Qurain Petrochemical Industries Company K.S.C.P. and Subsidiaries

Transcription

1 Qurain Petrochemical Industries Company K.S.C.P. and Subsidiaries CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS 31 MARCH 2016

2 Ernst & Young Al Aiban, Al Osaimi & Partners P.O. Box st Floor, Baitak Tower Ahmed Al Jaber Street Safat Square 13001, Kuwait Tel: Fax: ey.com/mena Al-Shatti & Co. Arraya Tower II, 23-24th floor, Sharq P.O. Box 1753 Safat Kuwait Telephone: Fax: INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF QURAIN PETROCHEMICAL INDUSTRIES COMPANY K.S.C.P. Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Qurain Petrochemical Industries Company K.S.C.P. (the Parent Company ) and its subsidiaries (collectively, the Group ), which comprise the consolidated statement of financial position as at 31 March 2016, and the consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements 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, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 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 from 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 controls relevant to the entity s preparation and fair presentation of the consolidated 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 entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by entity s management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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5 Qurain Petrochemical Industries Company K.S.C.P. and Subsidiaries CONSOLIDATED STATEMENT OF INCOME For the year ended 31 March 2016 Notes Sales 162,124, ,217,885 Cost of sales (104,779,834) (76,160,181) GROSS PROFIT 57,344,417 33,057,704 Realised gain on sale of financial assets available for sale 54, ,657 Dividend income 7 13,660,501 18,282,003 Interest and other income 697, ,832 Gain on fair valuation of previously held equity interest in acquiree - 12,914,823 General and administrative expenses (41,332,532) (28,620, 854) Impairment loss on financial assets available for sale 7 (1,317,573) (179,191) Finance costs (1,537,511) (1,402,729) Share of results of associates 8 10,688,563 2,696,212 Foreign exchange loss (116,979) (353,209) Profit before taxation and Board of Directors remuneration 38,141,225 37,686,248 Taxation 16 (844,779) (1,203,294) Board of Directors remuneration 14 (150,000) (150,000) Profit for the year 17 37,146,446 36,332,954 Attributable to: Shareholders of the Parent Company 24,714,826 31,348,603 Non-controlling interest 12,431,620 4,984,351 37,146,446 36,332,954 Basic and diluted earnings per share attributable to shareholders of the Parent Company fils fils The attached notes 1 to 25 form part of these consolidated financial statements. 4

6 Qurain Petrochemical Industries Company K.S.C.P. and Subsidiaries CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 March 2016 Notes Profit for the year 37,146,446 36,332,954 Other comprehensive (loss)/income: Other comprehensive (loss)/income to be reclassified to consolidated statement of income in subsequent periods: Financial assets available for sale: Net changes in fair value of financial assets available for sale (26,237,995) (2,755,167) Net gain on sale of financial assets available for sale transferred to consolidated statement of income (54,590) (649,657) Impairment of financial assets available for sale transferred to consolidated statement of income 7 1,317, ,191 Share in other comprehensive income of associates 8 541,931 3,229,143 Exchange differences arising on translation of foreign operations 1,212,772 12,336,334 Transfer to the consolidated statement of income upon business combination - 134,292 Net gain (loss) on hedge of a net investment in foreign operation 20 93,958 (3,829,280) Net other comprehensive (loss)/income to be reclassified to statement of income in subsequent periods (23,126,351) 8,644,856 Other comprehensive (loss)/income not to be reclassified to consolidated statement of income in subsequent periods: Asset revaluation reserve (125,267) 56,958 Net other comprehensive (loss)/income not to be reclassified to consolidated statement of income in subsequent periods (125,267) 56,958 Other comprehensive (loss)/income for the year (23,251,618) 8,701,814 Total comprehensive income for the year 13,894,828 45,034,768 Attributable to: Shareholders of the Parent Company 903,805 34,628,074 Non-controlling interest 12,991,023 10,406,694 13,894,828 45,034,768 The attached notes 1 to 25 form part of these consolidated financial statements. 5

7 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 March 2016 Equity attributable to shareholders of the Parent Company Noncontrolling interests Total equity Share capital Statutory reserve Voluntary reserve Treasury shares Other reserve Cumulative changes in fair values Foreign currency translation reserve Retained earnings Sub-total As at 1 April ,919,258 16,412,430 16,290,728 (10,094,908) 70, ,245,079 7,730,999 68,827, ,402,470 98,961, ,363,991 Profit for the year ,714,826 24,714,826 12,431,620 37,146,446 Other comprehensive (loss)/income (56,958) (24,856,822) 1,102,759 - (23,811,021) 559,403 (23,251,618) Total comprehensive income for the year (56,958) (24,856,822) 1,102,759 24,714, ,805 12,991,023 13,894,828 Transfer to reserves - 2,570,961 2,570, (5,141,922) Purchase of treasury shares (1,730,128) (1,730,128) - (1,730,128) Dividend paid to NCI (5,571,365) (5,571,365) Dividends (Note 14) (10,485,654) (10,485,654) - (10,485,654) Ownership changes in subsidiaries , ,300 (346,265) (235,965) 109,919,258 18,983,391 18,861,689 (11,825,036) 124,329 91,388,257 8,833,758 77,915, ,200, ,034, ,235,707 As at 1 April ,919,258 13,142,240 13,020,538 (9,429,389) - 119,448,250 1,305,315 54,549, ,955,875 8,145, ,101,144 Profit for the year ,348,603 31,348,603 4,984,351 36,332,954 Other comprehensive income (loss) ,958 (3,203,171) 6,425,684-3,279,471 5,422,343 8,701,814 Total comprehensive income (loss) for the year ,958 (3,203,171) 6,425,684 31,348,603 34,628,074 10,406,694 45,034,768 Transfer to reserves - 3,270,190 3,270, (6,540,380) Purchase of treasury shares (665,519) (665,519) - (665,519) Dividends (Note 14) (10,529,989) (10,529,989) - (10,529,989) Non-controlling interests arising on business combination ,920,982 80,920,982 Ownership changes in subsidiaries , ,029 (511,424) (497,395) As at 31 March ,919,258 16,412,430 16,290,728 (10,094,908) 70, ,245,079 7,730,999 68,827, ,402,470 98,961, ,363,991 The attached notes 1 to 25 form part of these consolidated financial statements. 6

8 Qurain Petrochemical Industries Company K.S.C.P. and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 March 2016 Notes OPERATING ACTIVITIES Profit before taxation and Board of Directors remuneration 38,141,225 37,686,248 Adjustments to reconcile profit before taxation and Board of Directors remuneration to net cash flows: Realised gain on sale of financial assets available for sale (54,590) (649,657) Share of results of associates 8 (10,688,563) (2,696,212) Gain/loss on sale of property, plant and equipment (5,186) - Gain on fair valuation of previously held interest in the acquiree - (12,914,823) Provision for doubtful debts 6 (510,297) (1,451,905) Impairment loss on financial assets available for sale 7 1,317, ,191 Depreciation 17 6,752,273 4,364,524 Amortisation 17 1,884,492 1,414,647 Finance costs 1,537,511 1,402,729 Provision for employees end of service benefits 1,750, ,346 40,124,976 28,024,088 Working capital adjustments: Trade and other receivables 1,931,189 5,844,084 Inventories (2,161,528) (3,962,357) Related party balances 240,523 - Trade and other payables 423,741 4,659,728 Cash from operations 40,558,901 34,565,543 Taxation paid (1,203,294) (874,049) Board of Directors remuneration paid (150,000) (150,000) Employees end of service benefits paid (211,721) (391,734) Net cash flows from operating activities 38,993,886 33,149,760 INVESTING ACTIVITIES Purchase of financial assets available for sale (2,281,207) (4,407,913) Proceeds from sale of financial assets available for sale 804,620 2,217,644 Acquisition of investment in associates 8 (23,371) (8,684) Acquisition of subsidiary, net of cash acquired (259,130) (21,056,145) Purchase of property, plant and equipment (5,515,099) (12,204,597) Proceeds from sale of property, plant and equipment 37, ,672 Dividend received from associates 1,353,935 1,101,858 Net cash flows used in investing activities (5,882,550) (33,997,165) FINANCING ACTIVITIES Net movement in term loans (5,274,199) 27,271,234 Dividends paid (9,818,685) (9,708,090) Purchase of treasury shares (1,730,128) (665,519) Payment of finance costs (1,201,880) (1,388,268) Dividend to non-controlling interest of a subsidiary (5,571,365) (5,312,523) Movement in non-controlling interests (346,265) - Net cash flows (used in) from financing activities (23,942,522) 10,196,834 Effect of foreign currency translation 85,745 (646,276) Net increase in cash and cash equivalents 9,254,559 8,703,153 Cash and cash equivalents at beginning of the year 26,205,637 17,502,484 Cash and cash equivalents at end of the year 5 35,460,196 26,205,637 7

9 1 CORPORATE INFORMATION The consolidated financial statements of the Qurain Petrochemical Industries Company K.S.C.P. (the Parent Company ) and its subsidiaries (collectively, the Group ) for the year ended 31 March 2016 were authorised for issue by the Board of Directors on 10 May The shareholders of the Parent Company have the power to amend these consolidated financial statements at the Annual General Assembly after issuance. The Parent Company is a Public shareholding company, established by Amiri Decree No 432/2004 on 10 November The Parent Company s shares were issued for public subscription by the Ministerial Decree No. 34/2004 on 28 November The Parent Company s shares are listed on the Kuwait Stock Exchange. The Parent Company s registered address is at 26th floor, KIPCO Tower, Khalid Bin Al Waleed Street, Sharq, P.O. Box No 29299, Safat 13153, Kuwait. The new Companies Law No. 1 of 2016 was issued on 24 January 2016 and was published in the Official Gazette on 1 February 2016 cancelled the Companies Law No 25 of 2012, and its amendments. According to article No. 5, the new Law will be effective retrospectively from 26 of November 2012, the executive regulations of Law No. 25 of 2012 will continue until a new set of executive regulations is issued. The activities of the Parent Company are carried out in accordance with the Article of Association. The principal activities of the Parent Company are: To manufacture all types of chemical and petrochemical materials and any other derivatives. To sell, purchase, supply, distribute, export and store these materials and participate in all the activities relating to the same including the establishment and lease of the necessary services. To participate in Equate Petrochemical Company K.S.C. (Closed), Kuwait Aromatics Company K.S.C. (Closed), Kuwait Styrene Company K.S.C. (Closed) and Kuwait Olefins Company K.S.C. (Closed). Contribute in industrial companies as well as finance, manage and trade in its shares Develop industrial and craft zones and projects launched by the State or private sector. Establishment of industrial projects or contribute therein after obtaining the necessary approvals from the Public Authority for Industry and the concerned authorities. The Parent Company may pursue the above mentioned activities in the State of Kuwait and abroad, originally or by proxy. It may have an interest in or participate in any manner with entities that carry on business activities similar to its own or which may assist the Parent Company in realising its objects in Kuwait or abroad, and it may buy or otherwise acquire such companies. 2.1 BASIS OF PREPARATION Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standard Board ( IASB ). Basis of measurement The consolidated financial statements of the Group are prepared under the historical cost convention as modified for the revaluation at fair value of financial assets available for sale. Functional and presentation currency The consolidated financial statements of the Group are presented in Kuwaiti Dinars ( ), which is the functional and presentational currency of the Parent Company. 2.2 CHANGES IN ACCOUNTING POLICY AND DISCLOSURES The accounting policies used in the preparation of the financial statements are consistent with those used in previous year, except for the adoption of the following amendments to IFRS during the year: Annual Improvements Cycle With the exception of the improvement relating to IFRS 2 Share-based Payment applied to share-based payment transactions with a grant date on or after 1 July 2014, all other improvements are effective for accounting periods beginning on or after 1 July The Group has applied these improvements for the first time in these consolidated financial statements. They include: 8

10 2.2 CHANGES IN ACCOUNTING POLICY AND DISCLOSURES (continued) IFRS 3 Business Combinations The amendment is applied prospectively and clarifies that all contingent consideration arrangements classified as liabilities (or assets) arising from a business combination should be subsequently measured at fair value through profit or loss whether or not they fall within the scope of IAS 39. This is consistent with the Group s current accounting policy and, thus, this amendment did not impact the Group s accounting policy. IFRS 8 Operating Segments The amendments are applied retrospectively and clarify that: An entity must disclose the judgements made by management in applying the aggregation criteria in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are similar The reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities. This amendment did not have any impact to the consolidated financial statement during the current period. IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets The amendment is applied retrospectively and clarifies in IAS 16 and IAS 38 that the asset may be revalued by reference to observable data by either adjusting the gross carrying amount of the asset to market value or by determining the market value of the carrying value and adjusting the gross carrying amount proportionately so that the resulting carrying amount equals the market value. In addition, the accumulated depreciation or amortisation is the difference between the gross and carrying amounts of the asset. This amendment did not have any impact to the revaluation adjustments recorded by the Group during the current period. IAS 24 Related Party Disclosures The amendment is applied retrospectively for annual periods beginning on or after 1 July 2014 and clarifies that a management entity (an entity that provides key management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services. This amendment is not relevant for the Group as it does not receive any management services from other entities. Annual Improvements Cycle These improvements are effective from 1 July 2014 and the Group has applied these amendments for the first time in these consolidated financial statements. They include: IFRS 3 Business Combinations The amendment is applied prospectively and clarifies for the scope exceptions within IFRS 3 that: Joint arrangements, not just joint ventures, are outside the scope of IFRS 3 This scope exception applies only to the accounting in the financial statements of the joint arrangement itself Qurain Petrochemical Industries Company K.S.C.P. and its subsidiaries is not a joint arrangement, and thus this amendment is not relevant for the Group and its subsidiaries. IFRS 13 Fair Value Measurement The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IAS 39. The Group does not apply the portfolio exception in IFRS 13. The adoption of the above mentioned amendments did not have any impact on the financial position or performance of the Group. 2.3 STANDARDS ISSUED BUT NOT YET EFFECTIVE Standards issued but not yet effective up to the date of issuance of the Group s financial statements are listed below. This listing of standards issued is those that the Group reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. 9

11 2.3 STANDARDS ISSUED BUT NOT YET EFFECTIVE (continued) IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Group plans to adopt the new standard on the required effective date. IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15 revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognising revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after 1 January 2018 with early adoption permitted. The Group is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date. Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortize intangible assets. The amendments are effective prospectively for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact to the Group given that the Group has not used a revenue-based method to depreciate its non-current assets. Amendments to IAS 27: Equity Method in Separate Financial Statements The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. Entities already applying IFRS and electing to change to the equity method in its separate financial statements will have to apply that change retrospectively. For first-time adopters of IFRS electing to use the equity method in its separate financial statements, they will be required to apply this method from the date of transition to IFRS. The amendments are effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments will not have any impact on the Group s consolidated financial statements. IFRS 7 Financial Instruments: Disclosures The amendment clarifies that a servicing contract that includes a fee can constitute continuing involvement in a financial asset. An entity must assess the nature of the fee and the arrangement against the guidance for continuing involvement in IFRS 7 in order to assess whether the disclosures are required. The assessment of which servicing contracts constitute continuing involvement must be done retrospectively. However, the required disclosures would not need to be provided for any period beginning before the annual period in which the entity first applies the amendments. IFRS 16 Leases IFRS 16 is effective for annual reporting periods beginning on or after1 January Earlier application is permitted, but only in conjunction with IFRS 15, Revenue from Contracts with Customers. Amendments to IAS 1 Disclosure Initiative The amendments to IAS 1 Presentation of Financial Statements clarify, rather than significantly change, existing IAS 1 requirements. The amendments clarify: The materiality requirements in IAS 1 That specific line items in the statement of comprehensive income and the statement of financial position may be disaggregated That entities have flexibility as to the order in which they present the notes to financial statements. 10

12 2.3 STANDARDS ISSUED BUT NOT YET EFFECTIVE (continued) Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement of comprehensive income. These amendments are effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact on the Group. The Group intends to adopt these standards and amendments when they become effective. However, the Group expects no material impact from the adoption of the amendments on its financial position or performance. 3 SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation The consolidated financial statements comprise the financial statements of the Group and its subsidiaries (investees which are controlled by the Parent Company) including special purpose entities. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Group s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the equity holders of the Parent Company and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it derecognises, the related assets (including goodwill), liabilities, noncontrolling interest and other component of equity while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value. The consolidated financial statements comprise the financial statements of the Parent Company and its subsidiaries as at 31 March The subsidiaries of the Group are: Legal ownership % Company name Country of incorporation Principal activities United Petrochemical Industries Company K.S.C. (Closed) 96.00% 96.00% Kuwait Investment activities Qurain for Plastic Industries Company K.S.C. (Closed) 94.00% 94.00% Kuwait Manufacturing of plastic materials Qurain for Basic Material Industries Company K.S.C. (Closed) 94.00% 94.00% Kuwait Manufacturing of chemicals United Oil Projects Company K.S.C. (Closed) 47.50% 45.47% Kuwait Trading of chemical products Saudi Dairy and Food Stuff Company S.S.C. ( SADAFCO ) 40.11% 40.11% Kingdom of Saudi Arabia Manufacturing of dairy & food stuff 11

13 3 SIGNIFICANT ACCOUNTING POLICIES (continued) Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any noncontrolling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree s identifiable net assets. Acquisition costs incurred are expensed and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the consolidated statement of income. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity. Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in the consolidated statement of income. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Financial instruments Financial assets Initial recognition and measurement Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, financial assets available for sale, loans and receivables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial recognition. The Group has not classified any of its financial assets as held to maturity. All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through income statement. A regular way purchase of financial assets is recognised using the trade date accounting. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place. The Group s financial assets include cash and short term deposits, trade receivables and other receivables, due from a related party and financial assets available for sale. The Group has not classified any financial asset as derivatives designated as hedging instruments at inception upon initial recognition. 12

14 3 SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Financial assets (continued) Subsequent measurement The subsequent measurement of financial assets depends on their classification as follows: Financial assets available for sale Financial assets available for sale include equity and debt securities. Equity investments classified as available for sale are those, which are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions. After initial recognition, financial assets available for sale are subsequently measured at fair value with unrealised gains or losses recognised in other comprehensive income until the investment is derecognised, at which time the cumulative gain or loss is recognised in the consolidated statement of income, or determined to be impaired, at which time the cumulative loss is reclassified to the consolidated statement of income. Financial assets available for sale whose fair value cannot be reliably measured are carried at cost less impairment losses, if any. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the interest rate method. The interest rate method amortisation is included in the consolidated statement of income. The losses arising from impairment are recognised in the consolidated statement of income. The Group classifies cash and short term deposits, time deposits with banks and accrued income and other receivables and due from a related party as loans and receivables. Cash and cash equivalents Cash and short term deposits in the consolidated statement of financial position comprise cash at banks and on hand and short-term deposits with an original maturity of three months or less, less bank overdraft. Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment losses. Amortised cost Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate (EIR) method. The effective interest rate method ( EIR ) amortisation and the losses arising from impairment are recognised in the consolidated statement of income. Derecognition of financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: The rights to receive cash flows from the asset have expired; or The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. 13

15 3 SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Financial assets (continued) Derecognition of financial assets (continued) When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all of 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. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. 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. Impairment of financial assets The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrowers or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Financial assets available for sale For financial assets available for sale, the Group assesses at each reporting date whether there is objective evidence that a financial asset available for sale or a group of financial assets available for sale is impaired. In the case of equity investments classified as financial assets available for sale, objective evidence would include a significant or prolonged decline in the fair value of the equity investment below its cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on those financial assets available for sale previously recognised in the consolidated statement of income, is removed from other comprehensive income and recognised in the consolidated statement of income. Impairment losses on equity investments are not reversed through the consolidated statement of income; increases in their fair value after impairment are recognised directly in other comprehensive income. In the case of debt instruments classified as available for sale, impairment is assessed based on the same criteria as financial assets carried at amortised cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated statement of income. Financial liabilities Initial recognition and measurement Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, plus directly attributable transaction costs. The Group classifies its financial liabilities other than at fair value through profit or loss as accounts and other payables, term loans and bank overdraft. The Group has not classified any financial liability at fair value through profit or loss or derivatives at inception upon initial recognition. Subsequent measurement The subsequent measurement of financial liabilities depends on their classification as follows: 14

16 3 SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Financial liabilities (continued) Financial liabilities other than at fair value through profit or loss After initial recognition, financial liabilities other than at fair value through profit or loss are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in the consolidated statement of income when the liabilities are derecognised as well as through the EIR interest rate method amortisation process. Amortised cost Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The EIR amortisation is included in finance cost in the consolidated statement of income. Accounts and other payables Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Term loans After initial recognition, interest bearing loans are subsequently measured at amortised cost using the EIR method, any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated statement of income over the period of the borrowings. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates. Derecognition of 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 the consolidated statement of income. Offsetting Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position 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 assets and settle the liabilities simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty. Fair value The Group measures financial instruments, such as, financial assets available for sale, at fair value at each reporting date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. 15

17 3 SIGNIFICANT ACCOUNTING POLICIES (continued) Fair value (continued) The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3 Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. Inventories Inventories are stated at the lower of cost or net realisable value. Costs are those expenses incurred in bringing each product to its present location and condition and excludes borrowing costs. Cost is determined using the weighted average cost basis method. Raw materials, consumables and goods for resale - purchase cost on weighted average basis Finished goods - costs of direct materials and labour plus attributable overheads based on a normal level of activity. Net realisable value is based on estimated selling price less any further costs expected to be incurred on completion and disposal. Investment in associates An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. Under the equity method, the investment in an associate is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group s share of net assets of the associate since the acquisition date. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The consolidated statement of income reflects the Group s share of the results of operations of the associate. Any change in other comprehensive income of those investees is presented as part of the Group s other comprehensive income. In addition, when there has been a change recognised directly in the equity of the associate, the Group recognises its share of any changes, when applicable, in the consolidated statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The aggregate of the Group s share of profit or loss of an associate is shown on the face of the consolidated statement of income and is disclosed under Share of results of associates. The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value, then recognises the loss as Impairment loss on associates in the consolidated statement of income. Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised in consolidated statement of income. 16

18 3 SIGNIFICANT ACCOUNTING POLICIES (continued) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Capital work-in-progress is carried at cost and is not depreciated. Depreciation is calculated on a straight line basis over the estimated useful lives of assets as follows: Building Plant, machinery and equipment Furniture, office equipment and fixtures Computers Motor vehicles 50 years 3 to 25 years 4 to 10 years 3 years 4 to 6 years The initial cost of property, plant and equipment comprises their purchase price and any directly attributable costs of bringing an item of property, plant and equipment to its working condition and location. Expenditure incurred after the property, plant and equipment has been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the consolidated statement of income in the period in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond its originally assessed standard of performance, the expenditure is capitalised as an additional cost of property, plant and equipment. The carrying values of property, plant 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, being the higher of their value less costs to sell and their value in use. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of income in the year the asset is derecognised. The assets residual values, useful lives and methods of depreciation are reviewed at each financial year end, and adjusted prospectively if appropriate. Intangible assets Intangible assets are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and are expensed as incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. The estimated useful lives of intangible assets are as follows: Brand Leasehold rights Customer relationship Indefinite life 3-15 years 15 years Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the consolidated statement of income in the expense category consistent with the function of the intangible asset. Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash generating unit level. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. 17