Sharq - Ahmad Al-Jaber Street Emad Commercial Center - 7th Floor Tel.: Fax: P.O.Box: Safat, Kuwait Website:

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2 Sharq - Ahmad Al-Jaber Street Emad Commercial Center - 7th Floor Tel.: Fax: P.O.Box: Safat, Kuwait Website:

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5 His Highness Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah Amir of The State of Kuwait His Highness Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah The Crown Prince of The State of Kuwait His Highness Sheikh Naser Al-Mohammad Al-Ahmad Al-Sabah The Prime Minister of The State of Kuwait 3

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7 Contents Page Board Members 6 Executive Managment 7 Chairman s Message 8 Auditor s Report 12 Balance Sheet 14 Statement of Income 15 Statement of Changes in Equity 16 Statement of Cash Flows 17 Notes to the Financial Statements

8 BOARD MEMBERS Emad Jawad Bukhamseen Chairman & Managing Director Adnan Abdulnabei Al-Mussa Vice Chairman Dr. Anwar Ali Al-Naqei Board Member Tawfeeq Shamlan Al-Bahar Board Member Abdulla Abdul Samad Maarafi Board Member 6

9 EXECUTIVE MANAGEMENT Dr. Haidar Hasan Al-Juma Board Advisor Mufeed M. A. Abdal General Manager Richard Dagher Division Manager Finance / Legal / Administration George Bekhit Division Manager - Operation Eng. Ragia M. El-Menoufi Technical Department Manager Mohammad R. Al-Shawwa Marketing Manager 7

10 CHAIRMAN S & MANAGING DIRECTOR MESSAGE In the Name of God, Most Compassionate, Most Merciful Dear Messrs. Shareholders, It is my pleasure to welcome you in my name and in the name of the members of the board of directors of Al-Arabia Real Estate Company in reviewing and discussing with you the most important achievements reached through the year ending on December 31st The year 2007 had passed while Al-Arabia Real Estate Company continuously consolidating its position in the national real estate market through achieving a lot of real estate and investment achievements. Furthermore, the ambitions of the company expended to occupy a distinguished position in the regional real estate market through selecting important projects and developments throughout the Gulf and Middle East countries. While taking firm steps, The Company progressed in establishing its position locally and regionally through strategic planning previously drawn up and that may be summarized in the main aspects, as follows: 1. To establish in view of developing the operational income of the company through: Managing the company s operational assets that are subject to expansion. Pursuing the performance and physical operations targets of the under-construction projects. The acquisition of new projects through possessing inside or outside the State of Kuwait. 2. Setting up the development strategies as a five year plan for the company s activities in respect to creating opportunities in real estate sector, while considering the growth increment ratio in the sector both on the local and the regional markets. Accordingly, the financial and human resources strategies will be in parallel paths to the aimed growth. 3. To re-structure the real estate and investment assets of the company within the orientation of varying the investment and the risks distribution. 4. To re-structure the financing sources on the cost basis and to reinforce the profitability margins. The organizational structure of the company shall be developed according to the general goals of the management, in addition to the portrayal of the strategies, the policies and the organizational regulation of all the companies activities. First: Achievements on the Local level: As for the company s achievements on the local level, kindly find below the results of the under-construction projects; perhaps, the qualitative step of the projects nature initiated by the company and which reflects the expected profit and the operational profit rate as follows, is of the most important aspects of these projects: Project Expected annual revenue Commencing on Al-Arabiya Towerr KD 2,000,000 May 2008 Al-Farwaniyah Towerr KD 400,000 May 2008 Holiday In Hotel Second Phase KD 900,000 May 2008 Crystal Tour KD 3,000,000 February 2010 The operational revenues of year 2007 reached the amount of Dinars 3,256,211, while the result of the operational revenues expected for year 2008 is Dinars 3,300,000; thus the operational revenues shall double for year

11 Eqarat Dot Com International Company: The marketing plan of the Al-Arabiya is being actually activated through its contribution in the establishment of Eqarat Dot Com International Company with a share of 70% of the capital by Kuwaiti Dinars 300,000 so that it supports the company s activities in the national and gulf real estate market. Second: Achievements on the regional level: The past year witnessed a noticeable diversification in the company s investments on all local, regional and the middle east levels, which realizes the company s ambition and establishes its policy represented by the necessity of the regional expansion in new countries throughout the area, in execution of the Board of Directors policy by continuing the development of the operational performance of the company, and this by joining mega investment projects and by creating regional real estate and commercial alliances in order to firmly establish the company s bases in various investment environments to form bases for regional locations and a firmly established existence in a number of Arab countries that enjoy a political stability and promising investment opportunities supported by commercial laws. Establishing the Bait Al-A amal real estate company S.C.C. (Eqarat Dot Com) (Oman) On , Al-Arabiya Real Estate Company contributed in the establishment of a company in the Sultanate of Oman under the name of Bait Al-A amal real estate Company (Eqarat Dot Com) Oman S.C.C. The authorized fully paid capital of the company reached the amount of Omani Riyals 300,000, with a partnership rate of 30% of the capital, along with a group of the strategic participations such as the Emirates based Eqarat Dot Com Real Estate Company, and Balushi Investment L.L.C. The Company s activity is within the real estate and tourist investments, as well as projects development inside and outside the State of Kuwait, especially inside the Sultanate of Oman. In addition, the company s activity basis is the undertaking of direct and indirect marketing of all kinds of real estate projects. Establishing the Arabian Gulf Gate Investment Company S.C.C. in Oman. On , the Al-Arabia Real Estate Company contributed in the establishment of a company in the Sultanate of Oman under the name of Arabian Gulf Gate Investment Company whose fully paid authorized capital was fixed at OR 150,000 with an equal partnership share of 33,33% of the capital. The Arabian Gulf Investment Company took possession of a plot of land in Al Suday Area in the Sultanate of Oman, on which shall be built Al Riyad Project; the project shall be announced in September In addition, a number of 90 units have been effectively sold and the Company s management decided to stop the sale in order to amend and increase the unit s prices. Establishment of Sharam Dreams for Real Estate Development (Egypt) On , the Al-Arabia Real Estate Company won in the auction of Al-Ahli Bank of Egypt the Shendler plot of land. As a result thereof, Sharam Dreams for Real Estate Development was established and its authorized capital was fixed at one billion Egyptian Pounds, while its paid capital was fixed at 100 million Egyptian Pounds. The share of the Al-Arabia Real Estate Company of the paid up capital is 25%. Establishment of Landmark Real Estate and Tourism Investment Company Residence Park (Egypt) On , Al-Arabia Real Estate Company won in the auction of Al-Murooj project in the Sixth of October City, and as a result thereof, an Egyptian shareholding company was established under the name of Landmark Real Estate and Tourism Investment Residence Park land with an authorized capital of 120 million Egyptian Pounds, of which the Al-Arabia Real Estate Company owns 20% of its shares; the design concept of the project was effectively developed and the project participated in the real estate exhibition held in Kuwait, the land of exhibitions in Meshirif, from March 5th to 7th 2008 and 70 residential units have been reserved. 9

12 Establishment of Al-Arabia Real Estate Investment Company (Egypt) Al-Arabia Real Estate Company contributed in the establishment of Al-Arabia Real Estate Investment Company in the Arab Republic of Egypt with an issued capital of EP 200,000,000 (Egyptian Pounds 200 million) and a paid capital of EP 20,000,000 (Egyptian Pounds 20 million), of which the Al-Arabia Real Estate Company is 10% of the Company s capital. Lagoons Project: One of the most important projects obtained by Al-Arabia Real Estate Company is the Lagoons Project Land in the Emirate of Dubai where this possession is considered a quantitative leap in the volume and nature of investment projects outside the State of Kuwait. The plot of land amount is around 100 million Kuwaiti Dinars and the expected amount of the project development exceeds 1200 million dollars. The Al-Arabia Real Estate Company mobilized all its capabilities for the project s success, as it has also joined strategic partners that provide financing and development sources. The economic and marketing feasibility study of the project revealed important revenues for the investors, which enables the company to grow and to pursue its strategic plan. Result: The executive steps of the strategy of the Company Board of Directors and the noticeable developments that occurred on most of their conditions had the most important effects on the financial results by the end of 2007, since the company realized, during this period, profits that reached Dinars 5,654,837, whereas the total revenues of the company reached KD 10,158,448 while the expenses thereof reached KD 4,503,611. In addition, most of the company s results are still reflecting positive and good results, especially in respect of: Details Amounts in Million KD 2007 Amounts in Million KD 2006 Increase rate Assets 122,7 108,2 12,9% Shareholders rights 77,1 71,3 8,1% Under-development lands 32,8 24,4 34,4% Real estate investments 8,4 16,2-48% Dear Shareholders, In this brief meeting, I would like to express, in the name of all of you, my thanks and gratitude to the all the employees of Al-Arabia Real Estate Company for the fruitful efforts they have deployed throughout the past period to develop the capacities and abilities of your company to contribute in the sustainable growth processes and the activation of the national economy; in addition, we shall not forget all the governmental and non-governmental bodies that helped us during the last period, hoping that both you and they succeed within the instructions of His Highness Our Dearest Prince Sheikh Sabah Al Ahmad Al Jaber Al Sabah and His Heir Apparent His Highness Sheikh Nawaf Al Ahmad Al Sabah, may God protect them, as well as our wise Government presided over by His Highness Sheikh Nasser Al Mohammed Al Ahmad Al Sabah, may God protect him. Emad Jawad Bukhamseen Chairman and Managing Director 10

13 Annual Financial Statements And Independent Auditors Report For the year ended 31 December

14 31Years of Sustainable Achievements INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS Report on the Financial Statements We have audited the accompanying financial statements of (the Company ), which comprise the balance sheet as at 31 December 2007 and the related statements of income, changes in equity and cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. Except as discussed below, we conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Company s management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Basis for Qualified Opinion The financial information of Rotana Hotel Al Sharjah (United Arab Emirates) included in these financial statements are based on its management accounts and have not been audited. Its total assets are KD 507,140 as of 31 December 2007 and net profit is KD 720,229 for the year then ended (31 December 2006: KD 614,191 and KD 908,603 respectively). 12

15 Al-Arabia Real Estate Company - Annual Report 2007 Qualified Opinion In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had the financial information referred to in the preceding paragraph been audited, the financial statements present fairly, in all material respects the financial position of the Company as of 31 December 2007, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Report on Other Legal and Regulatory Requirements Furthermore, in our opinion proper books of accounts have been kept by the Company, and the financial statements, together with the contents of the report of the Board of Directors, are in accordance therewith. We further report that we obtained the information that we required for the purpose of our audit; and that the financial statements incorporate all information that is required by Commercial Companies Law of 1960, as amended, and by the Company s Articles of Association; that an inventory was duly carried out; and that, to the best of our knowledge and belief, no violations of the Commercial Companies Law of 1960, as amended, or of the Company s Articles of Association have occurred during the year ended 31 December 2007 that might have had a material effect on the business of the Company or on its financial position, except that the Company holds certain investments in shares in contradiction to its objectives. Bader A. Al-Wazzan Licence No. 62A PricewaterhouseCoopers Nasser Abdullah Al Muqait Licence No. 9A Al Ahli Bureau Kuwait, 10 March

16 31Years of Sustainable Achievements BALANCE SHEET as at 31 December 2007 Note ASSETS Non- current assets Property, plant and equipment 4 12,594,170 13,217,631 Properties under development 5 32,847,754 24,419,186 Advance payments for purchase of lands 10,652,347 4,399,675 Investment properties 6 8,439,238 16,193,959 Investment in associates 7 22,609,203 21,144,335 Investment in an unconsolidated subsidiary 8 210,000 - Available for sale investments 9 6,190,143 5,024,157 93,542,855 84,398,943 Current assets Properties and lands held for trading ,638 1,077,746 Inventories 24,641 26,396 Trade and other receivables 11 6,669,286 3,163,140 Investments at fair value through profit or loss 12 21,295,356 19,348,125 Cash and cash equivalents 1,087, ,337 29,204,678 24,317,744 Total assets 122,747, ,716,687 EQUITY AND LIABILITIES Equity Share capital 13 46,244,443 46,244,443 Share premium 5,614,733 5,614,733 Treasury shares 14 (1,228,585) (1,228,585) Gain on sale of treasury shares 934, ,353 Statutory reserve 15 3,939,477 3,356,964 Voluntary reserve 16 3,939,477 3,356,964 Company s share in an associate s reserves 282, ,536 Retained earnings 17,316,731 12,826,920 77,043,610 71,326,328 Non-current liabilities Bonds 17-20,000,000 Loans and bank facilities 18 7,000,000 5,903,077 Post employment benefits 165, ,818 7,165,617 26,082,895 Current liabilities Trade and other payables 19 4,083,152 6,310,547 Loans and bank facilities 18 14,455,154 4,996,917 Bonds 17 20,000,000-38,538,306 11,307,464 Total liabilities 45,703,923 37,390,359 Total equity and liabilities 122,747, ,716,687 The accompanying notes form an integral part of these financial statements. Emad Jawad Bukhamseen Chairman and Managing Director Adnan AbdulNabi Al Mousa Deputy Chairman 14

17 Al-Arabia Real Estate Company - Annual Report 2007 STATEMENT OF INCOME Note Net income from properties 1,468,152 1,551,933 Net income from hotels 1,457,004 1,261,122 Gain on \ (Losses from) disposal of investment properties 3,518,973 (234,209) Gain on sale of Properties and lands held for trading 571,900 - Gain from investments at fair value through profit or loss ,654 4,642,677 Other operating income 331, ,473 General and administrative expenses (294,135) (395,163) Staff costs 21 (786,441) (645,510) Depreciation and amortization (1,192,520) (1,036,683) Impairment of properties under development - (201,287) Operating profit 6,008,642 5,308,353 Company s share of associates results 1,580,518 (294,291) Loss on sale of a subsidiary - (238,420) Gain on sale of an associate - 51,670 Gain on sale of available for sale investments 296,192 1,270,739 Impairment of available for sale investments - (125,479) Finance costs (2,038,476) (2,210,492) Foreign currency exchange (21,748) (24,852) Board of Directors' remuneration (25,000) (25,000) Contribution to Kuwait Foundation for the Advancement of Sciences 22 (36,621) (33,635) National Labour Support Tax (106,115) (93,431) Zakat (2,555) - Net profit for the year 5,654,837 3,585,162 Earnings per share (fils) The accompanying notes form an integral part of these financial statements. 15

18 31Years of Sustainable Achievements STATEMENT OF CHANGES IN EQUITY Share Capital Share premium Treasury Shares Gain on sale of treasury shares Statutory reserve Voluntary reserve Foreign currency translation reserve Company s share in an associate s reserves Retained earnings Total Balance as at 1 January 2006, as previously reported 38,537,036 2,146,400 (814,025) 1,021,353 2,983,241 2,983,241 (2,663) 8,279 13,975,931 60,838,793 Prior year adjustments (note 24) (154,166) (154,166) Balance as at 1 January 2006 (restated) Company s share in an associate s reserves 38,537,036 2,146,400 (814,025) 1,021,353 2,983,241 2,983,241 (2,663) 8,279 13,821,765 60,684, , ,090 Sale of an associate ,663 1,167-3,830 Net profit recognized directly in equity , , ,920 Net profit for the year ,585,162 3,585,162 Total recognized profit for the year , ,257 3,585,162 3,800,082 Bonus shares at 5% 1,926, (1,926,852) - Capital increase 5,780,555 3,468, ,248,888 Cash dividends at 5% (1,905,709) (1,905,709) Purchase of treasury shares - - (798,680) (798,680) Sale of treasury shares ,120 (87,000) ,120 Transfers to reserves , , (747,446) - Balance as at 31 December ,244,443 5,614,733 (1,228,585) 934,353 3,356,964 3,356, ,536 12,826,920 71,326,328 Balance as at 1 January ,244,443 5,614,733 (1,228,585) 934,353 3,356,964 3,356, ,536 12,826,920 71,326,328 Company s share in an associate s reserves ,445-62,445 Net profit recognized directly in equity ,445-62,445 Net profit for the year ,654,837 5,654,837 Total recognized profit for the year ,445 5,654,837 5,717,282 Transfers to reserves , , (1,165,026) - Balance as at 31 December ,244,443 5,614,733 (1,228,585) 934,353 3,939,477 3,939, ,981 17,316,731 77,043,610 The accompanying notes form an integral part of these financial statements. 16

19 Al-Arabia Real Estate Company - Annual Report 2007 STATEMENT OF CASH FLOWS Cash flows from operating activities Cash generated from operating activities (Note 28) 7,189,567 6,360,449 Finance costs paid (2,206,935) (2,210,492) Net cash generated from operating activities 4,982,632 4,149,957 Cash flows from investing activities Acquisition of property, plant and equipment (185,800) (315,492) Acquisition of properties under development (9,709,677) (5,136,178) Advance payments for purchase of lands (10,652,347) (3,515,265) Acquisition of investment properties (139,861) (4,635,978) Proceeds from sale of investment properties 6,456,989 - Paid to gain associate Company (657,235) - Paid to gain subsidiary Company (210,000) - Proceeds from sale of an associate - 457,550 Acquisition of available for sale investments (1,461,186) (860,000) Proceeds from sale of available for sale investments 591, ,944 Dividends income received 835, ,889 Net cash used in investing activities (15,132,395) (12,579,530) Cash flows from financing activities Proceeds from capital increase - 9,248,888 Purchase of treasury shares - (798,680) Proceeds from sale of treasury shares - 297,120 Net proceeds from loans 10,555,160 1,585,827 Cash dividends paid (19,977) (1,734,879) Net cash generated from financing activities 10,535,183 8,598,276 Net increase/ (decrease) in cash and cash equivalents 385, ,703 Cash and cash equivalents at the beginning of the year 702, ,634 Cash and cash equivalents at the end of the year 1,087, ,337 The accompanying notes form an integral part of these financial statements 17

20 31Years of Sustainable Achievements 1. Incorporation and activities Arab Real Estate Company is a Kuwaiti Shareholding Company (Closed) incorporated in the State of Kuwait on 21 June 1976 and is listed in the Kuwait Stock Exchange. The Company s registered head office is located at Al-Sharq, Ahmed Al-Jaber Street, Emad Commercial Center, Kuwait. The Company is primarily engaged in the following activities: - Carrying out various real estate commercial activities such as purchase and sale of investments in land and properties and managing properties for others. - Undertaking various construction activities and sub activities thereto in favor of the Company or other parties in the public and private sectors including separate houses, buildings and housing complexes. - Undertaking contracting activities and trading in all materials related to construction or required for it. - Set up commercial markets and tourism, sport and entertainment facilities. - The Company may have interest or participate with entities that carry out similar activities or those that can assist the Company in achieving its objectives inside Kuwait and abroad and it may purchase or affiliate these entities. - Managing real estate portfolios for the Company only and investment in the shares and projects of other companies whose activities are similar to the Company s activities. - Establishing and managing real estate investment funds only. - Owning local and international shares and bonds of companies whose activities are similar to the Company s activities. - Constructing, acquiring and managing hotels and all tourism activities. - All maintenance activities including maintenance and performing civil, mechanical, electrical, elevators, plumping, phone and air conditioning activities to guarantee maintaining buildings and their safety and undertaking contracting related to above activities for the properties owned by the Company only. - Preparing studies and providing consultancy in all types of investment properties sector and undertaking, managing and utilizing all types of properties provided that the required terms are met counterparties. - Use the available financial surplus of the Company for investment in financial and real estates portfolios managed by specialized companies. - Purchase and sale of the shares of companies whose activities are similar and integral to the Company s activities. Certain investments of the Company are not in accordance with the stated activities of thereof - (Notes 7, 9 and 12). The financial information, for the year ended 31 December 2007, of Rotana Hotel Al Sharjah (United Arab Emirates included in these financial statements are based on its management accounts and have not been audited or reviewed. Its total assets is KD 507,140 as of 31 December 2007 and net profits are KD 720,229 for the year then ended (31 December 2006: KD 614,191 and KD 908,603 respectively) These financial statements were approved for issue by the Board of Directors of the Company on 10 March The General Assembly of shareholders has the authority to amend these financial statements after issuance. 18

21 Al-Arabia Real Estate Company - Annual Report Significant Accounting Policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis or preparation These financial statements have been prepared in conformity with International Financial Reporting Standards (IFRS). These financial statements are prepared under the historical cost basis, as modified the fair value of investment at fair value through profit or loss and available for sale investments. The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. It also requires management to exercise its judgment in the process of applying the accounting policies. The areas involving a high degree of judgment or complexity or areas where assumptions and estimates are significant to the financial statements are disclosed in Note (30). During the year, certain IFRS and Interpretations of the International Financial Reporting Interpretations Committee (IFRIC) have been issued. Standards, amendments and interpretations effective in IFRS (7) Financial Instruments: Disclosures, which requires the Company to make additional disclosures on the financial instruments, however, it will not have an impact on the classification and the valuation of the Company s financial instruments. - IAS (1) Presentation of Financial Statements (revised): Capital Disclosure which requires additional disclosures on share capital management. - IFRIC 10, Interim financial reporting and impairment, prohibits the impairment losses recognized in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. This standard does not have any impact on the Company s financial statements. Standards, amendments and interpretations effective in 2007 but not relevant - IFRIC 8, Scope of IFRS 2 ; - IFRS (4) Insurance contracts ; - IFRIC (7) Applying the restatement approach under IAS (29) Financial reporting in hyperinflationary economies. - IFRIC (9) Re-assessment of embedded derivatives Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Company - IFRIC (11) IFRS (2) Group and treasury share transactions, applicable for annual periods beginning on or after 1 March IAS (23) (Amendment), Borrowing costs (effective from 1 January 2009). - IFRS (8) Operating segments (effective from 1 January 2009). 19

22 31Years of Sustainable Achievements 2. Significant Accounting Policies - Continued 2.2 Foreign currency translation The functional currency of the Company is the Kuwaiti Dinar. Foreign currency transactions are translated at the rates of exchange prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into Kuwaiti Dinars at the rates of exchange prevailing at the balance sheet date. Resultant gains or losses are taken to the statement of income. 2.3 Property and equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided on a straight line basis over the estimated useful lives. The Company s management periodically reviews the useful lives of property and equipment. Any resultant changes are recognized in the statement of income on a retroactive basis. The useful lives of property and equipment are estimated as follows: Estimated useful lives (Years) Hotel buildings 20 Hotel furniture and fixtures 10 Company furniture and fixtures 4 Vehicles 3 Gains or losses from sale of property and equipment are recorded in the statement of income, as the difference between the selling price and net book value of such assets at the sale date. 2.4 Land and properties under development Lands and properties under development are stated at cost including development costs. At completion of development process, they are either classified as investment properties, lands and properties held for trading, or properties and equipment for the Company s self-occupation, depending on the management s intention regarding the future use of these lands and properties. 2.5 Investment properties Investment properties held by the Company for capital appreciation or renting out to others are recorded under non-current assets. Investment properties are stated at cost less accumulated depreciation and any impairment losses. Depreciation is calculated on investment properties on a straight line basis over their estimated useful lives. 2.6 Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortization are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell or value in use. Impairment losses are recognized in the statement of income for the period in which they arise. 20

23 Al-Arabia Real Estate Company - Annual Report Investment in associates Associated companies are those entities over which the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights indicate that the significant influence exist. Investments in associates are accounted for by the equity method of accounting. The investment is initially recorded at cost. The investment balance includes any goodwill less impairment loss (if any). The Company s share of its associates post acquisition profits or losses is recognized in the statement of income, and its share of post acquisition movements in reserve is recognized in equity. Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Company. The goodwill arising from acquisition of an associate is recognized in the investment in associates. Goodwill is tested annually for impairment and recorded at cost less impairment losses. 2.8 Financial instruments - recognition and de-recognition, classification and measurement In the normal course of business, the Company uses financial instruments, principally cash and cash equivalents, investment at fair value through profit or loss, available for sale investments, trade and other receivables, trade and other payables, bonds, loans and bank facilities. Recognition and de-recognition A financial asset or a financial liability is recognized when the Company becomes a party to the contractual provisions of the instrument. All regular way purchases and sales of financial assets are recognized at the settlement date, on which the Company receive or deliver the asset. A financial asset is derecognized when the contractual rights to receive cash flows from the financial asset expire, or when the Company has transferred substantially all the risks and rewards of ownership of the financial asset. A financial liability is derecognized when the obligation specified in the contract is discharged, cancelled or expired. Classification The Company determines the appropriate classification of its financial assets on the purchase date based on the purpose of acquisition. The Company classifies financial assets as investments at fair value through profit or loss, available for sale and loans and receivables. All financial liabilities are classified as financial liabilities other than at fair value through profit or loss. All financial assets are initially measured at fair value (plus transaction costs if not classified in the financial instruments at fair value through profit or loss). Investments at fair value through profit or loss This category has two subcategories: financial assets held for trading and those designated at fair value through profit or loss at inception. A financial asset held for trading are those assets acquired principally for the purpose of selling in the short term. 21

24 31Years of Sustainable Achievements 2. Significant Accounting Policies - Continued The financial assets designated at fair value though profit or loss at inception are classified in this category if managed and their performance is evaluated and internally reported on a fair value basis in accordance with documented strategic risk management or investment strategy. Loans and receivables These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. The Company s loans and receivables comprise trade and other receivables, and cash and cash equivalents. Available for sale These are non-derivative financial assets that are either designated in this category or not included in any of the above categories, and are principally, those acquired to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in profit rates. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date Measurement All financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the statement of income. Subsequently financial investments at fair value through profit and loss, and available for sale investments are measured at fair value, while loans and receivables are measured at amortized costs. Unrealized gains and losses arising from changes in the fair value of the financial investments at fair value through profit or loss are included in the statement of income. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analyzed between translation differences resulting from changes in amortized cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognized in profit or loss, while translation differences on non-monetary securities are recognized in equity. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognized in equity. In case of sale or impairment of the value of available for sale investments, the accumulated balance of these changes in the fair value in equity is transferred to the statement of income. Fair value The fair value of quoted investments is based on quoted closing bid prices. If the market for a financial asset is not active or the financial instrument is unquoted, fair value is derived from recent arm s length transactions, discounted cash flow analysis, other valuation techniques commonly used by market participants or determined with reference to market values of similar instruments. The fair value of financial instruments carried at amortized cost is estimated by discounting the future contractual cash flows at the current market interest rates for similar financial instruments. As for equity investments, whose fair values cannot be reliably determined, the investment is carried at cost less impairment provisions. 22

25 Al-Arabia Real Estate Company - Annual Report 2007 Impairment of financial assets An assessment is made at each balance sheet date to determine whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available for sale financial assets, the cumulative losses-measured as the difference between the acquisition cost and the current fair value, less any impairment losses on that financial asset previously recognized in the profit or loss transferred from equity and recognized in the statement of income. Impairment losses recognized in the statement of income on equity instruments are not reversed through the statement of income. A provision is made for impairment of loans and receivables if there is an objective evidence that the Company would not be able to collect all the amounts receivable. The amount of provision is the difference between the book value and the realizable value, being the present value of the expected future cash flows discounted at the effective interest rate. Impairment losses are taken to the statement of income. 2.9 Lands and properties held for trading Lands and properties acquired for sale are classified as lands and properties held for trading and carried at the lower of cost and net realizable value. The net realizable value is the estimated selling price less the costs estimated to complete sale Inventory Inventory is stated at the lower of cost and net realizable value. Cost is determined on the average cost basis. Net realizable value is the estimated selling price less the estimated cost of completion Cash and cash equivalents Cash and cash equivalents comprise cash on hand and at banks, and time deposits that mature within three months from the date of placement Treasury Shares The cost of the Company s own shares purchased, including directly attributable costs, is classified under equity. Gains or losses arising on sale are separately disclosed under shareholders equity and these amounts are not available for distribution. These shares are not entitled to cash dividends and rights issues. The issue of bonus shares increases the number of treasury shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares Post employment benefits The Company is liable under Kuwaiti Labor Law, to make payments to the employees for post employment benefits through defined benefits plan. Such payment is made on a lump sum basis at the end of an employee s service. This liability is unfunded and has been computed as the amount payable as a result of involuntary termination of the Company s employees on the balance sheet date. The Company expects this method to produce a reliable approximation of the present value of this obligation. 23

26 31Years of Sustainable Achievements 2. Significant Accounting Policies - Continued 2.14 Provisions for liabilities Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle this obligation and a reliable estimate of the amount can be made Revenue recognition - Gains and losses from sale of financial investment, investment properties, and lands and properties held for trading are recognized in the statement of income at completion of sale. - Income from renting investment properties are recognized on an accrual basis. - Dividends are recognized when the right to receive such payments is established. - Interest income is recognized on a time proportion basis Accounting for leases Where the Company is the lessor Assets leased for others under operating leases, other than investment properties, are included in property and equipment in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar assets. Rental income is recognized on a straight-line basis over the lease term. Where the Company is the lessee Leases of assets under which the lessor effectively retains all the risks and benefits of ownership are classified as operating leases. Payments made under operating leases are charged to the statement of income on a straight-line basis over the period of the lease Finance costs Finance costs that are directly attributable to the acquisition of a qualifying asset are capitalized as part of the cost of that asset. Capitalization of borrowing costs is suspended during the long terms in which there is an obstacle against the actual development. Capitalization is discontinued when all the activities necessary to bring the asset to it intended operating use are completed. Other borrowing costs are recognized as expenses in the period in which they have been incurred. 3. Risks Management 3.1 Financial instruments The Company has classified its financial assets and liabilities as of 31 December 2007 and 2006 as follows: - Available for sale investments which include investments in shares (Note 9). - Investments at fair value through profit or loss which include investments in shares (Note 12). - Loans and receivables, which include trade and other receivables (Note 11), and cash and cash equivalents. - Financial liabilities, which include Bonds (Note 17), loans and bank facilities (Note 18), and trade and other payables (Note 19) 24

27 Al-Arabia Real Estate Company - Annual Report Financial risks The Company s business activities expose it to certain financial risks such as market risk, credit risk and liquidity risk. The Company s financial risks exposures are managed and monitored by the Company s senior management. The most significant financial risks to which the Company is exposed to are as follows:- Market risks Market risk is the risk of loss resulting from fluctuations in the fair value or the future cash flows of financial instrument as a result of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk. The Company s senior management monitors and manages its market risks by regular oversight of the market s circumstances and the change in foreign exchange and interest rates, and market prices. Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is exposed to foreign currency risks resulted mainly from the Company s dealings in financial instruments denominated in foreign currencies. Foreign currency risks result from the future transactions on financial instruments in foreign currency as reflected in the financial statements. The Company is exposed to this risk as a result of dealing in financial instruments in US Dollar. Financial assets in foreign currencies are as of 31 December are as follows: US Dollar 5,879,443 4,084,158 Other currencies 667, Financial liabilities in foreign currencies are as of 31 December are as follows: US Dollar 203,272 59,262 Other currencies 27,298 - At 31 December 2007 and 2006, if the currency had weakened/strengthened by 10% against the US Dollar and other currencies, with all other variables held constant, profit for the year (before Contribution to Kuwait Foundation for the Advancement of Sciences (KFAS), National Labour Support Tax (NLST), and Zakat) would have been higher/lower as follows: US Dollar 555, ,970 Other currencies 28, , ,009 25

28 31Years of Sustainable Achievements 3. Risks Management - Continued These increase or decrease is mainly due to foreign exchange gains/losses on translation of balances in US Dollar and other currencies in cash and cash equivalent, investments at fair value through profit or loss, and trade and other receivables. The Company tracks and manages its foreign currency exposure by monitoring the changes in foreign currencies exchange rates on regular basis to assess their effects on the financial statements and take the necessary action. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Since the Company has no significant interest bearing assets, the Company s financial assets are substantially independent of changes in market interest rates. The Company is exposed to this risk as it holds the following financial liabilities: - Bonds (note 17). - Loans and bank facilities (Note 18). Financial liabilities issued at fixed interest rate expose the Company to fair value interest rate risk arises from changes in interest rates. Financial liabilities issued at variable interest rates expose the Company to cash flow interest rate risks. At 31 December 2007 and 2006, if interest rates at that date been 1% higher, with all other variables held constant, profit for the year (before KFAS, NLST, and Zakat) would have been lower mainly as a result of higher interest expense on issued bonds and bank facilities, by approximately KD 364,000. (approximately KD 330, ). The Company management monitors interest rate risk by regular tracking of market interest rates. Price risk It is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk). The Company is exposed to fluctuation risks of its equity financial assets as the Company owns investments classified in the balance sheet as investments available for sale and at fair value through profit or loss. The Company s investments classified as available for sale as at 31 December 2007 and 2006 are not quoted. While its investments classified as investments at fair value through profit or loss are quoted. The Company s management monitors and manages these risks through: - Tracking the market conditions and trends. - Invests with companies that have good financial positions that generate high operating income and dividends. The Company s management expects that the effect on profit (before KFAS, NLST, and Zakat) as a result of a change in the fair value of equity instruments at fair value through profit or loss due to a 5% increase/ decrease in equity indices (with all other variables held constant) is increase/ decrease in the net profit for the year ended 31 December as follows: Effect on statement of income Market index Kuwait Stock Exchange 835, ,000 Cairo Stock Exchange 229, ,000 1,064, ,000 26

29 Al-Arabia Real Estate Company - Annual Report 2007 Profit for the year would increase/decrease as a result of gains/losses on equity securities classified as at fair value through profit or loss. Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Receivables, and cash and cash equivalents are considered the most of the assets exposed to credit risk. The Company mitigates this risk by:- - Dealing with high net worth and reputable customers. - Dealing with highly credit rated financial institutions. The Company s management believes that the maximum exposure to credit risk as at 31 December is as follows:- Trade and other receivables (Note 11) 6,669,286 3,163,140 Cash and cash equivalents 1,087, ,337 7,757,043 3,865,477 Liquidity risks It is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk management mainly includes maintaining sufficient cash and high liquid financial instruments and the availability of funding resources to meet the Company s liquidity requirements. The table below analyses the maturities of the Company s financial liabilities: During one year More than one year and Less than two years 31 December 2007 More than two years and Less than five years More than five years Bonds (Note 17) 21,349, ,349,000 Bank facilities (Note 18) 15,130, ,500 3,236,757 7,835,507 26,825,383 Trade and other payables (Note 19) Total 4,083, ,083,152 40,562, ,500 3,236,757 7,835,507 52,257,535 During one year More than one year and Less than two years 31 December 2006 More than two years and Less than five years More than five years Bonds (Note 17) 1,324,000 21,349, ,673,000 Bank facilities (Note 18) 4,996,917 2,142,588 3,760,489-10,899,994 Trade and other payables (Note 19) Total 6,310, ,310,547 12,631,464 23,491,588 3,760,489-39,883,541 27