

IAS 1, Presentation of Financial Statements (effective for annual periods beginning on or after January 1, 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets.

Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Group expects the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions and balances.

IAS 27, Consolidated and Separate Financial Statements (effective for annual periods beginning on or after July 1, 2009). The revised standard requires that the effects of transactions with minority shareholders be recognized directly in equity, on the condition that control over the entity is retained by the parent company. In addition, the standard elaborates on the accounting treatment of the loss of control over a subsidiary, i.e. it requires that the remaining shares be restated to fair value, with the resulting difference recognized in the income statement. The Group is currently assessing the impact of the amended standard on its consolidated financial statements.

IFRS 3, Business Combinations (effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after July 1, 2009). The revised IFRS 3 includes the choice to disclose minority interests either at fair value or their share in the fair value of the net assets identified; a restatement of shares already held in an acquired entity to fair value, with the resulting differences to be recognized in the income statement; and additional guidance on the application of the purchase method, including the recognition of transaction costs as an expense in the period in which they were incurred, measuring goodwill in step acquisition, and recognizing post-acquisition changes in value of liability for contingent purchase consideration. The Group is currently assessing the impact of the amended standard on its consolidated financial statements.

(e) Standards, amendments and interpretations to existing standards that are not yet effective and not relevant for the Group's operations

IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after July 1, 2008).

IFRIC 13 includes guidance on the accounting treatment of transactions resulting from loyalty programmes implemented by an entity for its customers, such as loyalty cards or awarding of “points”. In particular, IFRIC 13 indicates the correct accounting for the entity’s obligation to provide free or discounted goods or services if and when the customers redeem the points.

Puttable financial instruments and obligations arising on liquidation – IAS 32 and IAS 1 Amendment (effective from January 1, 2009). The amendment requires classification as equity of some financial instruments that meet the definition of a financial liability. The Group does not expect the amendment to affect its consolidated financial statements.

IFRIC 11 IFRS 2 – Group and Treasury Share Transactions (effective for annual periods beginning on or after March 1, 2007). The interpretation contains guidelines on the following issues: applying IFRS 2, Share-based Payment, for transactions of payment with shares which are entered into by two or more related entities; and adopting an accounting approach in the following instances: an entity grants its employees rights to its equity instruments that may or must be repurchased from a third party in order to settle obligations towards the employees; or an entity or its owner grants the entity’s employees rights to the entity’s equity instruments, and the provider of those instruments is

the owner of the entity. The Group does not expect the interpretation to affect its consolidated financial statements as the Group has no history in granting equity instruments via third parties.

IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after January 1, 2008). The interpretation contains guidelines on applying the existing standards by entities being parties to service concessions between the public and the private sector. IFRIC 12 pertains to arrangements where the ordering party controls what services are provided by the operator using the infrastructure, to whom it provides the services and at what price. The Group does not expect the interpretation to affect its consolidated financial statements as none of Group companies provide for public sector.

IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after January 1, 2008). The interpretation contains general guidance on how to assess the limit of the surplus of fair value of a defined benefit plan over the present value of its liabilities which can be recognized as an asset, in accordance with IAS 19. In addition, IFRIC 14 explains how the statutory or contractual requirements of the minimum funding may affect the values of assets and liabilities of a defined benefit plan. The Group does not expect the interpretation to affect its consolidated financial statements as the Group has no qualifying assets.

2.2

(a) Subsidiaries

Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.

Inter-company transactions, balances and unrealized gains on transactions between Group companies are eliminated.

Unrealized losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

(b) Transactions and minority interests

The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

2.3

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The functional currency of the

parent company and subsidiaries in Estonia is Estonian kroon. The consolidated financial statements are presented in Euros, which is the Group’s presentation currency of those financial statements for the purposes of reporting to Group’s shareholders.

The following year-end exchange rates have been used: 1 Euro = 15,6466 Estonian kroons; 1 Ukrainian hryvna = 2,10657 Estonian kroons; 1 Russian rouble = 0,434805 Estonian kroons, the average rates 1 Ukrainian hryvna = 2,27306 Estonian kroons; 1 Russian rouble = 0,44698 Estonian krons.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.

Changes in the fair value of monetary securities denominated in foreign Currency classified as available for sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortized cost are recognized in profit or loss, and other changes in the carrying amount are recognized in equity.

Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss.

Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets such as equities classified as available for sale are included in the available-for-sale reserve in equity.

(c) Group companies

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

a) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

b) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and

c) all resulting exchange differences are recognized as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations and of borrowings are taken to shareholders’ equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognized in the income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

2.4

All property, plant and equipment is stated at historical cost less depreciation and impairment provision, where required.

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 Group 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 income statement during the financial period in which they are incurred.

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:

– Buildings 25-40 years

– Machinery 7-20 years

– Vehicles 3-5 years

– Furniture, fittings and equipment 3-8 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.5).

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within other (losses)/gains – net, in the income statement.

Borrowing costs are not included in the cost of property, plant and equipment (or other qualifying assets) but expensed as incurred.

2.5

Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

2.6

The Group has financial assets in the following categories: loans and receivables and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

Regular purchases and sales of financial assets are recognized on the trade-date – the date on which the Group commits to purchase or sell the asset.

(a) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet (Note 6). See Note 2.10 for measurement of trade receivables.

(b) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.

Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognized when the rights to receive cash flows from the investments

have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.

Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables are carried at amortized cost using the effective interest method.

When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the income statement as gains and losses from investment securities.

Interest on available-for-sale securities calculated using the effective interest method is recognized in the income statement as part of other income. Dividends on available-for-sale equity instruments are recognized in the income statement as part of other income when the Group’s right to receive payments is established.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss – is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement. Impairment testing of trade receivables is described in Note 2.10.

2.7

Agricultural activity is defined by the management as an activity of the biological transformation of biological assets for sale into agricultural produce or into additional biological assets. Agricultural produce is defined as the harvested product of the Group’s biological assets and a biological asset is defined as a living animal or plant.

Biological assets are measured on initial recognition and at each balance sheet date at its fair value less estimated point-of-sale cost, except for the case where the fair value cannot be measured reliably on initial recognition.

Agricultural produce harvested from the Group’s biological assets is measured at its fair value less estimated point-of- sale costs at the point of harvest and subsequently recorded as inventories (Note 2.9 (a)).

If an active market exists for a biological asset or agricultural produce, the quoted price in that market is the

appropriate basis for determining the fair value of that asset. If an active market does not exist the most recent market transaction price, provided that there has not been a significant change in economic circumstances between the date of that transaction and the balance sheet date, is used in determining fair value. Cost is used as an approximation of fair value when little biological transformation has taken place since initial cost incurrence, e.g. within short time after seeding the crop.

A gain or loss arising on initial recognition of a biological asset at fair value less estimated point-of-sale costs and from a change in fair value less estimated point-of-sale costs of a biological asset shall be included in profit or loss for the period in which it arises as “Gain arising from changes in fair value less estimated point of sale costs of biological assets”.

The Group has determined the groups of its biological assets to be livestock and growing crops.

The biological assets are recorded as current and non-current biological assets based on the operational cycle of the respective biological assets. In general, biological assets of pig breeding and growing plants are recognized as current assets, because the operational cycle is less than 12 months. Dairy herd is recorded as non-current biological asset because the operational cycle lasts more than 12 months.

(a) Livestock and dairy herd

Livestock are measured at their fair value less estimated point-of-sale costs. The fair value of livestock is determined based on market prices of livestock of similar age, breed and genetic merit based on the most likely market. The fair value of dairy herd also takes into account the milk quota attached to the herd.

Milk within EU can be sold based on milk quotas allocated by the State for each producer. The milk quota itself can not be separated from the herd and the agricultural business as it is not possible to trade with the quota in EU countries where the Group operates without selling it together with the herd and the agricultural business. Also, there is no active market available for the herd without the milk quota. As the fair value of the herd can be determined reliably only together with the attached milk quota, the Group considers the milk quota to be an integral part of the fair value of the dairy herd.

Milk outside EU can be sold free of any quota and therefore the fair value of herd is not affected by the sales restrictions.

(b) Crops – grain and grassland

Crops are measured at their fair value less estimated point-of-sale costs. At initial recognition (after seeding) the crops are measured at the cost as the market-determined values are not available for such biological assets). The crops are measured at fair value once the fair value becomes reliably measurable. Usually the fair value of a crop can be reliably measured only immediately before harvest. This does not create a significant limitation in valuation of crop balances at year-end, as the main increase in fair value is attributable to the same accounting period when the crop is harvested.

2.8

(a) Government grants related to income and expense

An unconditional government grant related to a biological asset measured at its fair value less estimated point-of-sale costs is recognized as income when the government grant becomes receivable (government grants for dairy herd, general area- aid subsidies). If a government grant is conditional, including whereby a government grant requires a Group company not to engage in specified agricultural activity, the Group recognizes the government grant as income when the conditions attaching to the government grant are met (investment subsidies, area-aid environmental subsidies) and until then aid received is recognized as a liability.

(b) Government grants related to purchase of property, plant and equipment

Government grants relating to property, plant and equipment are included in non-current liabilities as deferred government grants and are amortized to the income statement on a straight-line basis over the expected lives of the related assets.

2.9

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.

(a) Agricultural produce

Agricultural produce is initially at the time of harvest measured at its fair value less estimated point-of-sale costs and subsequently recorded in inventories until sold to third parties or used internally for feeding animals. The fair value of agricultural produce is determined based on market prices of only those markets where the produce is intended to be sold or used for feed. Cost of the agricultural produce is determined using FIFO method.

(i) Milk

Milk is initially measured at its fair value less estimated point-of-sale costs at the time of milking and subsequently recorded as inventories. The fair value of milk is determined based on market prices in the local area.

(ii) Grain and feeds

Grain and feeds produced by the Group are initially measured at its fair value less estimated point-of-sale costs at the time of harvest and subsequently recorded as inventories. The fair value of feed is determined based on market prices in the local area. The fair value of grain is determined based on quoted prices on the nearest market or if multiple markets are available, of the market where the Group’s company expects to sell the produce.

(b) Work-in-progress related to field preparation

Cost of agricultural preparation on fields before seeding is recorded as work-in-progress in inventories. After seeding the cost of field preparation is transferred to the fair value of biological assets (Note 2.7 (b)).

2.10

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less allowance for impairment. An allowance for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired.

The delinquency of payment is estimated separately on each market where the Group operates. The amount of the allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement within selling and marketing costs. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables.

Subsequent recoveries of amounts previously written off are credited against selling and marketing costs in the income statement.

2.11

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.

2.12

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

2.13

Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

2.14

Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method. Borrowing costs are not capitalized to the costs of a qualifying asset.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

2.15

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Group’s subsidiaries operate and generate taxable income.

Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

The effective income tax rate in Ukraine is 25% and in Russia 24%. Agricultural producers in both Ukraine and Russia are exempted from the ordinary corporate income tax system if they meet the requirements to be recognized as agricultural producers (note 2.15 (b)). The income tax in Estonia is calculated only on distributed earnings with the effective rate 21/79 of the distributed amount (note 2.15 (c))

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated 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 or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized 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 is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

b) Agricultural tax regimes in Ukraine and Russia

Both in Ukraine and Russia companies are exempt from ordinary corporate income tax regime if they meet criteria to be recognized as agricultural producers. In Ukraine, a company is automatically considered to be an agricultural producer if it derived at least 75% of its revenue in the previous tax year from the sales of self-produced agricultural product. Simplified agricultural tax means that the agricultural producer pays tax based not on its profits, but on the total area used for agricultural production.

In Russia a company can apply for the agricultural tax regime if it meets the criteria of an agricultural company. The criteria vary between regions, but are based in general on the measures of proportion of agricultural activity in all activities of the company.