SAKER FUND SEGREGATED PORTFOLIO ANNUAL REPORT AND FINANCIAL STATEMENTS A SEGREGATED PORTFOLIO OF FALCON INVESTMENT PROPERTY SPC

Transcription

1 A SEGREGATED PORTFOLIO OF FALCON INVESTMENT PROPERTY SPC (COMPANY REGISTRATION NUMBER SH ) ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE PERIOD FROM 24 JUNE 2009 TO 30 JUNE 2010

2 CONTENTS Page Directors and Company information...3 Directors report Property manager s report Independent auditors report Statement of comprehensive income...17 Statement of financial position Statement of cash flows...19 Statement of changes in equity Notes to the financial statements

3 DIRECTORS AND COMPANY INFORMATION DIRECTORS: Bradley Lincoln Laurence McNairn Richard Battey AUDITORS: Grant Thornton Limited PO Box 313 Lefebvre House Lefebvre Street St Peter Port Guernsey GY1 3TF PROPERTY MANAGER: The Property Store SH#20 Al Shaffar Building Sheikh Zayed Road PO Box Dubai United Arab Emirates ADMINISTRATOR, REGISTRAR & SECRETARY: Heritage International Fund Managers Limited Heritage Hall Le Marchant Street St Peter Port Guernsey GY1 4HY LEGAL COUNSEL (CAYMAN): Solomon Harris First Caribbean House PO Box 1990 George Town Grand Cayman KY1-1104, Cayman Islands PROMOTER: The Property Store SH#20 Al Shaffar Building Sheikh Zayed Road PO Box Dubai United Arab Emirates REGISTERED OFFICE: SH Corporate Services Limited 4 th Floor Harbour Centre PO Box 61 George Town Grand Cayman KY-1102, Cayman Islands PROPERTY ADVISOR: Devco Property Advisors Limited Heritage Hall Le Marchant Street St Peter Port Guernsey GY1 4HY PRINCIPAL BANKER: Royal Bank of Scotland (Guernsey) International Ltd 1 Glategny Esplanade St Peter Port Guernsey GY1 4BQ LEGAL COUNSEL (DUBAI): Al Tamini & Company Dubai International Finance Centre 6 th Floor, Building 4 East Sheikh Zayed Road PO Box 9275 Dubai United Arab Emirates 3

4 DIRECTORS REPORT The Directors submit their report and the audited financial statements for the period from 24 June 2009 to 30 June STRUCTURE OF THE COMPANY The Saker Fund Segregated Portfolio (the Fund ), a Segregated Portfolio of Falcon Investment Property SPC (the Company ), was established on 24 June 2009 as an exempted segregated portfolio of the Company within Part XIV of the Companies Law (2007 Revision) of the Cayman Islands. The Company s memorandum does not limit its objects and in accordance with Cayman Law its objects are unrestricted and shall have full power to carry out any objective not prohibited by any law as provided by Section 7(4) of the Companies Law (2007 Revision). CHANNEL ISLANDS STOCK EXCHANGE LISTING The Fund was admitted to the Official List of the Channel Islands Stock Exchange on 12 August The original offer period for the Fund was for 5 months from 1 July 2009 to 30 November This was extended to 31 March 2010, on the Board s approval, in order to maximise investment into the Fund. As at the revised closing date of 31 March 2010, the Fund had raised the amount of 16,688,026, and the offer period was duly closed. ACTIVITIES The principal activity of the Fund is that of a segregated portfolio fund. The Fund intends to invest substantially all of its assets in real estate relating to property developments in the United Arab Emirates (UAE). The Fund is a closed ended fund with a redemption date of 30 November RESULTS AND DIVIDENDS The results for the period are shown in the statement of comprehensive income on page 17. The Directors do not recommend the payment of a dividend from the results for the period ended 30 June DIRECTORS The Directors of the Company are as stated on page 3. Bradley Lincoln, Laurence McNairn and Richard Battey were appointed as Directors of the Falcon Investment Property SPC on 27 May DIRECTORS RESPONSIBILITIES The Directors are required by the Companies Law (2007 Revision) of the Cayman Islands to prepare financial statements for each financial period which give a true and fair view of the state of affairs of the Fund and of the profit or loss of the Fund for that period and are in accordance with applicable laws. 4

5 DIRECTORS REPORT (continued) In preparing these financial statements, the Directors are required to: Select suitable accounting policies and then apply them consistently; Make judgments and estimates that are reasonable and prudent; State whether applicable accounting standards have been followed subject to any material departures disclosed and explained in the financial statements; and Prepare the financial statements on a going concern basis, unless it is inappropriate to presume that the Fund will continue in business. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Fund and to enable them to ensure that the financial statements comply with the Companies Law (2007 Revision) of the Cayman Islands. They are also responsible for safeguarding the assets of the Fund and hence for taking reasonable steps for the prevention and detection of fraud, error and non-compliance with laws or regulations. The Directors confirm that they have complied with the above requirements in preparing the financial statements and that the going concern basis for the preparation of the financial statements is appropriate. AUDITORS Grant Thornton Limited were appointed by the Directors as Auditors to the Fund at the Board meeting dated 24 June Grant Thornton Limited have completed their due diligence and have indicated their willingness to act as auditors to the Fund. Laurence McNairn Richard Battey Director Director Date: 1 November 2010 Date: 1 November 2010 Heritage Hall Le Marchant Street St Peter Port Guernsey 5

6 PROPERTY MANAGER S REPORT OVERVIEW OF ABU DHABI AND THE UAE The United Arab Emirates is a constitutional federation of seven emirates: Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-qaiwain, Ra's al-khaimah and Fujairah. The federation was formally established on 2 December Sheikh Khalifa bin Zayed Al Nahyan was elected as President on 3 November 2004, following the death of Sheikh Zayed bin Sultan Al Nahyan, who held the post from the foundation of the State on 2 December 1971 until his death on 2 November The Supreme Council meets at five-year intervals to reaffirm the existing President or elect a new one. The term of elected office for the Vice-President is also five years, and the post is presently held by Sheikh Mohammed bin Rashid Al Maktoum, who was elected following the death of his brother, Sheikh Maktoum bin Rashid Al Maktoum, in early Each of the separate emirates has its own controlling government and own economies that vary dramatically based on historic oil reserves and approach to Western style advances in an Arabic based region. Abu Dhabi is the capital of the UAE and the Abu Dhabi Ruler is currently the president. 6

7 PROPERTY MANAGER S REPORT (continued) ECONOMIC CLIMATE Abu Dhabi and the UAE General: While many nations and some Emirates are dealing with issues of state or national debt, Abu Dhabi is not burdened by debt. The Emirate, as the capital of the UAE, is sitting on a strong cash surplus and the region is currently an area where European banks are looking to gain credit lines. Abu Dhabi is investing heavily in reducing its reliance on oil revenues and taking advantage of the general market recession to place contracts for projects on infrastructure and growth to take advantage of relatively depressed prices in the global economy. The UAE, financed by Abu Dhabi, is on a marketing offensive to attract business and is happy to issue tax incentives to attract the right businesses. The financial markets are regarded as being very important in this strategy and the UAE market is regarded as an emerging market by FTSE tracking funds. As a consequence both Abu Dhabi and Dubai bourse are achieving increased liquidity and a number of IPO s are readying for launch. If, as is widely expected, the two exchanges combine, the resulting market would become the second largest in the Gulf Region after Saudi Arabia s Tadawul, which would increase its appeal to other investment platforms. Estimates of the additional cash inflows to the region from a structural change of this nature range from US$5bn upwards. Overall, the strength of the region as a business hub is increasing and it appears to be aligning itself heavily with the West and East and marketing itself as the meeting point for Asia and Europe. We believe that the indications for strong regional growth in the future are visible as long as the Dubai debt is well managed. Regional government s investment into the short term travel market continues, with the Dubai based Emirates airline placing significant orders for new aircraft. The new airport that sits on the Abu Dhabi side of Dubai is now open. 7

8 PROPERTY MANAGER S REPORT (continued) DUBAI DEBT POSITION Currently Dubai s well publicised debt is reportedly being adequately serviced and will in all probability be restructured further in the future. Devco Property Advisors Limited understands that international banks had initially sought to dramatically reduce their exposure to Dubai loans. However, more recently this scepticism of the Region has softened with analysts now identifying improving central controls as a key element in enabling a swift recovery. International banks do not want to restrict their potential for future activity in the Gulf and are looking more favourably on their relationship with borrowers and developers now. Of Dubai s total debt exposure, an amount of over $15bn of the total is owed to Abu Dhabi banks and it is also the Abu Dhabi authorities that are now controlling the debt discussions, allowing the Region as a whole to manage its profile and debt positions. The general expectation is that Dubai s current debt position will have to be rolled over and it is likely that the Abu Dhabi banks lead the way in brokering this agreement. PROPERTY MARKET Abu Dhabi The market consensus is that while prices continue to rise, we will not see the acceleration that once was a characteristic of the region. This is in part due to the improved road between Abu Dhabi and Dubai allowing an evening out of prices and preventing one from racing ahead of the other. There is still a shortage of property available in the short term compared to the expected population growth. Strongest demands is expected on the Al Reem and Saadiyat Islands. Saker currently holds Abu Dhabi property interests on Al Reem Island. Dubai For the last 2 years general media coverage of Dubai has been reporting expectation of future price falls with current pricing levels being unsustainable. Recently, however, there has been a turn in the market. Some areas have started to experience modest price increases and a recent Fitch Rating report which suggested continued decline, was rapidly rejected by UBS, HSBC and the London Financial Times. The general market view is that the market has already priced in the worst possible scenario, and that with the economic changes these worst case scenarios may now be averted. Market Data from UK investors It is known that property in the Marina area of Dubai is increasing in price and a tower was recently sold to a London investor at a rate of 1900AED per sq ft this was for an entire 25 floor tower. "We believe the UAE is best-positioned in the region to benefit from the pick-up in global economic activity. The region-specific concerns have started to ease said Turker Hamzaoglu, economist with Bank of America Merrill Lynch. (CNN, 29 th November 2009). 8

9 PROPERTY MANAGER S REPORT (continued) Al REEM ISLAND Al Reem Island, is a superb, world-class waterfront development, consisting of residential, commercial and business projects, which is currently being built on the natural island of Al Reem Island, located off the north-eastern coast of Abu Dhabi city, the capital of the UAE. The development on Al Reem Island will be connected to the Abu Dhabi city island by 2 or 3 bridges and be located just 20 minutes along the Ring Road from Abu Dhabi International Airport. This ring road is part of the main Dubai to Abu Dhabi Highway, which leads directly into the commercial centre of Dubai, Sheikh Zayed Road. Road communications between Al Reem Island, Abu Dhabi, the international airport, and the centre of Dubai, are straightforward and are ideal for travel purposes. Properties have been purchased on the Al Reem Island, Abu Dhabi at the locations marked with a star 9

10 PROPERTY MANAGER S REPORT (continued) INDIVIDUAL PROPERTIES ON AL REEM ISLAND Properties on Al Reem Island have been selected using an assessment process ensuring that the properties were at a stage of construction where the property was likely to be progressed rapidly rather than being delayed by any debt or financing concerns. All properties have had their initial ground-works completed and completion dates confirmed by the developers as before the redemption date of the Fund. HYDRA AVENUE Towers 5 and 6 are now completed to the 8 th floor and the shape of the building is very clear. The project is on target for completion in

11 PROPERTY MANAGER S REPORT (continued) 11

12 PROPERTY MANAGER S REPORT (continued) FIRST GULF BANK Due for completion in Q the project is on target and taking shape Floor 9 and 10 going into position Floor 9 and 10 and also a view of the numbers of cranes in operation on the project 12

13 PROPERTY MANAGER S REPORT (continued) MARKETING OF THE ABU DHABI PROPERTIES The intention with the Abu Dhabi properties is not to market these until the properties near completion. PROPERTY MANAGEMENT During the construction phases the properties are visited and overseen by both TPS locally and Devco Property Advisors Limited to understand progress. MYSTICA, WATERFRONT DUBAI The Mystica properties provided a key location at the base of the Jebel Ali palm. It is also very well located for the new international airport. The Marina area has been singled out as one of the key areas for the new higher end developments and Mystica is one of the few places that has town houses as opposed to standard apartments. MARKETING OF THE DUBAI PROPERTIES The intention with the Dubai properties is to market these properties at an early stage. TPS have already drawn up local marketing material and will start marketing a limited number of the properties over the coming months. Properties will be marketed through an established network of real estate sales brokers predominantly in the Middle East and Asian markets. 13

14 PROPERTY MANAGER S REPORT (continued) PROPERTY REVALUATION Original Purchase Latest Independent Movement Price Valuations 9 June 2010 Hydra 840, , ,288 Marina 549, ,572 84,987 Mystica 13,747,856 16,426,862 2,679,006 Al Odaid 1,277,817 1,325,274 47,457 Total 16,416,085 19,354,823 2,938,738 In preparation for the audited accounts a latest professional valuation of all of the properties currently owned by the fund was arranged. The net realisable value of the Hydra, Marina and Al Odaid properties, as stated within the Allsopp & Allsopp (a RERA registered valuation expert) valuation reports dated 9 June 2010, is the consequence of a beneficial shift in interest rates (7%) and a modest price rise based around prices achieved for recent property sales in the same or neighbouring buildings (3%). Annualised these Abu Dhabi based properties have therefore experienced approximately 6% annual price inflation. The Mystica properties are based in Dubai. As they are still 18 months from completion, and therefore not predicted to achieve their optimum selling price for some time, the valuation we have used is based upon valuations in March 2010 which Allsopp & Allsopp confirm as still being current. The strong growth is therefore a reflection in part of the exchange gain, and in part the good discounts secured at acquisition by taking advantage of the macro-economic factors at play in early Overall, in comparison to both global and regional property indicators we believe the fund s portfolio has performed excellently in The Property Store, 3 August

15 INDEPENDENT AUDITORS REPORT To the members of The Saker Fund Segregated Portfolio We have audited the financial statements of Saker Fund Segregated Portfolio (the Fund) for the period ended 30 June 2010 which comprise the Statement of Comprehensive Income, the Statement of Financial Position, the Statement of Cash Flows, the Statement of Changes in Equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as issued by the IASB. This report is made solely to the Fund s members, as a body, in accordance with Companies Law (2007 Revision) of the Cayman Islands. Our audit work has been undertaken so that we might state to the Fund s members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Fund and the Fund s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As described in the Statement of Directors Responsibilities within the Directors Report, the Fund s directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable legal and regulatory requirements and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Fund s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. 15

16 INDEPENDENT AUDITORS REPORT (continued) Opinion on the financial statements In our opinion the financial statements: give a true and fair view of the state of the Fund s affairs as at 30 June 2010 and of its loss for the period then ended; have been properly prepared in accordance with IFRSs as issued by the IASB; and have been prepared in accordance with the requirements of Companies Law (2007 Revision) of the Cayman Islands. Grant Thornton Limited Chartered Accountants Lefebvre House Lefebvre Street St Peter Port Guernsey Channel Islands 1 November

17 STATEMENT OF COMPREHENSIVE INCOME Jun-10 Notes Income Other income 44,800 Expenses Administrative expenses 4 (212,729) Operating loss (167,929) Finance income and expenses 5 Finance income 319 Finance expense (917) Loss for the period (168,527) Other comprehensive income - Total comprehensive loss for the period (168,527) Loss attributable to: Equity holders of the Fund (168,527) Total comprehensive income attributable to: Equity holders of the Fund (168,527) Basic and diluted earnings per share 14 (23.25) All items above are derived from continuing activities. The accompanying notes form an integral part of these financial statements. 17

18 Assets STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2010 Jun-10 Notes Current assets Inventories 6 16,416,085 Cash and cash equivalents 388,953 Total assets 16,805,038 Liabilities Current liabilities Trade and other payables 7 285,539 Total current liabilities 285,539 Total net assets 16,519,499 Capital and reserves Share capital 8 16,688,026 Retained earnings 9 (168,527) Total equity 16,519,499 Total liabilities and equity 16,805,038 Net asset value per share The financial statements on pages 17 to 37 were approved and authorised for issue by the Directors on 1 November Laurence McNairn Richard Battey DIRECTOR DIRECTOR Date: 1 November 2010 The accompanying notes form an integral part of these financial statements. 18

19 STATEMENT OF CASH FLOWS Jun-10 Notes Net cash used in operating activities 10 (16,299,073) Cash flows from financing activities Proceeds from issue of shares: Participating shares 8 16,688,026 Net movement in cash and cash equivalents 388,953 Opening cash and cash equivalents - Cash and cash equivalents as at the period end 388,953 The accompanying notes form an integral part of these financial statements. 19

20 STATEMENT OF CHANGES IN EQUITY Jun-10 Notes Total equity at beginning of period - Issue of shares: Participating shares 8 16,688,026 Total comprehensive loss for the period 9 (168,527) Total equity as at end of period 16,519,499 The accompanying notes form an integral part of these financial statements. 20

21 NOTES TO THE FINANCIAL STATEMENTS GENERAL INFORMATION The Saker Fund Segregated Portfolio (the Fund ), a Segregated Portfolio of Falcon Investment Property SPC (the Company ), was established on 24 June 2009 as an exempted segregated portfolio of the Company within Part XIV of the Companies Law (2007 Revision) of the Cayman Islands. The Company s memorandum does not limit its objects and in accordance with Cayman Law its objects are unrestricted and shall have full power to carry out any objective not prohibited by any law as provided by Section 7(4) of the Companies Law (2007 Revision). The Company with registered number SH , being domiciled in the Cayman Islands, operates under the Companies Law and ordinances and regulations made thereunder. The principal activity of the Company is to carry on business as an exempted segregated portfolio company. The Company s investment activities are managed by The Property Store (the Property Manager ). The Company s Board of Directors (the Board ) has delegated the Company s administration to Heritage International Fund Managers Limited. 1. SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting policies after all of which have been applied consistently throughout the period in the preparation of the statements, are set out below. Basis of preparation These financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The financial statements have been prepared in Pounds Sterling (GBP), which is the presentational currency of the Fund, and under the historical cost convention. To prepare these financial statements, IFRS requires management to make estimates, assumptions and to exercise judgement in the process of applying the Fund s accounting policies. The areas involving a high degree of judgement or complexity or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 2. Adoption of new and revised standards Standards and interpretations in issue and not yet relevant to the Fund At the date of authorisation of these financial statements, the following standards and interpretations, which have not been applied in these financial statements, were issued but not yet effective: 21

22 NOTES TO THE FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Effective for periods beginning on or after Revised and amended standards IFRS 1 First time adoption of IFRS 1 January 2010 IFRS 2 Group cash-settled share based payment transactions 1 January 2010 IFRS 3 Business combinations 1 July 2009 IFRS 5 Non-current assets held for sale and discontinued 1 July 2009 operations IFRS 9 Financial instruments 1 January 2013 IAS 27 Consolidated and separate financial statements 1 July 2009 consequential amendments arising from amendments to IFRS 3 IAS 28 IAS 31 Investments in associates consequential amendments arising from amendments to IFRS 3 Interest in joint ventures consequential amendments arising from amendments to IFRS 3 1 July July 2009 IAS 39/IFRIC 9 IAS 39 Embedded Derivatives-Amendments to IAS 39 and IFRIC 9 Financial instruments: recognition and measurement amendments for eligible hedged items 1 July July 2009 Interpretations IFRIC 17 Distributions of non-cash assets to owners 1 July 2009 IFRIC 18 Transfers of assets from customers 1 July 2009 Management anticipates that the adoption of these standards in future periods will have no material impact on the financial statements of the Fund. 22

23 NOTES TO THE FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (continued) a) Segment reporting The Fund recognises that a business segment is exposed to unique risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and return that are different from those segments operating in other economic environments. Management is of the opinion that the Fund is engaged in a single business segment of real estate acquisition and development in one geographical area being the United Arab Emirates (UAE). Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors, as a whole. The key measure of performance used by the Board to assess the Fund s performance and to allocate resources is the total return on the Fund s NAV, as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained within the financial statements. For management purposes, the Fund is organised into one main operating segment, which invests in properties in the UAE. b) Foreign currency translation Functional and presentation currency Items included in the financial statements of the Fund are measured using the currency of the primary economic environment in which the Fund operates (functional currency). The financial statements are presented in GBP which is the Fund s functional and presentation currency. Transactions and balances The books and records of the Fund are maintained in GBP. IAS 21 requires foreign currency monetary assets and liabilities to be translated into the functional currency at the rate of exchange prevailing at the statement of assets and liabilities date. Transactions in currencies other than GBP are translated at the rate of exchange ruling at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from translations at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. 23

24 NOTES TO THE FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (continued) c) Inventories The real estate under construction and land that are being held or developed for future sales, are classified as inventories. They are carried at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less costs to complete the development and selling expenses (see Note 2). Cost is the acquisition cost together with subsequent capital expenditure incurred in the developments. d) Revenue and expense recognition Revenue comprises the proceeds from the sale of real estate. Revenue is recognised in the statement of comprehensive income when significant risks and rewards of ownership have been transferred to the buyer on the date of unconditional exchange or for conditional exchanges when all conditions have been satisfied. Revenue is measured at the fair value of the consideration received or receivable. Expenses are recognised on an accrual basis and are charged through the statement of comprehensive income in the period in which they are incurred. Expenses which are incidental to the acquisition of real estate are included within the cost of inventory. e) Other income Other income comprises of monies paid by The Property Store on behalf of the Fund in relation to the balance of the property transfer fee owed by the Fund on the Mystica properties, and after offsetting formation fees paid by the Fund for which The Property Store is responsible. The excess was treated as the Property Store s contribution to the Fund. f) Operating loss Operating loss includes gross profit from the sale of inventory and as reduced by administrative expenses and excludes finance costs and finance income. g) Financial instruments Financial assets and financial liabilities are recognised on the Fund s statement of financial position when the Fund becomes a party to the contractual provisions of the instrument. The Fund shall offset financial assets and financial liabilities if the Fund has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis. 24

25 NOTES TO THE FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Financial assets The Fund s financial assets consist of loans and receivables. The Fund has not classified any of its financial assets as held to maturity, financial assets at fair value through profit or loss or as available for sale. Unless otherwise indicated, the carrying amounts of the Fund s financial assets are a reasonable approximation of their fair value. Financial assets recognised in the statement of financial position as trade and other receivables, if any, are classified as loans and receivables. They are initially recognised at fair value plus transaction costs that are directly attributable to the acquisition or issue and subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. A provision for impairment is established when there is objective evidence that the Fund will not collect the full amount due according to the original terms of the receivables. Significant financial difficulties of the counterparty to the receivable, probability that the counterparties will enter bankruptcy or financial re-organisation and/or delinquency in payments are considered indicators that the receivable is impaired. Cash and cash equivalents comprise current deposits with banks. Cash equivalents are short term highly liquid investments that are readily convertible to known amounts of cash, are subject to insignificant risk of changes in value and are held for the purpose of meeting short term cash commitments rather than for investment or other purposes. Financial asset interest income is accrued on a time basis by reference to the principal outstanding and the effective interest rate applicable. This equals the estimated future cash receipt through the expected life of the financial asset. De-recognition of financial assets A financial asset (in whole or in part) is de-recognised either: when the Fund has transferred substantially all the risks and rewards of ownership; or when it has transferred or retained substantially all the risks and rewards and when it no longer has control over the asset or a portion of the asset; or when the contractual right to receive cash flow has expired. Any gain or loss on de-recognition is taken to the statement of comprehensive income. 25

26 NOTES TO THE FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Financial liabilities The Fund classifies its financial liabilities into financial liabilities measured at amortised cost. Unless otherwise indicated, the carrying amounts of the Fund s financial liabilities are a reasonable approximation of their fair values. Financial liabilities include trade payables and other short term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method. The fair value of a non-interest bearing liability is its discounted repayment amount. If the due date of the liability is less than one year, discounting is omitted. De-recognition of financial liabilities A financial liability (in whole or in part) is de-recognised when the Fund has extinguished its contractual obligations, it expires or is cancelled. Any gain or loss on de-recognition is taken to the statement of comprehensive income. Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset or liability and of allocating interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset or liability, or, where appropriate, a shorter period. g) Share capital Financial instruments issued by the Fund are treated as equity only to the extent that they do not meet the definition requirements of a financial liability. Participating shares are classified as equity in the statement of financial position. h) Taxation The Fund is liable to foreign tax arising on its foreign investments. The Fund invests in real estate under construction and land located in the UAE. No liability to foreign taxation arises on the results for the period. 26

27 NOTES TO THE FINANCIAL STATEMENTS 2. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS Management makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial statements year are outlined below. Valuation of inventory Inventories are valued at the lower of cost and net realisable value (NRV) in accordance with IAS 2. Based on a valuation of the inventories as at the period end, purchase costs of similar properties in the development, as well as the developer s sales price for those properties, the Directors have decided to measure the inventory at cost as at 30 June 2010, in the belief that the properties are worth at least that amount and therefore have not been impaired. The Directors will continue to review the value of inventories on an ongoing basis. A valuation based on estimated current market value has been carried out at 30 June 2010 in order to help determine the NRV of the properties at a more advanced stage in the project. The NRV of the inventory, in the considered opinion of the valuer, is detailed within the Property Managers Report on page REVENUE AND COST OF SALES During the period to 30 June 2010, no sales of assets were concluded. It is expected that with progress being made in the construction of the properties, revenue during the next accounting period would derive primarily from sales of real estate held by the Fund. 27

28 NOTES TO THE FINANCIAL STATEMENTS 4. ADMINISTRATIVE EXPENSES Jun-10 Administration fees 66,843 Director s fees 48,547 Property Advisor s fees 44,410 Property valuation fees 13,638 Audit fees 11,667 Insurance premiums 7,750 Regulatory fees 4,774 Sundry expenses 4,532 Statutory filing fees 3,796 Directors expenses 3,118 MLRO fees 2,387 Legal and professional fees 1,267 Total 212,729 The Fund has no employees. 5. FINANCE INCOME AND EXPENSES Jun-10 Bank interest income 1 Foreign exchange gain 318 Finance income 319 Foreign exchange loss (917) Finance expenses (917) The above interest income arises from financial assets classified as loans and receivables and has been calculated using the effective interest rate method. There are no other gains and losses on loans and receivables. The above interest income represents the total interest income on financial assets not at fair value through profit or loss. The above finance expenses arise on financial liabilities measured at amortised cost. There are no other gains and losses on financial liabilities measured at amortised cost. 28

29 NOTES TO THE FINANCIAL STATEMENTS 6. INVENTORIES Jun-10 Real Estate Cost brought forward - Additions 16,416,085 Net book value 16,416,085 Total inventory consists of real estate units of the underlying properties within the UAE. The real estate has been recorded at the lower of cost and net realisable value (NRV). A number of the property units held by the Fund, specifically the Mystica properties, were transferred to the Fund in exchange for participating shares. The basis used for issuing the number of shares is the current market value of the property units at the time of transfer. A total of 13, participating shares were issued in exchange for the Mystica properties. 7. TRADE AND OTHER PAYABLES Jun-10 Creditors 210,750 Property advisor s fee 20,760 Administration fees payable 16,350 Legal and professional fees 13,638 Audit fees 11,667 Director s fees 10,205 Other 2,169 Total 285,539 The Fund has financial risk management policies in place to ensure that all payables are paid within the credit timeframe. 29

30 NOTES TO THE FINANCIAL STATEMENTS 8. SHARE CAPITAL Authorised share capital of the Company: 25,000 Participating Shares of GBP 0.01 par value Jun-10 - Allotted and called up share capital of the Company: 25,000 Participating Shares of GBP 0.01 par value Opening shares - Issued during the period 16,688 Closing shares 16,688 Opening capital - Issued during the period 16,688,026 Closing capital 16,688,026 The Fund redemption date is 30 November The participating shares entitled the shareholder to such dividends as the Directors in their absolute discretion lawfully declare. The participating shares do not automatically entitle the holder to receive notice of, attend, speak or vote at general meetings of the Fund. A number of the property units are held by the Fund, specifically the Mystica properties. A total of 13, participating shares were transferred in exchange for the Mystica properties (Note 6). 30

31 NOTES TO THE FINANCIAL STATEMENTS 9. RETAINED EARNINGS Jun-10 Beginning retained earnings - Loss for the period (168,527) Ending retained earnings (168,527) Any surplus/deficit arising from the profit/loss for that period is taken to retained earnings. 10. NET CASH USED IN OPERATING ACTIVITIES Jun-10 Operating loss from operations (167,929) Net finance expense for the period (598) Changes in working capital: Movement in inventories (16,416,085) Movement in trade and other payables 285,539 Net cash used in operating activities (16,299,073) 11. SUBSEQUENT EVENTS There have been no significant material subsequent events. 31

32 NOTES TO THE FINANCIAL STATEMENTS 12. RELATED PARTIES Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. The Directors are responsible for the overall control, management and supervision of the Company s affairs and are responsible for the overall implementation of the investment objective and policy of the Company. The Company has three non-executive Directors, all independent of the Administrator other than Mr Laurence McNairn, who is a director of the Administrator, Heritage International Fund Managers Limited. Jun-10 Directors fees for the period 48,547 Payable at the end of the period 10,205 According to the Company particulars, each Director is entitled to an annual fee of 20,000, with the exception of Mr Bradley Lincoln, who is entitled to an annual fee of 10,000. Property advisory fees payable to Devco Property Advisors Limited during the period were 44,410, of which 20,760 remains outstanding as at the period end date. Heritage International Fund Managers (HIFM) are the administrators of the Fund. Under the administration agreement, the Fund shall pay HIFM an annual fee of 60,000. In addition, HIFM receives per investor transaction. In the period ended 30 June 2010, the total fees paid to HIFM was 66,843, of which 16,350 remains outstanding as at the period end date. The audit fee expense incurred in respect of the Falcon Investment Property SPC for the period ended 30 June 2010, shall be borne equally between each Fund within the SPC. This year the Fund shall be responsible for one third of the audit fee of 5,

33 NOTES TO THE FINANCIAL STATEMENTS 13. FINANCIAL INSTRUMENTS RISK MANAGEMENT The activities of the Fund expose it to a number of risks and uncertainties which could have a material impact on the Fund s long term performance and could cause actual results to differ materially from expected and historic results. The main risks include market risk (foreign currency risk and interest rate risk), credit risk and liquidity risk. This note describes the Fund s policy, its objectives and processes for managing those risks and the methods used to measure them. The following table analyses the carrying amounts of the financial assets and liabilities by category as defined by IAS 39: Jun-10 Trade and other receivables (excluding pre-payments) Cash and cash equivalents Total current assets - 388, ,953 Financial liabilities measured at amortised cost: Trade and other payables Total current liabilities 285, ,539 Principal financial instruments The principal financial instruments used by the Fund, from which financial instrument risk arises, are as follows: Trade and other receivables; Cash and cash equivalents; Trade and other payables. 33

34 NOTES TO THE FINANCIAL STATEMENTS 13. FINANCIAL INSTRUMENTS RISK MANAGEMENT (continued) General objectives, policies and processes The overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Fund s financial performance. The Board of Directors has overall responsibility for the determination of the Fund s risk management and sets policy towards that. The policy and processes for measuring and mitigating each of the main risks are described below. a) Market risk The Fund is exposed through its operations to market risk which encompasses foreign currency risk and interest rate risk. i) Foreign currency risk Foreign currency risk is the risk that the value of financial instruments may fluctuate due to changes in foreign exchange rates. Currency risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Funds functional currency, also when individual entities within the Fund enter into transactions that are denominated in currencies other than their functional currency. The table below illustrates the Fund s exposure to foreign currency risk at 30 June Sterling (GBP) Cash and cash equivalents Total current assets Trade and other payables Total liabilities Total net assets Jun , , , , ,414 The Fund does not use forward exchange contracts or derivatives hedging strategy to mitigate the risk of exposure currency risk, but management ensures that the Fund continually monitors the movement in exchange rates of currencies of interest. Significant parts of the Fund s financial instruments are denominated in GBP. As a consequence, the Fund does not have a material exposure to currency risk. 34

35 NOTES TO THE FINANCIAL STATEMENTS 13. FINANCIAL INSTRUMENTS RISK MANAGEMENT (continued) ii) Interest rate risk Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. The Fund s exposure to interest rate risk relates to the Fund s cash and cash equivalents which are at variable interest rates. The Fund has no other interest-bearing assets and liabilities as at the balance sheet date, however, the Fund may be required to borrow funds to complete the RTP contracts. As a consequence, the Fund is only exposed to variable interest rate risk. An increase or decrease of 100 basis points would result in an insignificant impact on the net asset value of the Fund. iii.) Price risk The Fund has no significant exposure to price risk as it does not hold any equity, securities or commodities. b) Credit risk Credit risk is the risk that the Fund will experience financial loss due to a counterparty failing to discharge an obligation. Credit risks principally arise from trade and other receivables and cash and cash equivalents. The Fund s maximum exposure to credit risk by class of financial instrument is as shown below: Trade and other receivables (excluding pre-payments) Cash and cash equivalents Total financial assets Jun , ,953 There are no trade and other receivables as at 30 June The Fund mitigates its credit risk exposure by conducting due diligence on all counterparties. Cash and cash equivalents are held by the Royal Bank of Scotland International (credit rating AA- (Fitch)). 35

36 NOTES TO THE FINANCIAL STATEMENTS 13. FINANCIAL INSTRUMENTS RISK MANAGEMENT (continued) c) Liquidity risk Liquidity risk is the risk that the Fund will encounter difficulty in meeting its obligations arising from financial liabilities. The Fund monitors its liquidity requirements by the use of both short term and long term cash flow forecasts. The cash flow forecasts are used to demonstrate funding adequacy for scheduled payments and cash-outflows due in day-to-day transactions. All liabilities are due within one year. Capital risk management The Fund s objectives when managing capital are to safeguard the Fund s ability to continue as a going concern in order to provide returns for shareholders and benefits for other shareholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Fund may adjust the amount of dividends paid to shareholders of the Fund, return capital to shareholders of the Fund, issue new shares or sell assets to reduce debt. The capital of the Fund consists of the proceeds from the issue of preference shares. The Directors manage the capital of the Fund in accordance with the Fund s investment objectives and policies. The Fund had no borrowings as at 30 June Fair value estimation The Fund adopted the amendments to IFRS 7 for financial instruments that are measured in the statement of financial position at fair value. This requires disclosure of fair value measurements by level of the following fair value measurement hierachy: Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1). Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2). Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). The Fund does not hold any financial instruments measured at fair value. The carying value less impairment provision of trade receivables and payables approximate their fair values. 36

37 NOTES TO THE FINANCIAL STATEMENTS 14. BASIC AND DILUTED EARNINGS PER SHARE AND NET ASSET VALUE PER SHARE a.) Basic and Diluted Earnings per Share The earnings per share is based on the loss for the period and on the weighted average number of shares in issue for the period. Loss for the period Weighted average number of shares Basic and diluted EPS Jun-10 (168,527) 7,249 (23.25) The Fund has not issued any shares or other instruments that are considered to have dilutive potential. a) Net Asset Value per Share The net asset value for the Fund is arrived at by dividing the total net assets of the Fund as at the period end date, by the number of participating shares of the Fund at the period end date. No new subscriptions have taken place after the period end. 15. ULTIMATE CONTROLLING PARTY The ultimate controlling party of Falcon Investment Property SPC is Best Asset Management Limited. 37