2 Annual Report 08. His Highness Sheikh Sabah Al Ahmad Al Jaber Al Sabah Amir of The State of Kuwait

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2 His Highness Sheikh Sabah Al Ahmad Al Jaber Al Sabah Amir of The State of Kuwait His Highness Sheikh Nawaf Al Ahmad Al Jaber Al Sabah Crown Prince of The State of Kuwait His Highness Sheikh Nasser Al Mohammed Al Ahmad Al Sabah Prime Minister of The State of Kuwait 2 Annual Report 08

3 Contents Company Mission Board of Members Company Projects Board Directors Report Financial Statements Auditors Report Income Statement Balance Sheet Cash Flows Statement Statements Of Changes In Equity Annual Report 08

4 Company Mission Establish and develop a comprehensive network of distinguished educational institutions that helps in developing humanity in accordance with an effective scientific, Methodism in frameworks molded to go along with the values of the society we live in and in synergy with the culture we live in and inspired by the principles we believe in, as well as work on building a generation well- informed in the latest technology, able to rely on itself and dedicating to serve its society and manhood. Annual Report 08 7

5 Board Members Dr. Suliman Sadoun AlBader Chairman Tariq A. AlAdsani Vice Chairman Nasser S. AlSaleh Board Member Fuad A. AlKhamees Board Member Hamid A. AlWazzan Board Member Suliman H. AlMousa Board Member Reem M.Badran Board Member Annual Report 08 9

6 Petra Company for Education Country and Registration: Hashemite Kingdom of Jordan Issued Capital: Jordanian Dinar 16,000,000 Ownership Ratio: 9.4% Year of Establishment: 1991 The Academic Programs Collage and Study Programs College of Information Technology Pharmacy & Medical Science Faculty of Arts & Science Faculty of Architecture& Arts Faculty of Administrative & financial Science MasterDegree Pharmacy Science English Language/ Translation The Future plan of the University An approval has been obtained to increase the university capacity to reach 6000 male and female students. 10 Annual Report 08 Annual Report 08 11

7 Kingdom University Company Country and Registration : Kingdom of Bahrain Issued Capital: American Dollar 15,000,000 Ownership Ratio: 45% Year of Establishment : 2004 The Academic Programs Collage and Study Programs Faculty of Business Management Faculty of Information Technician Faculty of Law Faculty of Arts Faculty of Architecture Higher Diploma Degrees Information techniques Kuwait Science and Technology Institute Company Country and Registration: Kuwait Issued Capital: Kuwait Dinars 4,000,000 Ownership Ratio: 8.75% Year of Establishment: 2007 The Future plan of the Institute The Science & technology Institute was established jointly with the Indian institute for Technology ( I.I.T), Delhi. MasterDegree Information Technique Business Management Law Environmental Engineering Architecture The Future plan of the University The University Management planning to transfer to the new campus in Hamad city. As for the increasing demand of joining Kingdom University. 12 Annual Report 08 Annual Report 08 13

8 Saudi Kuwiati Education & Training Company W.L.L. The Educational Elite Company Country and Registration: Kingdom of Saudi Arabia Issued Capital: Saudi Riyal 5,000,000 Ownership Ratio: 100% Year of Establishment : 2007 Country and Registration : Kuwait Issued Capital: Kuwait Dinars 5,000,000 Ownership Ratio: 15% Year of Establishment : 2007 The Future plan of the Company Investment in the educational filed until the founding of the First Education Company and Training (Closed stock company), which is expected to start investment in education in KSA. Building project educational complexes in Riyadh, where educational facilities were purchased in Yasmines' area north of Riyadh city will be allocated an area of 12,000 square meters the pools of education for boys and girls to another area of 12,487 square meters. The development of Global Science Schools in the Riyadh city that the company s share amounts to 60%. Choice Action team and the administrative and technical cadres of the company. The Future plan of the Company Construction of the internal light academy jointly with the international oak ridged academic in the United Sate of America applying the Military Education System in the earlier age stage and adopting a new and unique conception of education aiming to building the leading personality in the society. 14 Annual Report 08 Annual Report 08 15

9 Vice Chairman's Message Dear Shareholders, On Behalf of my colleague board members, I would like to welcome you all in the third annual meeting. As, I would like to give you a review about the First Education Company (FEC) activities and its achievements during the fiscal year ended in 12/31/08. The last quarter in 2008 witnessed a chain of sequent financial and economical development which has clear effects that causes the biggest global recession since decades. Despite these challenges and economic circumstances that we are experiencing, your company is still going on an obvious strategy to achieve its vision and mission in a least possible losses. As a result of the solidarity of the efforts of the company s executive management and employees, we tried to overcome those obstacles and the difficult economic conditions to achieve net income amounted to 1,750,594 as the percentage of operating profit is 48% in comparison with 36% last year. Note that the amount of 1,428,006 was taken as allocation of the net losses of the company. With regard to education projects, I ll begin with Kingdom University Company in Kingdom of Bahrain, which your company owns 45.2%. The number of the students arose from 259 student in 2006 to 1164 student now, with expansion of 349%. Also, the income increased approximately about 45.8% in comparison with last year. As for the profits have risen by almost 51.9% from the year FEC operates within an obvious mission, which is developing a unique integrated network of educational institutions and distinguished leaders among educational levels that contributes in human development and a better returns for investors and shareholders. Despite, all the challenge that the future held, the company is committed to the achievement of development goals and the most important to raise the level of education and training in Kuwait and the region. In conclusion, the highest on my own behalf and on behalf of all members of the governing council deepest gratitude of appreciation to his highness the Amir of Kuwait and HH the crown prince, HH the prime minister and the members of government responsible. We also extend our thanks to all the company s personnel all levels of administrative and technical for their sincere efforts they have made in achieving what we have achieved, thanks to Almighty Allah. Best Regards, Tariq A. AlAdsani Vice Chairman / Managing Director There is no doubt that the economic crisis that affected many countries including Kuwait, requires caution with investing in every project. Although, the investment in education considered off-risk investment. Therefore, your company is keen on maintain achieved gains and the protection of shareholders rights. 16 Annual Report 08 Annual Report 08 17

10 Independent Auditors Report To The Shareholders Of First Education Company K.S.C. (Closed) We have audited the accompanying consolidated financial statements of First Education Company K.S.C. (Closed) (the parent company ) and a subsidiary (the group ) which comprise the consolidated balance sheet as at 31 December 2008, consolidated income statement, consolidated cash flow statement and consolidated statement of changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Consolidated Financial Statements First Education Company K.S.C. (Closed) and A Subsidiary CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2008 The management of the parent company is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. Except as described in the Basis of Qualified Opinion below, we conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated financial statements in order to design audit procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the parent company s management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained, except for the matters described in the Basis of Qualified Opinion below, is sufficient and appropriate to provide a basis for our audit opinion. 18 Annual Report 08 Annual Report 08 19

11 Independent Auditors Report To The Shareholders Of First Education Company K.S.C. (Closed) (Continued) Basis of qualified opinion As mentioned in Note 4, the parent company has not consolidated the financial statements of its indirect subsidiary as at 31 December 2008, as the management was unable to obtain the financial statements for this subsidiary. In the absence of availability of the financial statements of this subsidiary as at 31 December 2008, we are unable to determine the likely impact, if any, of this matter on the consolidated balance sheet as at 31 December 2008 and consolidated income statement for the year then ended. Qualified opinion In our opinion, except for the effect of the matter referred in paragraph of the Basis of Qualified Opinion above, the consolidated financial statements present fairly, in all material respects, the financial position of the group as of 31 December 2008 and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Report on Other Legal and Regulatory Matters Furthermore, in our opinion proper books of account have been kept by the parent company (except as noted above) and the consolidated financial statements, together with the contents of the report of the parent company s board of directors relating to these consolidated financial statements, are in accordance therewith. We further report that we obtained all the information and explanations that we required for the purpose of our audit and that the consolidated financial statements incorporate all information that is required by the Commercial Companies Law of 1960, as amended, and by the parent company>s articles of association, that an inventory was duly carried out and that, to the best of our knowledge and belief, no violations of the Commercial Companies Law of 1960, as amended, nor of the parent company s articles of association have occurred during the year ended 31 December 2008 that might have had a material effect on the business of the parent company or on its financial position. CONSOLIDATED INCOME STATEMENT Year ended 31 December 2008 Note INCOME Murabaha income - 401,868 Wakala income 366, ,754 Net investment income 3 504, ,553 Share of results of an associate 6 692, ,623 Dividend income 140, ,720 Other income 47,029 25,910 1,750,594 1,726,428 EXPENSES Impairment of financial assets available for sale 5 (468,000) - Provision for credit losses 7 (960,006) - Staff cost (201,728) (145,234) Depreciation (14,714) (2,610) Other expenses (111,592) (90,049) (LOSS) PROFIT BEFORE DIRECTORS REMUNERATION, CONTRIBUTION TO KUWAIT FOUNDATION FOR THE ADVANCEMENT OF SCIENCES (KFAS) AND ZAKAT (1,756,040) (237,893) (5,446) 1,488,535 Directors remuneration - (21,000) Contribution to KFAS - (13,397) Zakat - (893) (LOSS) PROFIT FOR THE YEAR (5,446) 1,453,245 WALEED A. AL OSAIMI LICENCE NO. 68 A OF ERNST & YOUNG 19 August 2009 Kuwait 20 Annual Report 08 Annual Report 08 21

12 CONSOLIDATED BALANCE SHEET Notes ASSETS Non current assets Furniture and equipment 59,196 55,426 Investment in an unconsolidated subsidiary 4 287,275 - Financial assets available for sale 5 3,250,795 4,788,955 Properties under development 870,081 - Investment in an associate 6 2,883,778 2,345,284 7,351,125 7,189,665 Current assets Murabaha and ijara receivables - 6,372,855 Wakala receivables 7 3,840,025 - Financial assets at fair value through income statement 8 3,695,210 2,159,135 Other assets 9 1,416,739 1,208,477 Bank balances and cash 377, ,934 9,329,103 9,917,401 TOTAL ASSETS 16,680,228 17,107,066 EQUITY AND LIABILITIES Equity Share capital 10 15,000,000 15,000,000 Statutory reserve , ,342 Cumulative changes in fair value 116,294 (26,046) Foreign currency translation reserve (117,532) (134,262) Retained earnings 1,039,731 1,945,177 Total equity 16,260,835 17,007,211 Non current liabilities Employees end of service benefits 3,431 5,578 Current liabilities Accounts payable and accruals 415,962 94,277 Total liabilities 419,393 99,855 TOTAL EQUITY AND LIABILITIES 16,680,228 17,107,066 CONSOLIDATED CASH FLOW STATEMENT Year ended 31 December 2008 OPERATING ACTIVITIES (Loss) profit for the year after directors remuneration, (5,446) 1,453,245 contribution of KFAS and Zakat Adjustments for: Depreciation 14,714 2,610 Provision for employees end of service benefits 7,310 3,340 Realised gains on sale of financial assets at fair value through (76,291) (404,191) income statement Unrealised loss (gain) on financial assets at fair value 52,470 (152,362) through income statement Share of results of an associate (692,854) (501,623) Dividend income (140,285) (114,720) Provision for credit losses 960,006 - Impairment of financial assets available for sale 468, , ,299 Changes in operating assets and liabilities: Murabaha and ijara receivables 6,372, ,173 Wakala receivables (4,800,031) 2,022,685 Other assets (208,262) (1,179,589) Accounts payable and accruals 322,075 65,953 Cash flows from operating activities 2,274,261 1,589,521 Employees end of service benefits paid (9,457) - Net cash from operating activities 2,264,804 1,589,521 INVESTING ACTIVITIES Dividend income received 140, ,720 Purchase of furniture and equipment (18,484) (48,125) Purchase of financial assets available for sale (1,268,029) (965,625) Purchase of an unconsolidated subsidiary (287,275) - Purchase of financial assets at fair value through (2,693,553) (2,692,957) the income statement Proceeds on disposal of financial assets available for sale 2,480,529 - Proceeds on disposal of financial assets at fair 1,181,299 1,883,400 value through income statement Dividend received from an associate 170,700 - Purchase of properties under development (870,081) - Net cash used in investing activities (1,164,609) (1,708,587) FINANCING ACTIVITIES Dividend paid (900,000) - Net cash used in financing activities (900,000) - INCREASE (DECREASE) IN BANK BALANCE AND CASH 200,195 (119,066) Tareq A. Al-Adsani Deputy Chairman Bank balances and cash at 1 January 176, ,000 BANK BALANCES AND CASH AT 31 DECEMBER 377, , Annual Report 08 Annual Report 08 23

13 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Cumulative Foreign currency Share Statutory changes in translation Retained capital reserve fair value reserve earnings Total At 1 January ,000, ,342 (26,046) (134,262) 1,945,177 17,007,211 Changes in fair value of financial assets available for sale , ,340 Foreign exchange translation adjustment ,730-16,730 Total income recognised directly in equity ,340 16, ,070 Loss for the year (5,446) (5,446) Total income (loss) for the year ,340 16,730 (5,446) 153,624 Dividend (Note 10) (900,000) (900,000) Balance at 31 December ,000,00 222, ,294 (117,532) 1,039,731 16,260,835 At 1 January ,000,000 73,489 14, ,785 15,728,411 Changes in fair value of financial assets available for sale - - (40,183) - - (40,183) Foreign exchange translation Adjustment (134,262) - (134,262) Total expense recognised directly in equity - - (40,183) (134,262) - (174,445) Profit for the year ,453,245 1,453,245 Total income for the year - - (40,183) (134,262) 1,453,245 1,278,800 Transfer to statutory reserve - 148, (148,853) - Balance at 31 December ,000, ,342 (26,046) (134,262) 1,945,177 17,007,211 1 CORPORATE INFORMATION The consolidated financial statements of First Education Company K.S.C. (Closed) (the parent company ) and a subsidiary (the group ) for the year ended 31 December 2008 were authorised for issue in accordance with a resolution of the board of directors on 19 August The Shareholders General Assembly has the power to amend these consolidated financial statements after issuance. The parent company is a Kuwaiti closed shareholding company registered and incorporated in Kuwait on 20 December The registered office of the company is at P.O. Box 20230, Safat 13063, Kuwait. The principal activities of the group comprise the following: Constructing and managing local and private universities, schools, institutes and training centres Constructing and managing other activities related to the education process (students accommodations, restaurants, libraries, etc.) Investing excess resources in investment portfolios that are managed by specialised companies inside or outside Kuwait. All activities of the group are carried out in compliance with the Islamic Sharia. 2 SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and applicable requirements of Ministerial Order No. 18 of The consolidated financial statements have been presented in Kuwaiti Dinars. The consolidated financial statements are prepared under the historical cost convention modified to include the measurement at fair value of financial assets at fair value through income statement and financial assets available for sale. 2.2 Changes in accounting policies and disclosures The accounting policies used in the preparation of the consolidated financial statements are consistent with those used in the previous years. The following International Accounting Standards Board ( IASB ) Standards and Interpretations applicable to the group have been issued but are not yet mandatory, and have not yet been adopted by the group: IFRS 3(Revised) Business Combinations and IAS 27(Revised) Consolidated and Separate Financial Statements The revised standards were issued in January 2008 and become effective for financial years beginning on or after 1 July IFRS 3(Revised) introduces a number of changes in the accounting for business combinations occurring after this date that will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs, and future reported results. IAS 27(Revised) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as an equity transaction. Therefore, such transactions will no longer give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. Other consequential amendments were made to IAS 7 Statement of Cash flows, IAS 12 Income Taxes, IAS 21 the Effects of Changes in Foreign Exchange Rate, IAS 28 Investment in Associates and IAS 31 Interest in Joint Ventures. The changes by IFRS 3(Revised) and IAS 27(Revised) will affect future acquisitions or loss of control and transactions with minority interests. 24 Annual Report 08 Annual Report 08 25

14 IAS 1 Revised Presentation of Financial Statements The revised Standard was issued in September 2007 and becomes effective for financial years beginning on or after 1 January The Standards separates owner and non-owner changes in equity. The statement of changes in equity will include only details of transactions with owners, with non-owner changes in equity presented as single line. In addition, the Standards introduces the statement of comprehensive income; it present all items of recognised income and expense, either in one singe statement, or in two linked statements. The group is still evaluating whether it will have one or two statements. 2.3 Basis of consolidation The consolidated financial statements include the financial statements of the parent company and its subsidiary for the year ended 31 December The financial statements of the subsidiary are prepared for the same reporting year as the parent company, using consistent accounting policies. The consolidated financial statements include the following subsidiary: Name of the company Country of incorporation Interest in equity Principal activities Saudi Kuwaiti Education & Training Company W.L.L. Saudi Arabia 100% - Education During the year ended 31 December 2008, the parent company subscribed for 100% equity interest in Saudi Kuwaiti Education & Training Company W.L.L. incorporated in Saudi Arabia for 36,440. From the date of establishment, Saudi Kuwaiti Education & Training Company W.L.L. contributed 39,850 to the profit of the group. Subsidiaries are those enterprises controlled by the group. Control exists when the group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases. All inter-company balances and transactions, including intercompany profits and unrealised profits and losses are eliminated on consolidation. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. The subsidiary has been accounted for using the purchase method of accounting. The purchase method of accounting involves allocating the cost of the business combination to the fair value of the assets acquired and liabilities and contingent liabilities assumed at the date of acquisition. 2.4 Summary of significant accounting policies Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received. The following specific recognition criteria must also be met before revenue is recognised: Murabaha, ijara and wakala income Income from murabaha, ijara and wakala is recognised on a time proportion basis so as to yield a constant periodic rate of return based on the balance outstanding. Dividend income Dividend income is recognised when the right to receive payment is established. Furniture and equipment Furniture and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight line basis over the estimated useful lives of 5 years. The carrying values of furniture and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. Expenditure incurred to replace a component of an item of furniture and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases future economic benefits of the related item of furniture and equipment. All other expenditure is recognised in the income statement as the expense is incurred. Investment in associates The group s investments in its associates are accounted for under the equity method of accounting. An associate is an entity in which the group has significant influence and which is neither a subsidiary nor a joint venture. Under the equity method, investments in associates is initially recognised at cost and adjusted thereafter for the post-acquisition change in the group s share of net assets of the associate. The group recognises in the consolidated income statement its share of the total recognised profit or loss of the associate from the date that influence or ownership effectively commenced until the date that it effectively ceases. Distributions received from an associate reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the group s share in the associate arising from changes in the associate s equity that have not been recognised in the associate s income statement. The group s share of those changes is recognised directly in equity. Whenever impairment requirements of IAS 36 indicate that investment in an associate may be impaired, the entire carrying amount of investment is tested by comparing its recoverable amount with its carrying value. Goodwill is included in the carrying amount of an investment in associate and, therefore, is not separately tested for impairment. The reporting dates of the associates and the group are identical and in case of different reporting date of associate, which are not more than three months, from that of the group, adjustments are made for the effects of significant transactions or events that occur between that date and the date of the group s consolidated financial statements. The associate s accounting policies conform to those used by the group for the like transactions and events in similar circumstances. Unrealised profits and losses resulting from transactions between the group and its associate are eliminated to the extent of the group s interest in the associate. Properties under development Properties under development are stated at cost. Such properties will be reclassified, after completion of construction and development, as investment properties. Financial assets and liabilities The group classifies its financial assets as cash and cash equivalents, financial assets at fair value through income statement, murabaha and ijara receivables, wakala receivables, other receivables and financial assets available for sale, whereas the financial liabilities are classified as accounts payable and accruals. The group recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instruments. A regular way purchase of financial assets is recognised using the trade date accounting. Regular way purchases are purchases of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. Financial liabilities are not recognised unless one of the parties has performed or the contract is a derivative contract. 26 Annual Report 08 Annual Report 08 27

15 Financial assets and financial liabilities are measured initially at fair value (transaction price at arm s length terms) plus, in case of a financial asset or financial liability not at fair value through income statement, directly attributable transaction costs. Financial assets Financial assets include the following items: Cash and cash equivalents Cash and cash equivalents are defined as bank balances, cash and short-term murabaha. Short-term murabaha are financial assets originated by the group and represent deals with high credit quality local financial institutions with a residual maturity of up to three months from the contract date. These are stated at amortised cost and are subject to an insignificant risk of changes in value. Financial assets at fair value through income statement Financial assets at fair value through income statement includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through income statement. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Gains or losses on investments held for trading are recognised in the income statement. Financial assets may be designated at initial recognition as at fair value through income statement if the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognising gains or losses on them on a different basis; or (ii) the assets are part of a group of financial assets which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management strategy. Murabaha and ijara receivables Murabaha is an Islamic transaction involving the purchase and immediate sale of an asset at cost plus an agreed profit. The amount due is settled on a deferred payment basis. Ijara is an Islamic transaction involving the purchase and immediate lease of an asset at cost plus an agreed profit. The amount due is settled on a deferred payment basis. Ijara receivables are stated at the aggregate of the minimum lease payments due, net of any deferred income. Murabaha and ijara receivables arising from the group s financing of transactions on an Islamic basis are stated at amortised cost. Third party expenses such as legal fees, incurred in granting a murabaha or ijara are treated as part of the cost of the transaction. Wakala receivables Wakala is an agreement whereby the group provides a sum of money to a customer under an agency arrangement, who invests it according to specific conditions in return for a fee. The agent is obliged to return the amount in case of default, negligence or violation of any terms and conditions of the wakala. These are stated at amortised cost including provision for impairment, if any. Other receivable Other receivable are stated at original invoice amount less a provision for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when there is no possibility of recovery. Financial assets available for sale Financial assets available for sale are those non-derivative financial assets that are designated as available for sale or are not classified in any of the preceding categories. After initial measurement, available for sale financial assets are measured at fair value with unrealised gains or losses being recognised directly in equity in the net unrealised gains reserve. When the investment is disposed of, the cumulative gain or loss previously recorded in equity is recognised in the consolidated income statement. Financial liabilities Financial liabilities include the following items: Accounts payable and accruals Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not. Derecognition of financial assets and liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: the rights to receive cash flows from the asset have expired; the group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass through arrangement; or the group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the group s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the group could be required to repay. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss. Impairment of financial assets An assessment is made at each balance sheet date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence or indication exists, any impairment loss is recognised in the income statement. The group assess whether objective evidence of impairment exists on an individual basis for each individual significant Islamic financing receivables and collectively for others. The main criteria that the group uses to determine that there is objective evidence of an impairment consideration include whether any payment of principal or profit are overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty s business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral etc. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention. 28 Annual Report 08 Annual Report 08 29

16 Impairment is determined as follows: (a) (b) (c) For assets carried at fair value, impairment is the difference between cost and fair value less any impairment loss previously recognised in the consolidated income statement; For assets carried at cost, impairment is the difference between carrying value and the present value of future cash flows discounted at the current market rate of return for a similar financial assests. For assets carried at amortised cost, impairment is based on estimated cash flows discounted at the original effective profit rate Reversal of impairment losses recognised in prior years is recorded when there is an indication that the impairment losses recognised for the financial asset no longer exist or have decreased and the decrease can be related objectively to an event occurring after the impairment was recognised. Reversals of impairment losses are recognised in the consolidated income statement except for available for sale equity investments which are recognised in the cumulative changes in fair values through equity. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated balance sheet if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the financial assets and settle the financial liabilities simultaneously. Fair values Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Consequently, differences can arise between carrying values and the fair value estimates. Underlying the definitions of fair value is the presumption that the group is a going concern without any intention or requirement to materially curtail the scale of its operations or to undertake a transaction on adverse terms. Financial assets available for sale investments and financial assets at fair value through income statement For investments traded in organised financial markets, fair value is determined by reference to stock exchange quoted market bid prices at the close of business on the balance sheet date. For investments where there is no quoted market price, a reasonable estimate of the fair value is determined by reference to recent arm s length transactions, current fair value of another instrument that is substantially the same, an earnings multiple, or an industry specific earnings multiple or is based on the expected cash flows of the investment discounted at current rates applicable for items with similar terms and risk characteristics. Fair value estimates take into account liquidity constraints and assessment for any impairment. Investments with no reliable measures of their fair values and for which no fair value information could be obtained are carried at their initial cost less impairment in value, if any. Other financial assets and liabilities For other financial assets and liabilities, fair value is determined based on expected future cash flows and management s estimate of the amount at which these assets could be exchanged for cash on an arm s length basis or a liability settled to the satisfaction of creditors. Impairment of non-financial assets An asset is impaired if its carrying amount exceeds its estimated recoverable amount. The recoverable amount of an asset is the higher of an asset s fair value less cost to sell and value in use. Fair value less cost to sell is the amount obtainable from the sale of an asset in an arm s length transaction. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. An assessment is made at each balance sheet date to determine whether there is objective evidence that an asset may be impaired. If such evidence exists, an impairment loss is recognised in the consolidated income statement. Reversal of impairment losses is recognised in the consolidated income statement. Employees end of service benefits The group provides end of service benefits to its expatriate employees. The entitlement to these benefits is based upon the employees final salary and length of service subject to the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment. With respect to its national employees, the group makes contributions to government scheme calculated as a percentage of the employees salaries. The group s obligations are limited to these contributions, which are expensed when due. Accounts payable and accruals Liabilities are recognised for amounts to be paid in future for goods or services received, whether billed by the supplier or not. Foreign currencies The consolidated financial statements are presented in Kuwaiti dinars, which is the group s functional and presentation currency. Transactions in foreign currencies are initially recorded in the functional currency at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to consolidated income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Assets including goodwill and liabilities, both monetary and non-monetary, of foreign operations are translated at the exchange rates prevailing at the balance sheet date. Operating results of such entities are translated at average rates of exchange for the entities period of operations. The resulting exchange differences are accumulated in a separate section of the equity (foreign currency translation reserve) until the disposal of the entities. Contingencies Contingent liabilities are not recognised in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognised in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. 30 Annual Report 08 Annual Report 08 31

17 The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future periods. 3 NET INVESTMENT INCOME The most significant use of judgments and estimates are as follows: Classification of investments Management decides on acquisition of an investment whether it should be classified as carried at fair value through income statement or available for sale. Classification of investments as fair value through income statement depends on how management monitor the performance of these investments. When they have readily available reliable fair values and the changes in fair values are reported as part of profit or loss in the management accounts, they are classified as fair value through income statement. Impairment of financial assets The group treats financial assets available for sale equity as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is significant or prolonged requires considerable judgment. Impairment losses on murabaha, ijara and wakala receivables The group reviews its problem murabaha, ijara and wakala receivables on an annual basis to assess whether a provision for impairment should be recorded in the income statement. In particular, considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions. Valuation of unquoted equity investments Valuation of unquoted equity investments is normally based on one of the following: recent arm s length market transactions; current fair value of another instrument that is substantially the same; the expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics; or other valuation models. The determination of the cash flows and discount factors for unquoted equity investments requires significant estimation. Realised gain on sale of financial assets available for sale 480,529 - Realised gain on sale of financial assets at fair value through income statement Unrealised (loss) gain on financial assets at fair value through income statement 4 INVESTMENT IN AN UNCONSOLIDATED SUBSIDIARY 76, ,191 (52,470) 152, , ,553 During the year ended 31 December 2008, the subsidiary of the parent company - Saudi Kuwaiti Education & Training Company W.L.L. acquired 60% equity interest in International Education Schools (unconsolidated subsidiary), a company incorporated in Saudi Arabia for 287,275. The group was unable to obtain the audited financial statements of this subsidiary as the accounting records of this subsidiary are still being finalised. Therefore, interest in this subsidiary is carried at cost. 5 FINANCIAL ASSETS AVAILABLE FOR SALE Quoted investments Equities securities 1,965,671 1,823,330 Unquoted investments Equities securities 1,285,124 2,965,625 3,250,795 4,788,955 The unquoted equity investments are carried at cost due to the non availability of reliable measures of their fair values. Management has performed a review of its unquoted investments to assess whether impairment has occurred in the value of these investments due to the impact of the global financial crisis. Based on this, management has recorded an impairment of 468,000 (2007: Nil) in the consolidated income statement. Unquoted equity securities amounting to 733,874 (2007: 2,965,625) are managed by a related party (Note 12). 32 Annual Report 08 Annual Report 08 33

18 6 INVESTMENT IN AN ASSOCIATE Details of investment in the associate is as follows: Name of company Principal activity Country of registration Percentage of ownership The Kingdom University W.L.L Education Bahrain 45.20% 45.20% The voting capital of the associate is held by nominees on behalf of the parent company. The movement in the carrying amount of investment in the associate during the year is as follows: As at 1 January 2,345,284 - Additions - 1,977,923 Foreign currency translation adjustment 16,340 (134,262) Share of results 692, ,623 Dividend received (170,700) - 2,883,778 2,345,284 Summarised financial information of the associate: Share of associate s balance sheet: Total assets 2,990,998 2,406,610 Total liabilities 107,210 61,326 Share of associate s revenue and profit: Gross revenue 1,245, ,900 Profit for the year 692, ,623 7 WAKALA RECEIVABLES Gross amount 4,800,031 - Less: deferred income - - 4,800,031 - Less: Provision for credit losses (960,006) - 3,840,025 - Based on specific information and in light of the unprecedented, unusual and current market conditions, management has recorded provision for credit losses of 960,006 in the consolidated income statement in respect of wakala receivables. The average profit attributable to wakala receivables during the year was 8.95% (2007: Nil) per annum. 8 FINANCIAL ASSETS AT FAIR VALUE THROUGH INCOME STATEMENT Held for trading Quoted equity securities 105, ,317 Designated Unquoted managed funds 3,589,723 1,972,818 3,695,210 2,159,135 Held for trading quoted equity securities amounting to 104,466 (2007: 186,317) and unquoted managed funds amounting to Nil (2007: 249,417) are managed by a related party (note 12). 9 OTHER ASSETS Advance paid for acquisition of investments 397,630 1,186,866 Receivable in respect of redemption of units of unquoted managed fund 896,170 - Others 122,939 21,611 1,416,739 1,208,477 Subsequent to the year end, the group received the outstanding receivable in respect of redemption of units of unquoted managed fund. 10 SHARE CAPITAL AND DIVIDENDS The share capital of the parent company consists of 150,000,000 authorised, issued and fully paid up shares of 100 fils each. During the board meeting held on 19 August 2009, the Board of Directors of the parent company has recommended no cash dividends or bonus shares for the year ended 31 December This proposal is subject to approval by the shareholders annual general meeting. On 14 May 2008, the annual general meeting of the shareholders of the parent company approved cash dividend of 6 fils per share amounting to 900,000 in respect of the year ended 31 December STATUTORY RESERVE In accordance with the Law of Commercial Companies, no transfer has been made to statutory reserve, since losses have been incurred during the year. 34 Annual Report 08 Annual Report 08 35

19 Distribution of the statutory reserve is limited to the amount required to enable the payment of a dividend of 5% of paid up share capital to be made in years when retained earnings are not sufficient for the payment of a dividend of that amount. 12 RELATED PARTY TRANSACTIONS Related parties represent major shareholders, directors and key management personnel of the group, and entities controlled, jointly controlled or significantly influenced by such parties. Pricing policies and terms of these transactions are approved by the group s management. Transactions with related parties included in the consolidated income statement and consolidated balance sheet are as follows: Major shareholders Consolidated income statement Murabaha and wakala income ,464 General and administration expenses ,315 Consolidated balance sheet Financial assets at fair value through income statement (managed by a related party) 104, , ,734 Financial assets available for sale (managed by a related party) 733, ,874 2,965,625 Accounts payable and accruals - - 4,534 Key management compensation: Salaries and other short term benefits 121, ,168 Terminal benefits 2,810 2, , , COMMITMENTS, the group had no commitments to invest in unquoted securities (2007: 206,369). 14 RISK MANAGEMENT Risk is inherent in the group s activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the group s continuing profitability and each individual within the group is accountable for the risk exposures relating to his or her responsibilities. The group is exposed to credit risk, liquidity risk and market risk. Market risk is subdivided into profit rate risk, foreign currency risk and equity price risk. It is also subject to operating risks. The independent risk control process does not include business risks such as changes in the environment, technology and industry. They are monitored through the group s strategic planning process CREDIT RISK Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The group s credit policy and exposure to credit risk is monitored on an ongoing basis by the board of directors. Gross maximum exposure to credit risk With respect to credit risk arising from the financial assets of the group, which comprise bank balances and other assets, the group s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. The group s exposure to credit risk across the financial assets is as follows: Murabaha and ijara receivables - 6,372,855 Wakala receivables 3,840,025 - Other assets 1,416,739 1,208,477 Bank balances 377, ,934 Gross maximum credit risk exposure 5,633,893 7,758,266 The exposures set above are based on net carrying amounts as reported in the consolidated balance sheet. Risk concentration of maximum exposure to credit risk Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the group s performance to developments affecting a particular industry or geographic location. The group s gross maximum exposure to credit risk can be analysed by the following industry sector as: Banks and financial institutions 4,217,154 6,549,328 Educational institutions 397,630 1,186,866 Other 1,019,109 22,072 5,633,893 7,758,266 The group s gross maximum exposure to credit risk can be analysed by the following geographical location: Kuwait Rest of middle east Total As at 31 December 2008 Wakala receivables 1,938,795 1,901,230 3,840,025 Other assets 1,308, ,069 1,416,739 Bank balances 161, , ,129 3,408,748 2,225,145 5,633, Annual Report 08 Annual Report 08 37