GRUPO FAMSA, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2017 and 2016 (With Independent Auditor s Report Thereon)

Transcription

1 GRUPO FAMSA, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2017 and 2016 (With Independent Auditor s Report Thereon) (Translation from Spanish Language Original)

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8 Consolidated Statements of Financial Position December 31, 2017 and 2016 Assets Note December December reclassified (note 5) Current assets: Cash and cash equivalent 7 $ 1,643,117 1,503,578 Accounts receivables, net 9 16,768,429 17,677,531 Rights to collect from related parties 1.a 800, ,000 Recoverable taxes 324, ,327 Other accounts receivable 10 2,140,876 1,770,899 Inventories, net 11 2,445,183 2,553,842 Advanced payments 454, ,272 Total current assets 24,576,902 25,324,449 Non-current assets: Restricted cash 8 311, ,785 Accounts receivables, net 9 8,431,555 8,215,346 Rights to collect from related parties 1.a 3,304,702 4,105,381 Property, leasehold improvements and furniture and equipment, net 12 1,378,676 1,880,989 Goodwill and intangible assets, net , ,190 Guarantee deposits 136, ,257 Other assets 14 1,368, ,341 Deferred income tax 24 4,814,057 1,695,040 Total non-current assets 20,219,140 17,165,329 Total assets $ 44,796,042 42,489,778 Liabilities and Stockholders equity Current liabilities: Demand deposits 15 $ 22,623,205 17,274,090 Short-term debt 16 2,911,207 4,026,018 Suppliers 1,579,182 1,373,372 Accounts payables and accrued expenses 17 1,300,450 1,238,526 Deferred income from guarantee sales 255, ,846 Income tax payable 74,099 36,912 Total current liabilities 28,743,656 24,171,764 Non-current liabilities: Time deposits 15 2,370,959 3,788,816 Long-term debt 16 6,114,730 5,974,656 Deferred income from guarantee sales 135, ,175 Employee benefits , ,123 Total non-current liabilities 8,797,482 10,002,770 Total liabilities 37,541,138 34,174,534 Stockholders equity: Capital stock 20 1,706,089 1,703,847 Additional paid-in capital 3,836,949 3,810,052 Retained earnings 774,292 1,975,230 Reserve for repurchase of shares 216, ,471 Cumulative foreign currency translation adjustment 630, ,059 Total stockholders equity attributable to shareholders 7,164,433 8,281,659 Non-controlling interest 90,471 33,585 Total stockholders equity 7,254,904 8,315,244 Contingencies Commitments Subsequent events Total liabilities and stockholders equity $ 44,796,042 42,489,778 The accompanying notes are an integral part of these consolidated financial statements.

9 Consolidated Statements of Income For the years ended December 31, 2017 and 2016 (Thousands of Mexican pesos, except for basic and diluted earnings per share) Note (See Note 5) Net sales 28 $ 9,779,633 10,823,434 Interest earned from customers 28 7,774,264 6,720,295 Total revenues 17,553,897 17,543,729 Cost of sales 21 (9,649,532) (9,724,395) Gross profit 7,904,365 7,819,334 Operating expenses 21 (6,787,594) (7,050,605) Other incomes - net , ,519 (6,493,458) (6,825,086) Operating profit 1,410, ,248 Financial expenses 23 (1,102,814) (1,474,492) Financial income , ,617 Financial results, net (660,060) (1,094,875) Profit (loss) before income tax 750,847 (100,627) Income tax 24 (443,461) 446,701 Consolidated net income $ 307, ,074 Net income attributable to: Controlling interest $ 305, ,947 Non-controlling interest 1,890 2,127 Consolidated net income $ 307, ,074 Basic and diluted earnings per share attributable to controlling interest, in Mexican pesos $ Number of outstanding shares ,089, ,969,112 Weighted average of ordinary shares $ 562,335, ,987,872 The accompanying notes are an integral part of these consolidated financial statements.

10 Consolidated Statements of Comprehensive Income For the years ended December 31, 2017 and 2016 Note Consolidated net income $ 307, ,074 Other comprehensive income (loss), net of taxes: Items that will not be reclassified to statement of income: Actuarial gains (losses), net of income taxes 19,24 (7,486) 20,341 Items that will be reclassified to statement of income: Valuation of cash flow hedges, net of income taxes (3,871) - Foreign currency translation adjustment 24 72, ,663 Consolidated comprehensive income $ 368, ,078 Consolidated comprehensive income attributable to: Controlling interest $ 367, ,951 Non-controlling interest 1,890 2,127 Comprehensive income for the period $ 368, ,078 The accompanying notes are an integral part of these consolidated financial statement.

11 Consolidated Statements of Changes in Stockholders Equity As of December 31, 2017 and 2016 Note Capital stock Additional paid-in capital Retained earnings Reserve for repurchase of shares Cumulative foreign currency translation adjustments Total stockholders equity attributable to shareholders Total noncontrolling interest Total stockholders equity Balances as of December 31, 2015 $ 1,704,085 3,812,903 1,610, , ,396 7,601,456 31,458 7,632,914 Repurchase of shares (238) (2,851) - 1,341 - (1,748) - (1,748) Net income , ,947 2, ,074 Other comprehensive income , , , ,004 Balances as of December 31, ,703,847 3,810,052 1,975, , ,059 8,281,659 33,585 8,315,244 Impacts of early adoptions of IFRS 9 5 and IFRS (2,852,871) - - (2,852,871) - (2,852,871) Balances as of January 1, ,703,847 3,810,052 (877,641) 234, ,059 5,428,788 33,585 5,462,373 Repurchase of shares 2,242 26,897 - (18,352) - 10,787-10,787 Net income , ,496 1, ,386 Other comprehensive income - - (7,486) - 72,925 65,439-65,439 Valuation of cash flow hedges - - (3,871) - - (3,871) - (3,871) Cancellation of deferred tax 24 collection rights - - 1,288, ,288,261-1,288,261 Other movements , ,533 54, ,529 Balances as of December 31, ,706,089 3,836, , , ,984 7,164,433 90,471 7,254,904 The accompanying notes are an integral part of these consolidated financial statements.

12 Consolidated Statements of Cash Flows December 31, Note Operating Activities: Income (loss) before income tax $ 750,847 (100,627) Adjustments: Allowance for doubtful accounts 21 1,112,183 1,692,509 Accrued interest of rights to collect from related parties 23 (271,483) (371,906) Allowance for obsolete inventories 11 29,675 - Employee benefits 19 49,845 23,686 Depreciation and amortization 12,13 412, ,933 Gain on sale of property, leasehold improvements, furniture and equipment 22 (239,947) (22,131) Loan placement costs (425,307) - Interest income 23 (14,688) (7,711) Amortization of debt obtaining costs 5,915 - Interest expenses 23 1,102, ,802 Interest expenses to bank depositors 21 1,376, ,184 Exchange (gain) loss, net (139,903) 1,056,930 Subtotal 3,748,838 4,458,669 Accounts receivable (5,518,398) (5,707,475) Inventories of products for sale 78,984 (101,285) Collection rights from related parties 1.a 1,072,162 - Interest paid to bank depositors (1,376,007) (825,094) Demand deposits and time deposits 3,931,258 2,684,987 Decrease in other working capital accounts (203,734) (89,435) Net cash flows from operating activities 1,733, ,367 Investing activities: Acquisition of property, leasehold improvements, furniture and equipment 12 (109,205) (150,313) Acquisition of intangible assets 13 (79,981) (19,522) Proceeds from sale of property, leasehold improvements, furniture and equipment 505,142 27,091 Other assets and guarantee deposits (76,742) - Interest received 14,688 7,711 Net cash flow from investing activities 253,902 (135,033) Financing activities: Proceeds from current and non-current debt 16 6,615,191 3,721,275 Interest paid 16 (1,102,814) (932,620) Payments of current and non-current debt 16 (7,129,890) (3,784,162) Resale (repurchase) of shares, net 20 10,787 (1,748) Net cash flow from financing activities (1,606,726) (997,255) Increase (decrease) of cash and cash equivalents 380,279 (711,921) Adjustments to cash flow as a result of changes in exchanges rates (240,740) 21,176 Cash and cash equivalents and cash restricted: At the beginning of the year 7,8 1,815,363 2,506,108 At the end of the year 7,8 $ 1,954,902 1,815,363 The accompanying notes are an integral part of these consolidated financial statements.

13 December 31, 2017 and 2016 (1) General information and other significant events - Grupo Famsa, S. A. B. de C. V. and subsidiaries ( Famsa, Company or Grupo Famsa ) was incorporated in Mexico as a corporation whose shares are traded in the Mexican Stock Exchange, S.A.B. of C.V. and are listed under the symbol GFAMSA. The address of the Company and its corporate office are located in Ave. Pino Suarez No Nte, Zona Centro, Monterrey, Nuevo Leon, Mexico. The Company is controlled by a trust whose beneficiaries are the Garza Valdez family. The consolidated financial statements of the Company as of December 31, 2017 and 2016 comprise the Company and its subsidiaries (the Company and individually Company Entities ). FAMSA, through its subsidiaries, is mainly engaged in wholesale and retail sales to the general public of consumer products such as furniture, appliances, electronics, clothing and footwear, and so on, as well as providing financing to customers. The Company has the authorization of the Ministry of Finance and Public Credit to operate Banco Ahorro Famsa, S. A. Institución de Banca Múltiple (BAF) as established by the Mexican Law of Credit Institutions (LIC), under the supervision and monitoring of the National Banking and Securities Commission (the Commission) and Banco de Mexico (Banxico). BAF's main activities consist of providing multiple banking services in accordance with the LIC, which include, among others, taking and granting loans and the collection of deposits. Relevant events a) On December 20, 2017, Famsa México, S.A. of C.V. and the companies Desarrollos Inmobiliarios Garza Valdez, S.A. de C.V., Inmobiliaria Garza Valdez, S.A. de C. V., Garza Valdez de la Laguna, S.A. de C.V., Inmobiliaria Logar de Monterrey, S.A. de C.V. and Mr. Don Humberto Garza González (as a whole the "Guarantors"), carried out an amendment to the payment guarantee agreement originally subscribed on December 11, 2015, which expired when its terms and conditions were substantially modified and thus the rights and obligations that corresponded to each of the parties were replaced with the new terms.

14 2 Through this new agreement it was agreed to subscribe Famsa Mexico special shares in favor of the Guarantors, non-transferable shares without corporate or economic rights. These actions actually paid represented $ 54,996. In addition to the foregoing and in accordance with the intention that motivated the original guarantee agreement, it was agreed that the Guarantors will pay Famsa Mexico a premium in subscription of shares for $ 4,154,751; the Guarantors being obliged to pay the total amount of the same in solidarity, regardless of the number of shares subscribed and paid for each one of them. At the end of the period subscribed in the previously detailed agreement, the current shareholders of Famsa Mexico are obliged to reimburse the Guarantors for the value of these special shares at their nominal value. The unpaid balance of the collection rights as of December 31, 2017 represented a total of $4,104,702, which must be paid within a period of no more than five years, generating the computation and payment of interest on unpaid balances of 8.19%. It is important to mention that the Guarantee Trust subscribed on April 20, 2017 and where a property package of the Guarantors was deposited remains valid until the collection rights with Famsa Mexico are fully settled. As of December 31, 2017, the collection right amounts to $4,104,702, of which $800,000 is presented as current assets and the remaining as non-current. Additionally, during 2017 an accrued income was recorded on these collection rights for $271,483 and collection of $1,072,162 was achieved. As of December 31, 2016, the collection right that was integrated by its present value plus the interest accrued as of that date amounted to $4,905,381, of which $800,000 was presented as current assets and the remainder as non-current. b) As described in note 16 to the consolidated financial statements, on July 27, 2017, the Company contracted a loan for $2,634 million pesos with Bancomext (a TIIE rate pbs. with a semi-annual payment plan and 10-year maturity). With the proceeds from this loan, the Company made the early partial amortization of its Senior Notes due in 2020, for a total of U.S. 110 million and liquid short-term bank debt by $562 million pesos.

15 3 (2) Basis of preparation - (a) Authorization and preparation basis The consolidated financial statements of Grupo Famsa, S.A.B. de C.V. and subsidiaries have been prepared in accordance with the International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ), adopted by public entities in Mexico in accordance with the amendments to the Rules for Public Companies and Other Participants in the Mexican Stock Exchange, issued by the Mexican National Banking and Securities Commission. On April, 30, 2018, Mr. Humberto Garza Valdez, CEO of the Company and Mr. Abelardo Garcia Lozano, CFO of the Company, authorized the issuance of the accompanying consolidated financial statements and their notes. In accordance with General Corporations Law and the Company's by-laws, the stockholders are empowered to modify the financial statements after its issuance. The accompanying consolidated financial statements will be submitted for approval of the next Stockholders Meeting. (b) Basis of measurement The consolidated financial statements have been prepared on a historical cost basis, except for, the following items of the consolidated statement of financial position which were measured at present value or fair value: a. Certain financial instruments b. Collection rights from related parties c. Long-term accounts receivables d. Defined benefit liabilities to employees measured at present value of the defined benefit obligation (c) Presentation of consolidated statements of income and consolidated statements of comprehensive income The Company presents its costs and expenses in the consolidated statements of income according to their function as a common practice in the industry the entity belongs to.

16 4 The Company presents the operating profit as it is considered an important performance measure for users of financial information. In accordance with IFRS, the inclusion of subtotals as the "result of operating activities", and the adjustment of the income statement varies significantly by industry and company, attending to specific needs. Revenues and costs that are of an operational nature are presented within this item. The row "Other income, net" in the consolidated statements of income is mainly comprised of income and expenses that are not directly related to the main activities of the Company or that are of an unusual and/or non-recurring nature, such as losses on the sale of assets, among others. The Company decided to present the comprehensive income in two statements: the first statement includes only the items that comprise the net result and is denominated "Consolidated statement of income" and the second statement from the net result at which the income statements were concluded then presents the other comprehensive income. This is denominated "Consolidated Statement of Comprehensive Income". (d) Presentation of consolidated statements of cash flows The consolidated statements of cash flows of the Company are presented using the indirect method; except for the financing activities which reflect the totality of the loans received and paid in the year. (e) Functional and reporting currency The Company s accompanying consolidated financial statements are presented in Mexican pesos ( pesos or $ ) because it represents the Mexican domestic currency and periodic reports to the Mexican Stock Exchange are carried in such currency. All information is presented in thousands of pesos, except when indicated otherwise. Moreover, to determine the functional currency of each subsidiary of the Company, management assesses the economic environment in which it primarily generates and disburses cash. For this, factors related to sales, costs, sources of financing and cash flows generated by the operation are considered. Because some of the Company s subsidiaries have identified the dollar as functional currency, the financial information has been translated in accordance with the guidance in IAS 21 Effect of exchange rate variations to consolidate the financial statements, considering the methodology described in note 3.4.

17 5 As of December 31, 2017 and 2016, the peso/dollar exchange rates were $19.66 and $20.64, respectively. Unless otherwise indicated, all financial information presented in pesos has been rounded to the nearest thousand. When referring to U.S. or dollars we refer to amounts expressed in thousands of United States of America or US dollars. (f) Use of estimates The preparation of the consolidated financial statements in accordance with IFRS requires Management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the useful lives of property, machinery and equipment, fair values of land and buildings, present value of accounts receivable, impairment of goodwill and long-lived assets; valuation allowances for receivables, other receivables, inventory and deferred income tax assets; valuation of financial instruments, labor liabilities related to defined benefits and contingencies. Actual results could differ from those estimates and assumptions. (3) Significant accounting policies - The accounting policies indicated below have been applied consistently for the periods presented in these consolidated financial statements and in the preparation of the consolidated statement of financial position under IFRS, with the exception of the effects related to the early adoption of new accounting standards that are describe below: 3.1 Early adoption of new accounting standards a) The Company adopted IFRS 9, "Financial Instruments", in its consolidated financial statements in advance with effect on January 1, 2017, using the prospective approach to hedge accounting. Regarding Classification and Measurement, the Company did not restate financial information for the comparative year given that the business models of the financial assets did not originate differences between the adoption exercise and the comparative year, therefore, the comparative value amounts under IFRS 9 and International Accounting Standard 39, "Financial Instruments: Recognition and Valuation", are consistent. Likewise, for the part corresponding to impairment, the previous periods will not be reestablished, only the difference between the book value before applying IFRS 9 and the new book value calculated under the new regulations at the beginning of the annual reporting period will be reported.

18 6 As a result of the adoption of IFRS 9, the Company modified its accounting policies in order to align them with the provisions of said standard. The following are the changes made to the policies: Classification of financial assets and liabilities: IFRS 9 contains three main categories of classification of financial assets: - Measured at amortized cost; - Measured at fair value through other comprehensive income (FVOCI); - Measured at fair value through profit or loss (FVTPL) The classification of financial assets in accordance with IFRS 9 is based on the business model in which a financial asset is managed and the characteristics of the contractual cash flows. IFRS 9 eliminates the categories of held-to-maturity, loans and accounts receivable and available for sale included in IAS 39. According to IFRS 9, the derivatives implicit in contracts where the host contract is a financial asset under the scope of the norm will never separate. In contrast, the hybrid financial instrument is evaluated as a whole for the evaluation of its classification. The adoption of IFRS 9 has not had a significant effect on the Company's accounting policies with respect to financial liabilities. Hedge accounting: The Company has adopted the new hedge accounting model under IFRS 9. The foregoing, in order for the Company to ensure that the hedge accounting relationships are aligned with its risk management, objectives, strategy and to apply an approach more qualitative and prospective when evaluating the effectiveness of coverage. The Company uses currency forward contracts to hedge the variability in cash flows for interest payments arising from fluctuations in currency exchange rates. The effective portion of the changes in the fair value of the hedging instruments are accumulated in a hedge reserve in the other comprehensive income.

19 7 Transition: The Company conducted a qualitative and quantitative evaluation for the adoption of IFRS 9. The activities carried out are the following: Review and update of current accounting policies, processes and internal controls related to financial instruments. Updating of the coverage files of its derivative financial instruments, as well as its accounting policies and internal controls. The determination of the business model within which financial assets are held. Determination of the calculation model of provisions based on the expected loss model. Classification of financial assets and liabilities at the date of initial application of IFRS 9: The following table shows the original measurement categories used by the Company in accordance with IAS 39 and the new measurement categories according to IFRS 9 for each class of financial assets and liabilities as of January 1, 2017: Financial assets Classification under IAS 39 New classification under IFRS 9 Forward contracts Fair value with changes N/A in Stockholder s equity Collection rights from related parties Loans and accounts receivables Amortized cost Government instruments Maintained until expiration Amortized cost Accounts receivables Loans and accounts receivables Amortized cost Loan portfolio Loans and accounts receivables Amortized cost Other accounts receivables Loans and accounts receivables Amortized cost Cash Maintained until expiration Amortized cost Surplus cash Maintained until expiration Amortized cost Financial liabilities Classification under IAS 39 New classification under IFRS 9 Forward contracts Fair value with changes N/A in Stockholders equity Short-term and long-term debt Other financial liabilities Other financial liabilities Demand and time deposits Other financial liabilities Amortized cost Intercompany loans Other financial liabilities Other financial liabilities Accounts payables (suppliers) Other financial liabilities Other financial liabilities

20 8 For the impairment of the credit portfolio, new models of expected loss were determined to calculate the provisions that should be recorded. The impact at the transition date is disclosed in note 5 to the consolidated financial statements. The main effect is due to the fact that IAS 39 considers a loss model incurred while IFRS 9 considers an expected loss model. b) The Company adopted IFRS 15, "Revenue from contracts with customers", in its consolidated financial statements in advance, that is, as of January 1, The transition considerations involved the recognition of the effect accrued to date of adoption, that is, the change in financial information for the year ended December 31, 2016, for those adjustments that arose as a result of the accounting differences between IAS 18 and the new IFRS 15 (see note 5). As a result of the adoption of IFRS 15, the Company modified its accounting policies in order to align them with the new five-step model established by the aforementioned standard. In note 5, the quantitative impacts that the adoption of this rule caused in the consolidated financial information are disclosed. The following are the changes made to the policies: Scope: Previously, IAS 18 was applied in the recognition of income from transactions and events arising from the sale of goods, rendering of services, interest income, royalties and dividends. Under IFRS 15, the Company must apply the requirements of the new standard to all contracts with customers, except for such purposes, those related to: - lease contracts within the scope of IFRS 16; - insurance contracts; within the scope of IFRS 4; - financial instruments and other rights and obligations in the scope of IFRS 9; - IFRS 10 Consolidated Financial Statements and - IFRS 11 Joint agreements Five-step model for revenue recognition: IFRS 15 replaces existing income recognition guidelines, including IAS 18, IAS 11, "Construction Contracts", and IFRIC 13, "Loyalty programs with clients". Unlike these standards where income was recognized at the time the Company transferred the significant risks and benefits of the goods or services; the new standard establishes a fivestep model to determine the time and amount which the income must be recognized based on the transfer of control of the goods or services in exchange for a consideration. As established by IFRS 15, income must be recognized over time (in the manner that best reflects the performance of the Company) or at a point in time, when control of the goods or services is transferred to the customer.

21 9 Contract costs: Unlike the previous revenue standard, IFRS 15 provides guidance on the capitalization of costs for obtaining and fulfilling contracts with customers; however, the new standard includes a practical file that indicates that an entity will not capitalize the incremental costs for obtaining a contract if the asset's amortization period is one year or less. The costs for the fulfillment of the contracts are not eligible for the purposes of the practical file cited above. Impacts on the consolidated financial statements: Note 5 shows the impacts in the consolidated financial statements derived from the early adoption of IFRS 15 for the year ended December 31, 2017 and its corresponding effect as of January 1, Basis of consolidation The consolidated financial statements include the financial statements of the Company and those of entities controlled by the Company and its subsidiaries. Balances and transactions between group entities, as well as unrealized income and expenses, have been eliminated in the preparation of the consolidated financial statements. Unrealized profits derived from transactions between entities of the group in which investments are accounted for under the equity method are eliminated against the investment to the extent of the Company's interest in the subsidiary. Unrealized losses are eliminated in the same way as unrealized profits, but only to the extent that there is no evidence of impairment. a. Subsidiaries The subsidiary companies are all the entities controlled by the Company. The financial statements of subsidiary companies are included in the consolidated financial statements of the Company as of the date control begins and through the date such control ends. Control is obtained when the Company has power over the investment; is exposed, or entitled to, variable returns derived from its interest in said entity, and has the capacity to affect such returns through the power over the entity in which it invests.

22 10 When the Company has less than the majority of the voting rights of an investee, it has power over it when the voting rights are sufficient to give it the practical ability to conduct its relevant activities unilaterally. The Company considers all relevant facts and circumstances to assess whether its voting rights in the investee are sufficient to give it power, including: i. Rights derived from other contractual agreements. ii. Any additional fact and circumstance indicating that the Company has, or does not have, the current ability to direct the relevant activities at the time the decisions are to be made, including the tendencies of shareholders voting at previous. iii. The percentage of the Company s interest in the voting rights in relation to the percentage and the dispersion of the voting rights of the other holders thereof, and; iv. Potential voting rights held by the Company, other shareholders or third parties. When the Company s interest in the subsidiaries is less than 100%, the interest attributed to external shareholders is reflected as non-controlling interest. The income and each component of other comprehensive income is attributable to controlling and non-controlling interests. The comprehensive income of the subsidiaries is attributed to the controlling and non-controlling interests even if it gives rise to a deficit in the latter. b. Non-controlling interests Non-controlling interests are measured at the proportionate share of the net identifiable assets at the acquisition date.

23 11 As of December 31 of 2017 and 2016, the shareholding ownership percentages are as follows: Retail sales % of ownership Famsa México, S.A. de C.V % 99.99% Impulsora Promobien, S. A. de C. V % 99.04% Famsa, Inc. and subsidiaries, (Famsa USA) % % Administrative services Corporación de Servicios Ejecutivos Famsa, S. A. de C.V % 99.99% Corporación de Servicios Ejecutivos, S. A. de C. V % 99.99% Promotora Sultana, S. A. de C. V % 99.99% Suministro Especial de Personal, S. A. de C. V % 99.99% Garval Servicios de Asesoría Empresarial, S. A. de C. V % 99.99% Manufacturing and other Auto Gran Crédito Famsa, S.A. de C.V % 99.99% Expormuebles, S. A. de C. V % 99.96% Mayoramsa, S. A. de C. V % 99.88% Verochi, S. A. de C. V % 99.99% Geografía Patrimonial, S. A. de C. V % 99.99% Corporación de Servicios para la Administración de Valores, S. A. de C. V % 99.80% Financial sector Banco Ahorro Famsa, S. A., Institución de Banca Múltiple (BAF) and Subsidiary 99.99% 99.99% 3.3 Segment Information Operating segments are defined as the components of a company, engaged in the production and sale of goods and services, which are subject to risks and benefits that are different from those associated with other business segments. With respect to the years presented, December 31, 2017 and 2016, the Company has operated on the basis of business segments. These segments have been determined considering the geographical areas. See Note 28.

24 12 Segment information is presented in a manner consistent with the internal reports provided to the operational decision maker. Responsible for allocating resources and evaluating the performance of operating segments, it is the CEO who makes strategic decisions. Inter-segment transactions are determined on the basis of prices comparable to those that would be used with or between independent parties in transactions comparable to market value. 3.4 Foreign currency a. Transactions in foreign currency Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or of valuation when the amounts are revalued. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of comprehensive income. b. Financial statements translation of subsidiaries in foreign currency The results and financial position of Famsa, Inc., which operates in the USA, are translated into the presentation currency as follows: - Assets and liabilities are translated at the closing rate at the date of the statement of financial position; - income and expenses recognized in the statement of comprehensive income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rates on the dates of the transaction) and; - Stockholders equity balances recognized in the statement of financial position are translated at historical exchange rates. - Exchange differences arising in the translation were recognized as an item of the comprehensive income (loss) in Stockholders equity.

25 Cash and cash equivalents Cash and cash equivalents include cash balances, bank deposits and other highly liquid investments with original maturities of less than three months with minor risk of changes in value. 3.6 Restricted cash Restricted cash represents limited cash in BAF and it comprises: a) deposits required by monetary regulations with Banxico, which earn a bank funding rate, b) inter-bank short-term loans whose term does not exceed three working days, and c) purchased foreign currency, whose settlement date is agreed subsequently to the transaction date. 3.7 Financial instruments i. Recognition and initial measurement The Company classifies its financial assets as loans (including loan portfolios), accounts receivable, other accounts receivable, collection rights to related parties, cash and cash equivalents and restricted cash, in the consolidated statement of financial position. Management determines the classification of its financial assets at the date of initial recognition. Loans and receivables 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 end of the reporting period. These are classified as non-current assets. Accounts receivable represent amounts owed by customers and they arise from sales of goods or services rendered in the regular course of Grupo Famsa operations. Acquisition costs are initially recorded at fair value together with origination costs, and subsequently at amortized cost. Costs and expenses associated with the initial granting of the loan are recorded as a deferred charge, which is amortized against income for the period as interest expense over the same accounting period in which the respective commission income collected is recorded.

26 14 ii. Classification and subsequent measurement Financial assets policy applicable as of January 1, 2017 In the initial recognition, a financial asset is measured at amortized cost, at fair value with changes in other comprehensive income ("FVOCI"); or at fair value through profit or loss ("FVTPL"). Financial assets are not reclassified after their initial recognition unless the Company changes the business model to manage financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period after the change in the financial assets business model. A financial asset is measured at amortized cost if it meets the following two conditions and is not designated as FVTPL: It is administered within a business model whose objective is to maintain assets to recover the contractual cash flows; and Contractual terms are only principal payments and interest on the outstanding principal amount. A financial asset is measured in FVOCI if it meets the following two conditions and is not designated as FVTPL: It is administered within a business model whose objective is achieved through the collection of contractual cash flows such as the sale of financial assets; and Contractual terms are only principal payments and interest on the outstanding principal amount. In the initial recognition of a capital instrument that is not held for trading, under the "other" business model, the Company may irrevocably choose to present changes in the fair value of the investment in other comprehensive income. This choice is made at the level of each investment. All financial assets that are not measured at amortized cost or FVOCI as described above, are measured at FVTPL. This measurement category includes all derivative financial instruments. Upon initial recognition, the Company may irrevocably designate a financial asset that meets the requirements to be measured at amortized cost or to FVOCI to be measured at FVTPL.

27 15 Financial assets: evaluation of the business model - policy applicable as of January 1, 2017 The Company evaluates the objective of the business model in which a financial asset is maintained at the portfolio level since this reflects the best way in which the business is managed and information is provided to the Company's Management. The information that is considered to evaluate the business model of a financial asset includes: The policies and objectives established for the portfolio and the operation of those policies in practice. They include whether the management strategy focuses on obtaining income from contractual interests, maintaining a particular interest rate profile, equalizing the duration of financial assets with the duration of any related liability or expected cash outflows or making cash flows through the sale of assets; How the performance of the portfolio is evaluated and reported to the Company's Management; The risks that affect the performance of the business model (and the financial assets that remain within that business model) and how those risks are managed; How to compensate those responsible for the portfolios of financial assets, for example; whether the compensation is based on the fair value of the assets under management or the contractual cash flows collected; and The frequency, volume and timing of sales of financial assets in prior periods, the reasons for such sales and expectations about future sales activity. Financial assets that are held for trading or that are managed and their performance is evaluated at fair value are measured at FVTPL.

28 16 Financial assets: evaluation of the characteristics of the contractual cash flows are only principal and interest payments - policy applicable as of January 1, 2017 For purposes of this evaluation, "principal" is defined as the fair value of the financial asset on initial recognition. "Interest" is defined as the consideration for the value of money over time and for the credit risk associated with the principal amount outstanding during a particular period and for other risks and basic costs of loans (for example, liquidity risk and administrative costs), as well as a profit margin. When evaluating whether the contractual cash flows are only principal and interest payments, the Company considers the contractual terms of the instrument. This includes evaluating whether the financial asset contains any contractual term that could change the timing or amount of the contractual cash flows so that it does not meet this condition. In making this assessment, the Company considers the following: Contingent events that would change the amount or timing of cash flows; Terms that can adjust the contractual coupon rate, including variable rate features; Payment and extension features; and Convertibility features. A prepaid feature is consistent with the characteristics of only principal payments and the prepayment amount represents the amounts of the principal and interest pending payment, which may include reasonable additional compensation for early termination of the contract. Financial assets: subsequent measurement - policy applicable as of January 1, 2017 Financial assets at amortized cost: These assets are subsequently measured at amortized cost using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, exchange gains or losses and impairment are recognized in income. Any gain or loss upon derecognition of assets is recognized in profit or loss.

29 17 Financial assets to FVTPL: These assets are subsequently measured at fair value. Net gains and losses, including interest or dividend income, are recognized in profit or loss. Investments in debt instruments to FVOCI: These assets are subsequently measured at fair value. Interest income, calculated using the effective interest method, exchange gains and losses and impairment are recognized in income. Other net gains and losses are recognized in OCI. At the time of derecognition of assets, the gains and losses accumulated in OCI are reclassified to the statement of income. Investments in equity instruments to FVOCI: These assets are subsequently measured at fair value. Dividends are recognized as income in results unless the dividend clearly represents a recovery of the cost of the investment. Other net gains and losses are recognized in OCI and are never reclassified to statement of income. Financial assets - policy applicable before January 1, 2017 The Company classified its financial assets into one of the following categories: Loans and accounts receivable; Maintained until expiration; Available for sale; and A FVTPL, and within this category as: - Maintained to negotiate; - Derivative financial instruments; and/or - Designated as FVTPL. Financial assets: subsequent measurement - policy applicable before January 1, 2017 Financial assets in FVTPL: Measured at fair value as well as their changes, including any income from interest or dividends, were recognized in profit or loss. Financial assets held to maturity: Measured at amortized cost using the effective interest method. Loans and accounts receivable: Measured at amortized cost using the effective interest method.

30 18 Available-for-sale financial assets: Measured at fair value, with the exception of impairment losses, interest income and foreign currency differences in debt instruments that are recognized in OCI and are accumulated in the fair value reserve. When these assets are written off, the gain or loss accumulated in the OCI is reclassified to the statement of income. Financial liabilities: classification, subsequent measurement (no changes) Financial liabilities are measured at amortized cost or FVTPL. A financial liability is classified as FVTPL if it is held for trading, it is a derivative financial instrument or it is designated as such in the initial recognition. Financial liabilities to FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognized in the statement of income. Other financial liabilities are subsequently measured at amortized cost using the effective interest method. Interest expenses and exchange gains and losses are recognized in results. Any gain or loss at the time of derecognition of financial liabilities is also recognized in profit or loss. iii. Derecognition of financial assets and liabilities Financial assets The Company derecognizes a financial asset when the contractual rights of the cash flows of the financial asset expire, or transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the asset the financial assets are transferred or in which the Company does not transfer or substantially retain the risks and benefits of ownership or control of the financial asset. Financial liabilities The Company derecognizes a financial liability when its contractual obligations are canceled or expire. The Company also derecognizes a financial liability when its terms are modified and the cash flows of the modified liability are substantially different, in which case, a new financial liability based on the modified terms is recognized at fair value. When deregistering a financial liability, the difference between the carrying amount and the consideration paid is recognized in profit or loss.

31 19 iv. Derivative financial instruments and hedge accounting Derivative financial instruments and hedge accounting - policy applicable as of January 1, 2017 The Company has derivative financial instruments to cover its exposures in foreign currency, with respect to the payment of interest in dollars. Embedded derivatives are separated from the main contract and are accounted for separately if the main contract is not a financial asset and certain criteria are met. Derivatives are initially measured at fair value. Subsequently, derivatives continue to be measured at fair value, and changes therein are recognized in profit or loss or other comprehensive income, depending on their coverage objective. The Company designates derivative financial instruments as hedging instruments to hedge the variability in cash flows associated with highly probable forecasted transactions that arise from variations in exchange rates. At the beginning of the hedging relationships, the Company documents the objective and risk management strategy for the hedge accounting. The Company also documents the economic relationship between the hedged item and the hedging instrument, including whether changes in the cash flows of the hedged instrument are expected to be effective. Cash flow hedges When a derivative is designated as a cash flow hedging instrument, the effective portion of the changes in the fair value of the derivative is recognized in OCI and accumulated in the hedge reserve. The effective portion of the changes in the fair value of the derivative that is recognized in OCI is limited to the cumulative change in the fair value of the hedging element, determined on the basis of the present value, from the beginning of the hedge. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in the result of the period. When the forecasted covered transaction subsequently results in the recognition of non-financial items such as inventory, the accumulated amount in the hedge reserve and the cost of the hedge reserve is included directly in the initial cost of the non-financial items when it is recognized.

32 20 For all other forecasted covered transactions, the accumulated amount in the hedge reserve and the cost of the hedge reserve is reclassified to results in the same period or periods in which the expected future cash flows hedged affect the result. If a hedge does not meet the requirements to be designated as hedge accounting or if the hedging instrument is sold, matured, terminated or exercised, the hedging relationship is suspended prospectively. When accounting for cash flow hedges is discontinued, the accumulated amount in the hedge reserve and the cost of the hedge reserve remains in capital until it is included in the cost of the non-financial items on initial recognition (if the coverage is a transaction that results in the recognition of non-financial items) or is reclassified to results in the same period or periods in which the expected future cash flows covered affect the result (for cash flow hedges). If the future hedged cash flows are no longer expected to occur, the amounts that have accumulated in the hedge reserve and the cost of the hedge reserve are immediately reclassified to the statement of income Offsetting of financial instruments Financial assets and liabilities are offset and the net amount is shown in the statement of financial position, when the right to offset the amounts recognized is legally enforceable and there are plans in place to settle them on a net basis or to realize the asset and pay the liability simultaneously Accounts payable Trade payables are obligations to pay for goods or services that have been acquired or received in the ordinary course of business from suppliers Impairment of financial assets The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and if that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

33 21 The objective evidence that financial assets are impaired includes default or default by a debtor, restructuring of an amount owed to the Company in terms that the Company would not consider under other circumstances, indications that a debtor or issuer will declare bankruptcy, adverse changes in the payment status of the credit granted by the Company, economic conditions that relate to non-compliance or the disappearance of an active market for an instrument. The Company considers evidence of impairment of financial assets measured at amortized cost at a specific level. The credit portfolio acquired is evaluated for specific impairment. The portfolio that is not specifically deteriorated is evaluated for collective impairment that has been incurred but not yet identified. In evaluating the collective impairment for loans and credits, the Company uses the historical trends of default probabilities, the timing of recoveries and the amount of the loss incurred, adjusted by management's judgments related to current economic and credit conditions that make it probable for actual losses to be higher or lower than those suggested by historical trends. For loans and receivables, if impairment exists, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the consolidated statement of income in the cost of sales as it is a practice in the industry. If in subsequent periods the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the reversal of the previously recognized impairment loss is recognized in the consolidated statement of income as a cost of sales reduction. 3.8 Coverage activities To protect itself from the risks derived from fluctuations in exchange rates for dollar interest payments, the Company selectively uses derivative financial instruments (forward contracts). When these derivatives are formally contracted for the purpose of covering risks and meet the requirements to be designated as hedging instruments in one or more hedging relationships, their formal designation is documented for this purpose.