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CROATIA AIRLINES D.D., ZAGREB
AND ITS SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
31 DECEMBER 2006
Contents
Page
Responsibility for the Financial Statements
3
Independent Auditor's Report
4
Consolidated Croatia Airlines Group Income Statement
and Croatia Airlines d.d. Income Statement
5
Consolidated Croatia Airlines Group Balance Sheet
6
Croatia Airlines d.d. Balance Sheet
7
Notes to the Financial Statements
Croatia airlines d.d., Zagreb and its subsidiaries
8-14
Responsibility for the financial statements
Responsibility for the Financial Statements
Pursuant to the Croatian Accounting Law, the Management Board is responsible for ensuring that financial
statements are prepared for each financial year in accordance with the International Financial Reporting Standards
(“IFRS’’) as published by the International Accounting Standards Board which give a true and fair view of the state of
affairs and results of Croatia Airlines d.d. (the “Company”) and Croatia Airlines Group. (“Group”) for that period.
After making enquiries, the Management Board has a reasonable expectation that the Company and the Group have
adequate resources to continue in operational existence for the foreseeable future. For this reason, the Management
Board continues to adopt the going concern basis in preparing the financial statements.
In preparing those financial statements, the responsibilities of the Management Board include ensuring that:

suitable accounting policies are selected and then applied consistently;

judgements and estimates are reasonable and prudent;

applicable accounting standards are followed, subject to any material departures disclosed and explained in the
financial statements; and

the financial statements are prepared on the going concern basis.
The Management Board is responsible for keeping proper accounting records, which disclose with reasonable
accuracy at any time the financial position of the company, and must also ensure that the financial statements comply
with the Croatian Accounting Law. The Management Board is also responsible for safeguarding the assets of the
Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other
irregularities.
Signed on behalf of the Management Board
Ivan Mišetić
Managing Director of the Company
Croatia Airlines d.d.
Savska 41
10000 Zagreb
Republic of Croatia
22 March 2007
Croatia airlines d.d., Zagreb and its subsidiaries
33
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Croatia Airlines d.d., Zagreb:
We have audited the accompanying financial statements of Croatia Airlines d.d., Zagreb (the ‘Company’) and of
Croatia Airlines d.d., Zagreb and its subsidiaries (the ‘Group’), which comprise the balance sheet as at 31 December
2006, and the related income statement, statement of changes in equity and cash flow statement for the year then
ended, and a summary of significant accounting policies and other explanatory notes.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with
International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining
internal control relevant to the preparation and fair presentation of financial statements that are free from material
misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making
accounting estimates that are reasonable in the circumstances.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit
in accordance with the International Standards on Auditing. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments,
the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entities’ internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Matters affecting opinion
As described in Note 6, the Company transferred the revaluation surplus which represents the difference between
depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost,
in the amount of HRK 24,676 thousand through the Income statement in accordance with Croatian Tax Law. This is a
departure from International Accounting Standard 16 – Property, Plant and Equipment, which requires that revaluation
surplus should be transferred directly to retained earnings. The retained earnings in the balance sheet at 31
December 2006 is understated, and net income for year then ended is overstated by the amount of HRK 24,676
thousand.
Opinion
In our opinion, except for the effect of the subject discussed in the previous paragraph, the financial statements
present fairly, in all material respects, the financial position of the Company and of the Group as at 31 December
2006, and their financial performance and their cash flows for the year then ended in accordance with International
Financial Reporting Standards.
Deloitte doo.
Branislav Vrtačnik, Certified auditor
Zagreb, 22 March 2007
44
Consolidated Croatia Airlines Group income statement and Croatia Airlines d.d. income
statement
For the year ended 31 December 2006
2006.
Croatia Airlines Group
HRK
000
2005.
Croatia Airlines Group
EUR
000
HRK
000
EUR
000
Operating revenues
1,353,759
184,877
1,410,468
190,598
Operating expenses
(1,368,598)
(186,530)
(1,374,727)
(185,606)
Financial revenues
165,330
16,602
62,655
3,073
Financial expenses
(118,206)
(10,540)
(120,113)
(10,999)
32,285
4,409
(21,717)
(2,934)
166
23
-
-
32,119
4,386
(21,717)
(2,934)
LOSS / PROFIT BEFORE TAX
Income tax expense
NET PROFIT FOR THE YEAR
2006.
Croatia Airlines d.d.
HRK
000
2005.
Croatia Airlines d.d.
EUR
000
HRK
000
EUR
000
Operating revenues
1,345,166
183,703
1,402,597
189,535
Operating expenses
(1,360,765)
(185,463)
(1,367,926)
(184,997)
Financial revenues
165,217
16,600
62,406
3,382
Financial expenses
(118,096)
(10,536)
(119,853)
(10,998)
31,522
4,305
(22,776)
(3,078)
-
-
-
-
31,522
4,305
(22,776)
(3,078)
LOSS / PROFIT BEFORE TAX
Income tax expense
NET PROFIT FOR THE YEAR
Croatia Airlines d.d., Zagreb and its subsidiaries
55
Consolidated Croatia Airlines Group balance sheet
As at 31 December 2006
2006.
2005.
Croatia Airlines Group
HRK
000
Croatia Airlines Group
EUR
000
HRK
000
EUR
000
ASSETS
Non-current assets
Intangible assets
Tangible assets
Accounts receivable
Financial assets
3,571
484
4,127
553
1,751,826
235,460
1,803,034
242,085
50,774
6,913
90,753
12,304
135,474
18,441
18,744
2,535
1,941,645
261,298
1,916,658
257,477
24,392
3,294
22,987
3,096
70,684
9,624
116,359
15,776
Current assets
Inventories
Accounts receivable
Financial assets
Cash and cash equivalents
6,053
824
9,615
1,304
70,972
9,663
78,479
10,640
172,101
23,404
227,440
30,816
20,552
2,798
8,937
1,212
2,134,297
287,500
2,153,035
289,505
Equity and reserves
Shareholders' equity
989,986
134,782
989,986
134,224
Revaluation reserves
217,794
29,652
242,470
32,874
8,408
1,145
60,675
8,227
-
(3,089)
-
(2,418)
(535,875)
(72,957)
(512,247)
(69,452)
32,119
4,386
(21,717)
(2,935)
712,431
93,919
759,167
100,521
1,111,492
151,325
946,774
128,366
272,942
37,160
409,271
55,490
37,432
5,096
37,822
5,128
2,134,297
287,500
2,153,035
289,505
Prepaid expenses and accrued income
TOTAL ASSETS
EQUITY AND LIABILITIES
Other reserves
Foreign exchange differences
Accumulated losses
Result for the year
Non-current liabilities
Current liabilities
Accrued expenses and deferred income
TOTAL EQUITY AND LIABILITIES
Croatia airlines d.d., Zagreb and its subsidiaries
66
Croatia Airlines d.d. balance sheet
As at 31 December 2006
2006.
Croatia Airlines d.d.
HRK
000
EUR
000
2005.
Croatia Airlines d.d.
HRK
000
EUR
000
ASSETS
Non-current assets
Intangible assets
Tangible assets
Accounts receivable
Financial assets
2,977
403
3,955
530
1,750,889
235,330
1,801,547
241,882
51,808
7,053
92,511
12,543
136,458
18,561
18,796
2,535
1,942,132
261,349
1,916,810
257,491
24,392
3,294
22,987
3,096
68,124
9,275
113,789
15,428
Current assets
Inventories
Accounts receivable
Financial assets
Cash and cash equivalents
5,972
813
9,493
1,287
68,715
9,355
76,105
10,318
167,203
22,737
222,373
30,129
20,388
2,776
8,871
1,203
2,129,725
286,862
2,148,054
288,823
Equity and reserves
Shareholders' equity
989,976
134,781
989,976
134,223
Revaluation reserves
217,794
29,651
242,470
32,874
7,827
1,066
60,208
8,164
Prepaid expenses and accrued income
TOTAL ASSETS
EQUITY AND LIABILITIES
Other reserves
Foreign exchange differences
Accumulated losses
Result for the year
Non-current liabilities
Current liabilities
Accrued expenses and deferred income
TOTAL EQUITY AND LIABILITIES
Croatia airlines d.d., Zagreb
-
(3,104)
-
(2,425)
(536,886)
(73,095)
(514,110)
(69,704)
31,522
4,305
(22,776)
(3,078)
710,233
93,604
755,768
100,054
1,111,492
151,324
946,774
128,366
271,056
36,903
408,063
55,326
36,944
5,030
37,449
5,077
2,129,725
286,862
2,148,054
288,823
7
Notes to the financial statements
For the year ended 31 December 2006
SUMMARY OF RELEVANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with the International Financial Reporting
Standards (IFRS) as published by the International Accounting Standards Board.
The financial statements have been prepared on the historical cost basis, except for aircraft and spare engines
included in tangible fixed assets, which have been revalued. The principal accounting policies adopted are set
out below.
a) Revenue recognition
Sales of goods are recognised net of sales taxes and discounts when delivery has taken place and transfer of
risks and rewards has been completed.
b) Passenger revenue
Passenger ticket sales are recorded as revenue when the transportation is provided. The value of unused
tickets is included in current liabilities as Air Traffic Liability until the date the ticket expires, after which they are
credited to income.
c) Frequent Flyer awards
The Company operates a frequent flyer award program that provides travel awards to members based on
accumulated mileage. The Company does not accrue for incremental costs for mileage accumulated in relation
to this program because the Company believes, based on past experience, that such costs are immaterial.
d) Interest income
Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective
interest rate applicable.
e) Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and
rewards of ownership to the lessee. All other leases are classified as operating leases.
f) The Group as lessor
Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease.
g) The Group as lessee
Assets held under finance leases are recognised as assets of the Group at their fair value at the date of
acquisition or, if lower, at the present value of the minimum lease payments. The corresponding liability to the
lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between
finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the
remaining balance of the liability. Finance charges are charged directly against income, unless they are directly
attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general
policy on borrowing costs (see below).
Croatia airlines d.d., Zagreb and its subsidiaries
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Notes to the financial statements
For the year ended 31 December 2006
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the
term of the relevant lease.
h) Foreign currencies
Transactions in currencies other than Croatian Kuna, except as described in the chapter Financial statement in
euro, are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates
prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are
denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was
determined. Gains and losses arising on exchange are included in net profit or loss for the period, except for
exchange differences arising on non-monetary assets and liabilities where the changes in fair value are
recognised directly to equity.
i) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which
are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are
added to the cost of those assets, until such time as the assets are substantially ready for their intended use or
sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure
on qualifying assets is deducted from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in net profit or loss in the period in which they are incurred.
j) Government grants
Government grants towards development costs are recognised as income over the periods necessary to match
them with the related costs and are deducted in reporting the related expense.
Government grants received in the form of direct financial support to the Company without any additional costs
related thereto, are recognised in the income statement for the period in which they are obtained.
k) Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as
reported in the income statement because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability
for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance
sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax basis used in the computation of
taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are
generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent
that it is probable that taxable profits will be available against which deductible temporary differences can be
utilised.
Croatia airlines d.d., Zagreb and its subsidiaries
9
Notes to the financial statements
For the year ended 31 December 2006
l) Tangible fixed assets
Fixed assets, except for aircraft and spare engines, are stated at cost less accumulated depreciation and any
recognised impairment loss.
Costs incurred in replacing major portions of the Group’s facilities that increase their productive capacity or
substantially extend their useful life are capitalised.
An element of the cost of aircraft relates to regular maintenance checks. These costs are depreciated over the
period from the purchase of the aircraft. Future periodic checks will be capitalised at the time of expenditure
and amortised to the next check.
Rotatable spare parts are allocated to the type of aircraft concerned and depreciated over their estimated
useful life.
In connection with the acquisition of certain aircraft and engines, the Company received certain discounts.
These discounts are deducted from the cost of the aircraft or are deferred and credited to the statement of
profit and loss on a proportional basis over the operational life of the aircraft, depending on the nature of the
discounts .
Included in the cost of aircraft is the residual value for each type of aircraft. Depreciation is charged on a
straight–line basis from the first day of the next month after the tangible asset is put in use. Equipment with a
useful life over one year and individual cost value over 2 thousand HRK are recorded as assets. Power
generating equipment and equipment of low value used in operating activities is recorded as tangible assets no
matter what its cost.
The Company engaged the Croatian Society of Professional Valuators, which at 31 December 2001 performed
qualified and independent valuation of aircrafts and spare engines using the market method. The valuation
effects are credited and charged to revaluation reserve.
The difference between net book value of assets that were sold or otherwise disposed of and the amount
realised from selling was recognised as net value directly to other revenue or other costs (gain/loss from sold
assets).
The costs of the ATR 42 aircraft are depreciated on a straight-line basis over a period of 20 years with no
residual value. Airbus aircraft are depreciated on a straight-line basis over a period of 20 years (except for the
second-hand Airbus 320 which is depreciated over a period of 12 years) after making allowance for their
estimated residual value. The cost of "12-year checks" are at a rate of 8.33%, and "6-year checks" are at a rate
of 16.67%.
The Airbus and ATR 42 spare parts are stated at cost and depreciated over the estimated useful life of the
aircraft to which they refer (20 years). Ground Service Equipment (“GSE”) and tools are stated at cost and
depreciated over 16,6 years.
Buildings are depreciated over their estimated useful life of 40 years, and other assets over their useful life,
which ranges from 4 – 10 years.
Croatia airlines d.d., Zagreb and its subsidiaries
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0
Notes to the financial statements
For the year ended 31 December 2006
m) Intangible fixed assets
Included in intangible assets is software, which is measured initially at purchase cost and is amortised on a
straight-line basis over is estimated useful life, which is two years.
n) Investments in subsidiary and associated companies
Subsidiaries are those companies in which the Company has control. Control is achieved where the Company
has the power to govern the financial and operating policies of an investee enterprise so as to obtain benefits
from its activities. An associate is an enterprise over which the Group is in a position to exercise significant
influence, but not control, through participation in the financial and operating policy decisions of the investee.
The results, assets and liabilities of subsidiaries and associated companies are presented in these separate
financial statements under the cost method and have been consolidated or presented under the equity method
of accounting in the Group statements.
o) Inventories
Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where
applicable, direct labour costs and overheads that have been incurred in bringing the inventories to their
present location and condition. Cost is calculated using the weighted average method. Net realisable value
represents the estimated selling price less all estimated costs of completion and costs to be incurred in
marketing, selling and distribution.
p) Financial instruments
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes
a party to the contractual provisions of the instrument.
Derivative contracts initially are recognised on cost value, and subsequently on fair value. On the contractual
date the Group classifies derivatives as:
1) hedging of fair value of recognised assets or liabilities (fair value hedge)
2) hedging of forecast transaction or firm commitment (cash flow hedge)
Changes in fair value of derivatives that are designated and classified as hedging and that are determined to
be an effective hedge are recognised in the profit and loss account together with all changes in fair value of
assets or liabilities that are hedged items. Gain or loss from derivative financial instruments that are used as
hedging instruments are recognised with regard to the nature of the hedged item.
Derivatives that are not hedging instruments are considered as trading instruments. Presently, the Group policy
does not allow holding of trading instruments.
q) Accounts receivable
Trade receivables are stated at their nominal value as reduced by appropriate allowances for estimated
irrecoverable amounts.
Croatia airlines d.d., Zagreb and its subsidiaries
1
1
Notes to the financial statements
For the year ended 31 December 2006
r) Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents comprise cash in hand, current
accounts at banks deposits up to ninety days.
s) Available for sale investments
Available-for-sale investments are recognised at trade date and initially stated at cost, including transaction
costs. The results, assets and liabilities in respect of available-for-sale assets are stated at cost. Investment
income is included in the income statement after the date of acquisition and only to the extent of receipts of the
investor based on distribution of accumulated net profits of the investee. Available-for-sale investments have
not been valued at fair value.
t) Loans and receivables
Loans and receivables originated by the Group are stated at amortised cost less provision for impairment, if
any related value adjustments are recognised in the income statement. Fair value of loans and receivables
originated by the Group approximates to their carrying amounts because they are short-term in nature.
Therefore, the Management Board of the Company believes that the carrying amounts of loans and receivables
approximate to their fair values.
u) Long-term borrowings
Long-term borrowings are recorded at the proceeds received, net of direct issue costs. Finance charges are
accounted for on an accrual basis and added to the carrying amount of the instrument to the extent that they
are not settled in the period in which they arise.
v) Accounts payable
Trade payables are stated at their nominal value.
w) Hedging and translation reserves
Loans and finance leases for the purchase of aircraft are denominated in foreign currencies and as such the
Company is exposed to the risk of fluctuations in exchange rates. The Company has evaluated its foreign
currency revenues and determined that foreign currency revenues form a highly effective cash flow hedge
against its principal and interest payments in foreign currency. Accordingly the Company accounts for
unrealised gains and losses on translation of the designated foreign currency debts as a separate component
of equity. The effectiveness of the hedge is monitored by management on a regular basis throughout the
period.
Hedging reserves related to the unpaid portion of long-term financial liabilities are treated as hedging only in an
amount relating to payment obligation due within the next 3 years. At the same time foreign exchange
differences from the unpaid portion of principal are directly recognised in the profit and loss account for the
period.
X) Use of estimates in the preparation of financial statements
Croatia airlines d.d., Zagreb and its subsidiaries
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2
Notes to the financial statements
For the year ended 31 December 2006
The preparation of financial statements in conformity with the International Reporting Financial Standards, as
published by the International Accounting Standards Board, requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, income and expenses and disclosure of
contingencies.
The significant areas of estimation used in the preparation of the accompanying financial
statements relate to provisions for receivables.
Future events may occur which will cause the assumptions used in arriving at the estimates to change. The
effect of any changes in estimates will be recorded in the financial statements, when determinable.
FINANCIAL STATEMENTS IN EUR
Croatian Law only permits the presentation of the primary financial statements in Croatian Kuna. Due to the
adoption of the Euro, most European airline companies are now reporting in Euro. Accordingly, the Board of
the Company decided in 2003 to change its second reporting currency from American dollars (USD) into Euro
(EUR). Thus the balance sheets, income statements, statements of changes in equity and of changes in cash
flows set out below are denominated in EUR. The translation into EUR has been performed in accordance with
the relevant accounting policies.
In the preparation of the financial statements as of 31 December 2006 and 2005, the Group uses Croatian
Kuna as the primary currency for recording transactions. Accordingly, the financial statements as of 31
December 2006 and 2005 are stated in kunas and translated to EUR as follows:
Year-end exchange rates have been used for all monetary assets and liabilities:
Non-current tangible and intangible assets together with related depreciation and amortization, as well as
inventories have been stated as follows:

Assets, inventories: at historical cost, translated into EUR at the date of purchase.

Depreciation and amortisation: calculated on the historical cost, by applying depreciation rates indicated
above.
Yearly average exchange rate has been used for all items in the income statement.
The resulting translation difference has been charged/credited to equity in the financial statements reported in
EUR.
Croatia airlines d.d., Zagreb and its subsidiaries
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3
Notes to the financial statements
For the year ended 31 December 2006
APPROVAL OF THE FINANCIAL STATEMENTS
The financial statements were approved by the Management Board and authorised for issue on 22 March 2007.
Signed for and on behalf of the Company on 22 March 2007.
Ivan Mišetić
Damir Šprem
Managing Director of the Company
Executive Vice President Finance
Croatia airlines d.d., Zagreb and its subsidiaries
14