ware d.0.0. Deloitte, 7200 hn mms Terazie 3 11000 Belgrade Serbia Tek +381 113812 100;+ 361 11 3812 200, Fave #981 119812 101; + 364 11.8812 201 wor delite coms Maja Mitrovie Financial and Controling Specialist sTech d.o0. Belgrade RE: Capitalization of cost of internally generated software 14 November 2013 Dear Ms. Mitrovié, In regard to our contract of July 1, 2013, please find below our memo on capitalization of cost of internally generated software. ‘The requirement that an intangible asset should be initially recorded at its cost applies to internally generated intangible assets es well as purchased intangible assets. Cost includes all cost incurred from the date on which all of the recognition criteria (those for purchased as well as for internally generated intangible assets) are met. If costs have been expensed prior to the recognition criteria begin met, they ‘may not be reinstated upon satisfaction of the criteria. (IAS 38:65871) Similar to self-constructed iters of property, plant and equipment, the cost of an intemally generated intangible asset includes ail directly attributable cost necessary to create, produce and prepare an asset to be capable of operating in the manner intended by management. These costs may include (in your case particularly): (IAS 38:66) + expenditure on materials and services used or consumed in generating the software (outsourcing and other related cost of externally engaged IT experts involved in software development); + the salaries, wages and other employment~elated costs (e.g. employee insurance, fees related to salaries payment and other compulsory fees and contributions related to salaries) of personnel directly engaged in generating the software; + borrowing costs, in accordance with the requirements of IAS 23 Borrowing Costs; and + any other expenditure that is directly attributable to generating the software, such as fees to register a legal right and amortisation of patents and licences and other assets that are used to generate the software (including travel cost related to staff performing business analyses). Dette eters one or oof De Tous Tora mils, a UKpmat copay lite by guanee a i eo ol mab ies, e: of ich ‘leony spn rnp ny Pen sw nda coasts fo daaed eel of ela arate of Oooh Tuc Teas,1AS 38 specifically prohibits the inclusion of the following items in the cost of an internally generated intangible asset + selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use; + clearly identified inefficiencies end initial operating losses incurred before an asset achieves planned performance; and + expenditure on training seif to operate the asset Evaluating whether overheads are “directly attributable costs" IAS 38:66 states that “the cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management’. E.g. premises costs are more likely to fall under IAS 38:67, which states that selling, administrative and other general overhead costs are not part of the cost of an internally generated intangible asset “unless this expenditure can be directly attributed to preparing the asset for use", Whether such costs can be considered ‘directly attributable’ will be @ matter of judament in the particular circumstances. However, to qualify as ‘directly allributable’, it would be expected that the costs would have been avoided had the entity not engaged in the development activites, ‘Therefore, if the premises are rented, it may be possible to demonstrate that the rental costs are directly attributable costs if they would not have been incurred had the entity not engaged in the development activities. For example, sTech might be able to demonstrate that + itdid not rent the premises until commencement of the software development activities; and + had it not engaged in the development activities, it would net have rented the premises until a later date for use in other activities. Based on information provided to us, we do understand that you are able to demonstrate above stated for the following cost categories: + cost of premises; + salaries, wages and other employment-elated costs of administrative personnel (financial and controller specialists) + overhead expenditures related to administrative personnel Actually, all these cost would have been avoided had the software not been developed, In addition, we have identified certain costs e.g. salaries, wages and other employment-related costs of General Manager (rental, airplane tickets, reallocation costs) occurred prior to commencing the activities of software development. In order to capitalize these costs, sTech would need to demonstrate that these costs (or portion of the costs) which are mainly related to the software development activities would have been avoided, such as in one of the following scenarios: + portion of these costs would be avoided ifthe entity was not engaged in development activities; or + GM would use his time to manage other activities for which sTech has engaged him. 23Costs that have been identified as not directly attributable are as follows: + salaries, wages and other employment-related costs of IT staff involved in cost of current IT infrastructure activities; + overhead expenditures related to IT infrastructure activities; + cost of premises related to IT infrastructure activities; + general bank fees related to bank account maintenance; + General manager's travel expenses related to Uniga activities on group level; + Expenditure on training staff to operate the asset; + SAP expenses (consultants engaged on monthly basis and amortization); + Entertainment and advertising expenses; + Management fee charged by the Group; + Audit fees, ‘These costs would have been occurred had sTech not engaged in software development. Disclaimer: Our work was performed using due professional care and is based upon the information provided to us. If you have reason to believe that we are not aware of all relevant facts, it is your responsibilty to inform us Jimmediately so that we can analyze the additional information and adjust our advice accordingly. We have advised you based upon our understanding of the accounting standards as of this date. Situations do exist whereby the ‘accounting and other authority's interpretation ofthe law and standards may vary from ours. Partner \ Manager i aeocnao |} Mig ge i \ ; see Nada Sudié ot 38