SAUDI HOME LOANS COMPANY (SHL) (A SAUDI CLOSED JOINT STOCK COMPANY) FINANCIAL STATEMENTS AND AUDITORS' REPORT FOR THE YEAR ENDED DECEMBER 31, 2014

Transcription

1 FINANCIAL STATEMENTS AND AUDITORS' REPORT FOR THE YEAR ENDED DECEMBER 31,

2 FINANCIAL STATEMENTS AND AUDITORS' REPORT FOR THE YEAR ENDED DECEMBER 31, INDEX PAGES Auditors report 1 Balance sheet 2 Statement of income 3 Statement of cash flows 4 Statement of changes in shareholders equity 5 Notes to the financial statements 6 21

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4 BALANCE SHEET AS AT DECEMBER 31, The accompanying notes form an integral part of these financial statements -2- Notes ASSETS Current assets Cash and bank balances 3 2,827,136 67,297,336 Long term investments current portion, net 4 184,215, ,011,916 Accrued finance lease income receivable 20,889,586 22,780,793 Prepaid expenses and other assets 5 10,200,513 7,617,126 Deferred origination fees current portion 6 2,944,879 2,351,798 Properties available for sale 272, ,385 Advances to property owners 7 39,144,200 54,387,506 Due from related parties 8 1,427, ,436 Total current assets 261,921, ,468,296 Non-current assets Long term investments, net 4 3,369,965,282 3,181,147,282 Deferred origination fees 6 32,641,305 27,093,426 Property and equipment, net 9 8,973,620 6,879,613 Total non-current assets 3,411,580,207 3,215,120,321 TOTAL ASSETS 3,673,501,576 3,552,588,617 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Tawaruq financing facilities current portion 8, ,783, ,880,400 Accounts payable 2,071,326 4,109,503 Advance from customers 11,965,743 37,807,558 Due to related parties 8-244,717 Accrued expenses and other liabilities 11 31,854,091 15,196,043 Provision for zakat and income tax 12 9,599,222 7,285,897 Total current liabilities 210,274, ,524,118 Non-current liabilities Tawaruq financing facilities 8, 10 2,323,794,514 2,334,848,148 Provision for end-of-service indemnities 13 3,044,318 2,175,266 Total non-current liabilities 2,326,838,832 2,337,023,414 TOTAL LIABILITIES 2,537,112,913 2,521,547,532 Shareholders' equity Share capital 1 800,000, ,000,000 Statutory reserve 14 36,016,581 24,771,371 General reserve 14 28,522,075 17,276,865 Retained earnings 271,850, ,992,849 Total shareholders equity 1,136,388,663 1,031,041,085 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 3,673,501,576 3,552,588,617

5 STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, Income Notes Lease finance income 231,792, ,952,460 Service fees, net 8, 10 9,444,754 - Less: Tawaruq financing charges 8, 10 (75,575,658) (62,194,112) Net lease finance income 165,661, ,758,348 Add: Application and evaluation fee income 5,923,800 8,389,000 Total operating income 171,584, ,147,348 General and administrative expenses 15 (37,168,329) (33,125,662) Selling and marketing expenses 16 (21,981,828) (19,915,071) Net operating income 112,434,779 95,106,617 Other income 17,316 43,999 NET INCOME 112,452,095 95,150,616 Earnings per share: 17 Net operating income Net income The accompanying notes form an integral part of these financial statements -3-

6 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, OPERATING ACTIVITIES Net income for the year 112,452,095 95,150,616 Adjustments for: Depreciation 1,324,873 1,836,941 Gain on disposal of property and equipment (17,316) (43,999) End-of-service indemnities 994, ,403 Provision for lease losses 2,085, ,282 Changes in operating assets and liabilities: Long term investments (193,107,339) (1,089,672,762) Accrued finance lease income receivable 1,891,207 (8,173,160) Prepaid expenses and other assets (5,074,626) (2,595,703) Deferred origination fees (6,140,960) (10,044,368) Properties available for sale - 1,604,739 Advances to property owners 15,243,306 (37,092,875) Due from/ to related parties, net (922,639) 4,621,591 Accounts payable (2,038,177) 2,844,580 Advance payments received from customers (25,841,815) 24,239,854 Accrued expenses and other liabilities 16,658,048 (3,857,183) Cash used in operations (82,493,016) (1,019,552,044) Zakat and income tax paid (2,299,953) (1,756,359) End-of-service indemnities paid (125,332) (126,315) Net cash used in operating activities (84,918,301) (1,021,434,718) INVESTING ACTIVITIES Purchase of property and equipment (3,418,880) (4,380,296) Proceeds from disposal of property and equipment 17,316 43,999 Net cash used in investing activities (3,401,564) (4,336,297) FINANCING ACTIVITIES Proceeds from Tawaruq financing facilities 884,263,122 1,139,193,424 Repayment of Tawaruq financing facilities (860,413,457) (65,146,275) Net cash from financing activities 23,849,665 1,074,047,149 Net change in cash and bank balances (64,470,200) 48,276,134 Cash and cash bank balances, January 1 67,297,336 19,021,202 CASH AND BANK BALANCES, DECEMBER 31 2,827,136 67,297,336 The accompanying notes form an integral part of these financial statements -4-

7 STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEAR ENDED DECEMBER 31, Notes Share capital Statutory reserve General reserve Retained earnings Balance as at January 1, 800,000,000 15,256,309 7,761, ,826, ,845,039 Net income for the year ,150,616 95,150,616 Transfer to reserves 14-9,515,062 9,515,062 (19,030,124) - Zakat and income tax (5,954,570) (5,954,570) Balances as at December 31, 800,000,000 24,771,371 17,276, ,992,849 1,031,041,085 Net income for the year ,452, ,452,095 Transfer to reserves 14-11,245,210 11,245,210 (22,490,420) - Zakat and income tax (7,104,517) (7,104,517) Balances as at December 31, 800,000,000 36,016,581 28,522, ,850,007 1,136,388,663 Total The accompanying notes form an integral part of these financial statements -5-

8 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1. ORGANIZATION AND ACTIVITIES Saudi Home Loans Company (SHL) (the "Company") is a Saudi closed joint stock company registered in Riyadh, Kingdom of Saudi Arabia under commercial registration No dated Dul Al Hejja 22, 1428H (corresponding to January 1, 2008). The Company also operates under Saudi Arabian General Investment Authority (SAGIA) license no: dated 23 Rajab 1430H (corresponding to July 16, 2009). The authorized and fully subscribed share capital of the Company amounting to 2 billion is divided into 200 million shares of 10 each. The Company's shareholders and their respective holdings in the called and paid up share capital of the Company as at December 31, and were as follows: Name No. of shares Share capital Arab National Bank 32,000, ,000,000 Dar Al Arkan Real Estate Development Company 12,000, ,000,000 Kingdom Installment Company 7,200,000 72,000,000 Youssef bin Abdullah Al Shalash 6,400,000 64,000,000 Tareq Mohammad Al Jarallah 4,800,000 48,000,000 Hathlool Bin Saleh Al Hathlool 4,800,000 48,000,000 International Finance Corporation 4,000,000 40,000,000 Abdulatif Bin Abdullah Al Shalash 4,000,000 40,000,000 Inma Almadaen Company 3,200,000 32,000,000 Daem Al Khaleej Company 1,600,000 16,000,000 80,000, ,000,000 The principal activities of the Company is to finance the purchase of houses and residential land and apartments in the Kingdom of Saudi Arabia, financing of real estates that are developed by all companies operating in the real estate development and financing the establishment of commercial and industrial projects. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements have been prepared in accordance with the accounting standards generally accepted in the Kingdom of Saudi Arabia issued by the Saudi Organization for Certified Public Accountants. The following is a summary of significant accounting policies applied by the Company: Accounting convention The financial statements are prepared under the historical cost convention using the accrual basis of accounting and the going concern assumption. -6-

9 FOR THE YEAR ENDED DECEMBER 31, 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Use of estimates The preparation of financial statements in conformity with generally accepted accounting standards requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Although these estimates are based on management's best knowledge of current events and actions, actual results ultimately may differ from those estimates. Long term investments Long term investments represent notes receivable from customers on finance lease. Leases are classified as finance lease whenever the terms of the lease transfer substantially all of the risks and rewards of ownership to the lessee. Provision for lease losses The Company reviews its problem lease contract receivables on a monthly basis to assess whether specific provisions for impairment should be recorded in the statement of income. In particular, considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions. Properties available for sale Represents properties acquired in satisfaction of debts and management s intention is to sell these properties in the near future. Properties available for sale are stated at the lower of cost or net realizable value. Revenue recognition Finance leases income is calculated using the effective yield method which recognizes income based on the accrual method. Unearned finance income represents unearned income on leases and is deducted from the balance of notes receivable resulting from leases, which represents the remaining leases balance. Lease finance income is recognized over the term of the lease using the effective yield method. On certain leases, the Company charges a non-refundable front-end fee which is recognized as income when received. Service fees are accrued on a time proportionate basis, as the services are rendered and are recorded net of related expenses. -7-

10 FOR THE YEAR ENDED DECEMBER 31, 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Property and equipment Property and equipment are stated at cost less accumulated depreciation. Expenditure on maintenance and repairs is expensed, while expenditure for betterment is capitalized. Depreciation is provided over the estimated useful lives of the applicable assets using the straight line method. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining term of the lease. The estimated useful lives of the principal classes of assets are as follows: Years Leasehold improvements 10 Vehicles 4 Furniture, fixtures and office equipment 4-10 Computers and software 3-5 Deferred origination fees Deferred origination fees comprises of the unamortized portion of commission paid to a shareholder for deals originated through their channel. This fee is amortized using the straight-line method over the period of the respective lease contracts. End-of-service indemnities End-of-service indemnities, required by Saudi Arabian Labor Law, are provided in the financial statements based on the employees' length of service. Zakat and income tax The Company is subject to the Regulations of the Directorate of Zakat and Income Tax ( DZIT ) in the Kingdom of Saudi Arabia. Zakat is charged on Saudi shareholder's equity account while income tax is charged on foreign shareholders' equity account. Zakat and income tax are provided on an accruals basis. The zakat charge is computed on the zakat base. Income tax is computed on adjusted net income. Any difference in the estimate is recorded when the final assessment is approved, at which time the provision is cleared. Impairment of long lived assets Assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss, if any, is recognized for the amount by which carrying amount of the asset exceeds its recoverable amount which is the higher of an asset s net selling price and value in use. For purpose of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. Provisions for obligations A provision is made when the Company has a legal or constructive obligation as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. -8-

11 FOR THE YEAR ENDED DECEMBER 31, 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impairment and uncollectibility of financial assets An assessment is made at each balance sheet date to determine whether there is objective evidence that a specific financial asset or a group of financial assets may be impaired. If such evidence exists, an impairment loss is recognized in the statement of income. For assets carried at cost, impairment is determined as the difference between cost and the present value of future cash flows discounted at the current market rate of return for similar financial assets. Foreign currencies translation Foreign currency transactions are translated into Saudi Riyals at the rates of exchange prevailing at the time of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rates prevailing at that date. Gains and losses from settlement and translation of foreign currency transactions are included in the statement of income. 3. CASH AND BANK BALANCES Cash on hand 23,500 23,500 Bank current accounts 2,803,636 67,273, LONG TERM INVESTMENTS, NET Net investment in finance leases at December 31 are summarized as follows: 2,827,136 67,297,336 Minimum lease payments: Performing leases 5,648,087,094 5,340,177,654 Non-performing leases 54,424,727 18,137,292 Long term investments Gross 5,702,511,821 5,358,314,946 Unearned finance income (2,144,484,488) (1,993,394,952) Long term investments before provision 3,558,027,333 3,364,919,994 Less: Provision for lease losses (3,846,739) (1,760,796) Long term investments 3,554,180,594 3,363,159,198 Less: Current portion (184,215,312) (182,011,916) Non-current portion 3,369,965,282 3,181,147,282-9-

12 FOR THE YEAR ENDED DECEMBER 31, 4. LONG TERM INVESTMENTS, NET (Continued) The Company generates substantially all of its revenues from leasing real estate in the Kingdom of Saudi Arabia. Gross amounts due in relation to the finance leases are due from individual customers. Title deeds of the underlying properties are in the name of the Company, except for those where the ownership has been transferred to Arab National Bank (a shareholder) in accordance with the terms of the facilities agreements for Tawaruq Financing facilities (Refer to Note 10), and for those where the ownership has been kept under the name of Kingdom Installment Company (a shareholder) as a custodian in accordance with the custodian agreement. The maturities of minimum lease payments, unearned finance income, and long term investments before provision as at December 31 are as follows: Year Minimum lease payments Unearned finance income Long term investments Long term investments Within one year 415,705,744 (227,643,694) 188,062, ,011,916 Year two 410,712,706 (214,486,910) 196,225, ,434,511 Year three 405,318,808 (200,814,151) 204,504, ,389,823 Year four 398,999,413 (186,626,978) 212,372, ,394,407 Year five and later 4,071,775,150 (1,314,912,755) 2,756,862,395 2,585,689,337 5,702,511,821 (2,144,484,488) 3,558,027,333 3,364,919,994 Allocations of amounts due under finance leases, net of unearned finance income and provision for lease losses are as follows: Performing leases, net Nonperforming leases, net Provision for lease losses Long term investments As at December 31, : 3,525,015,052 33,012,281 (3,846,739) 3,554,180,594 As at December 31, : 3,353,285,946 11,634,048 (1,760,796) 3,363,159,198 The movement in the provision for lease losses is as follows: Balance, January 1 1,760, ,514 Charge for the year (Note 15) 2,085, ,282 Balance, December 31 3,846,739 1,760,

13 FOR THE YEAR ENDED DECEMBER 31, 5. PREPAID EXPENSES AND OTHER ASSETS Insurance claims 5,144,927 3,946,860 Advance tax 3,059,929 2,491,239 Legal claim 1,018,356 1,018,356 Prepaid rent 586, ,468 Prepaid software maintenance 378, ,232 Employees advances and receivables 341, ,910 Others 822, ,803 11,352,255 8,768,868 Less: Provision for doubtful debts (1,151,742) (1,151,742) 6. DEFERRED ORIGINATION FEES 10,200,513 7,617,126 Deferred origination fees 35,586,184 29,445,224 Less: Current portion (2,944,879) (2,351,798) Non-current portion 32,641,305 27,093,426 Deferred origination fees comprises of the unamortized portion of commission paid to Arab National Bank, a shareholder for deals originated through their channel. This fee is amortized using the straight-line method over the period of the respective lease contracts. 7. ADVANCES TO PROPERTY OWNERS This balance represents the amounts of certified cheques issued under the property owners name, for the purchase of properties for SHL's Ijara Contracts (approved deals) and for which the transfer of title deeds, in the name of SHL, is in process. 8. RELATED PARTY TRANSACTIONS During the year, the Company transacted with the following related parties. The terms of those billings and charges are similar to the terms of ordinary trade receivables and payables: Name Arab National Bank Kingdom Installment Company for Trading Dar Al Arkan Real Estate Development Company Emar Albyader for Development and Trading Company Madarat Development and Technology Company Afwaf Investment Company Relationship Shareholder Shareholder Shareholder Affiliate Affiliate Affiliate -11-

14 FOR THE YEAR ENDED DECEMBER 31, 8. RELATED PARTY TRANSACTIONS (Continued) The significant transactions during the year and the related amounts are as follows: Loan obtained from a shareholder (Note 10) 2,478,578,213 2,454,728,548 Tawaruq financing charges (Note 10) 75,575,658 62,194,112 Service fees, net (Note 10) 9,444,754 - Deferred origination fees (Note 6) 9,139,315 12,400,782 Rent charged by an affiliate (Note 21) 1,578,605 2,142,392 Due from related parties as at December 31, is comprised of the following: Arab National Bank 1,427,358 50,000 Kingdom Installment Company for Trading - 699,436 Due to related parties as at December 31, are comprised of the following: 1,427, ,436 Afwaf Investment Company - 166,338 Dar Al Arkan Real Estate Development Company - 49,876 Eamar Albyader for Development and Trading Company - 27,053 Madarat Development and Technology Company - 1, PROPERTY AND EQUIPMENT, NET Cost Leasehold improvements Vehicles Furniture, fixture and office equipment Computers and software - 244,717 Work-inprogress Total January 1, 4,134, ,051 5,437,581 11,419,056 1,943,690 23,430,401 Additions 15,000 49,800 44, ,074 2,744,299 3,418,880 Transfers ,000 (50,000) - Disposals - (48,050) (48,050) December 31, 4,149, ,801 5,482,288 12,034,130 4,637,989 26,801,231 Accumulated depreciation January 1, 1,612, ,794 3,948,318 10,727,654-16,550,788 Charge for the year 422,225 92, , ,354-1,324,873 Disposals - (48,050) (48,050) December 31, 2,034, ,125 4,322,231 11,164,008-17,827,611 Net book value December 31, 2,114, ,676 1,160, ,122 4,637,989 8,973,620 December 31, 2,522, ,257 1,489, ,402 1,943,690 6,879,

15 FOR THE YEAR ENDED DECEMBER 31, 10. TAWARUQ FINANCING FACILITIES Tawaruq financing facilities 2,478,578,213 2,454,728,548 Less: Current portion (154,783,699) (119,880,400) Non-current portion 2,323,794,514 2,334,848,148 This item represents the Tawaruq financing facilities from Arab National Bank (a shareholder) to finance the long term investments. These facilities are secured by promissory notes, transfer of certain property title deeds ownership and assignment of contracts and proceeds from long term investments in favor of the bank. These facilities bearing finance charges at SIBOR plus annual profit margin ranging from 2% to 2.5%. Twenty percent of these facilities will be repaid in eight to ten equal semi-annual installments starting from 2015 with the last installment due at facility maturity date as shown below: Maturity date Facility amount Outstanding balance Current portion Non-current portion January ,000,000 98,077,563 1,002,956 97,074,607 July ,000,000 50,228,785 50,228,785 - March ,000, ,214,082 2,969, ,244,179 December ,000, ,261,941 9,795, ,466,510 September ,000, ,758,763 20,017, ,741,375 December ,000, ,698,813 29,276, ,422,413 December ,000, ,424,108 9,872, ,551,738 April ,000, ,642,396 25,000, ,642,396 April ,000, ,647,269 6,620, ,026,803 January ,000, ,624, ,624,493 3,897,000,000 2,478,578, ,783,699 2,323,794,514 Tawaruq financing facilities are scheduled for repayment as follows: Year - 119,880, ,228, ,880, ,476, ,880, ,011,535,139 1,200,106, ,424,108 24,980, ,289, ,624,493-2,478,578,213 2,454,728,

16 FOR THE YEAR ENDED DECEMBER 31, 10. TAWARUQ FINANCING FACILITIES (Continued) In their meetings held on March 27,, and July 7, respectively, the Board of Directors in accordance with the provisions of Article 24 of the Company s Bylaws resolved for the Company to enter into an Asset Sale Agreement with Arab National Bank to sell long term investments with a carrying value of million represented by 1,404 deals in settlement of facilities equal to the carrying value of these long term investments. This comprised of three transactions executed on March 27,, May 22,, and July 20, respectively. In accordance with the terms of the agreements entered into, an equivalent amount of facilities were granted to the Company out of which 634 million was utilized and outstanding as at December 31,. Consequently, the contractual rights and obligations of the Company relating to the sold investments have been transferred to Arab National Bank from the date of entering into the respective agreements and the related investments were derecognized on the date the respective agreements were entered into. As at December 31,, title deeds of certain properties are in the process of being transferred to the bank and are still in the name of the Company. As part of the Asset Sale Agreement and the Board of Directors resolutions, Arab National Bank has signed a Service Agreement with the Company and has appointed them to render administrative services in relation to the sold investments. Service fees charged during the year amounted to 10.7 million with related expenses amounting to 1.3 million, which is considered to be at market value for the amount of services provided. 11. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued Tawaruq financing charges 19,771,656 3,095,939 Employees' related expenses 5,516,210 4,607,653 Maintenance commitments on finance lease contracts (a) 5,200,663 5,433,163 Accrued brokerage fees 640,648 1,201,501 Accrued legal and consultation fees 210, ,000 Accrued withholding tax 63,421 - Others 451, ,787 31,854,091 15,196,043 (a) Maintenance commitments on finance lease contracts represent a provision for maintenance claims of houses and apartments financed through finance lease contracts for deals financed up to January

17 FOR THE YEAR ENDED DECEMBER 31, 12. PROVISION FOR ZAKAT AND INCOME TAX The significant components of the zakat base of the Company for the year ended December 31 which are subject to certain adjustments under zakat and income tax regulations are principally comprised of the following: Share capital 800,000, ,000,000 Adjusted income for the year 115,296,280 96,829,308 Provisions 10,163,137 8,891,282 Tawaruq financing facility 2,478,578,213 2,454,728,548 Statutory reserve 42,048,235 23,018,112 Long term investments (3,554,180,594) (3,364,919,994) Property and equipment, net (17,275,518) (15,627,814) Retained earnings 188,992, ,826,927 Other additions to Zakat base 2,494,705 1,381,203 Other deductions from Zakat base (74,730,384) (85,209,643) (8,613,077) 37,917,929 Zakat base for Saudi shareholders at 79% - 29,955,164 Zakat provision at 2.5% on the adjusted net income for the year 2,277,102 1,912,379 As the zakat base is less than the adjusted net income, zakat is calculated based on the adjusted net income. Income tax Portion of adjusted net income for non-saudi shareholders 24,212,219 20,334,155 Non-Saudi share of utilized provisions previously added back to the taxable income (75,144) (123,202) 24,137,075 20,210,953 Income tax for the year 4,827,415 4,042,191 The movement of the provision for zakat and income tax is as follows: Balance, beginning of the year 7,285,897 4,903,052 Provision for the year 7,104,517 5,954,570 Income tax adjustment (2,491,239) (1,815,366) Payment during the year (2,299,953) (1,756,359) Balance, end of the year 9,599,222 7,285,

18 FOR THE YEAR ENDED DECEMBER 31, 12. PROVISION FOR ZAKAT AND INCOME TAX (Continued) The Company has filed its zakat and income tax returns for the years from 2008 up to. During the Company received the final assessments in respect of the years from 2008 to 2011 requesting an additional zakat liability amounting to 45,638,701. However, the Company has filed an appeal against this assessment with the Preliminary Zakat and Tax Objection Committee (PZTOC). Such liability is primarily due to disallowing the deduction of the investments in finance leases from the Zakat base of the Company. The appeal with PZTOC was rejected and subsequently in 2015, the Company has filed another appeal to the Higher Appeals Committee of DZIT. An unfunded bank guarantee amounting to 45,638,701 was also provided to DZIT as per the routine requirements for appeals to the Higher Appeals Committee in relation to the additional zakat assessments for those years. The Company has also paid a sum of 171,575 for the tax differences in Based on the assessment of the Company and its independent Zakat and income tax advisor, the management of the Company does not see the need to record any additional provision. The Company s shareholders believe that adequate provision for Zakat, income tax and withholding tax have been booked in the financial statements for current year and prior years. 13. PROVISION FOR END-OF-SERVICE INDEMNITIES Balance, beginning of the year 2,175,266 1,489,178 Provision for the year 994, ,403 Payments during the year (125,332) (126,315) Balance, end of the year 3,044,318 2,175, STATUTORY AND GENERAL RESERVE In accordance with the Regulations for Companies in Saudi Arabia and the Company s bylaws, the Company has established a statutory reserve by the appropriation of 10% of the annual net income until the reserve equals 50% of the share capital. This reserve is not available for dividend distribution. On Rajab 2, 1433H (corresponding to June 19, 2012), the shareholders agreed to establish a general reserve by the appropriation of 10% of the annual net income, until the reserve equals 30% of the share capital. -16-

19 FOR THE YEAR ENDED DECEMBER 31, 15. GENERAL AND ADMINISTRATIVE EXPENSES Employees salaries and other benefits 25,516,647 23,538,354 Rent (Note 8) 2,437,239 3,232,772 Provision for lease losses (Note 4) 2,085, ,282 Legal and professional fees 1,706, ,545 Depreciation 1,324,873 1,836,941 Maintenance 851, ,401 Travel 794, ,237 Telecommunication 656, ,301 Recruitment related expenses 524, ,692 Printing and stationary 148, ,575 Withholding tax 84,905 4,788 Others 1,036, , SELLING AND MARKETING EXPENSES 37,168,329 33,125,662 Insurance expenses 10,930,902 8,899,371 Sales commission 4,017,621 3,680,872 Origination expenses 2,998,356 2,310,774 Evaluation fees 2,821,600 3,464,000 Marketing expenses 1,058,114 1,451,889 Others 155, , EARNINGS PER SHARE 21,981,828 19,915,071 Earnings per share from net operating income and net income is calculated by dividing the net operating income and net income for the year by the weighted average number of shares for the year ended December 31, amounting to 80 million shares (: 80 million shares). 18. SEGMENT INFORMATION The Company is currently administered as one operating segment engaged in financing the purchase of houses and residential land and apartments through Ijara Financing Contracts. The Company carries out its activities in the Kingdom of Saudi Arabia. -17-

20 FOR THE YEAR ENDED DECEMBER 31, 19. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is the amount for which an asset could be exchanged, or a liability settled between knowledgeable willing parties in an arm's length transaction. The Company's financial assets consist of cash and bank balances, long term investments, accrued finance lease income receivable, prepaid expenses and other assets, advances to property owners and due from related parties and its financial liabilities consist of accounts payable, provision for zakat and income tax, due to related parties, advance payments received, and accrued expenses and other liabilities. The fair value of financial instruments are not materially different from their carrying values. 20. RISK MANAGEMENT Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company has established procedures to manage credit exposure including evaluation of lessees' credit worthiness, formal credit approvals and obtaining collateral such as title on leased assets. Concentrations of credit risk arise when a number of counter-parties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Company's performance to developments affecting a particular industry or geographical location. The Company manages its credit risk exposure through attempting to diversify its leasing activities to ensure that there is no undue concentration of risk with individuals or groups of customers in specific locations or businesses. The credit risk on gross amounts due in relation to the long term investments is mitigated by the retention of title on leased assets. For details of the composition of the long term investments refer to Note 4. The Company follows a credit classification mechanism as a tool to manage the quality of credit risk of the lease portfolio. The Company grades the individual customer based on both subjectivity and payment history taking into consideration factors such as customer credit standing, financial strength, and security and quality of management. The Company monitors customers' grading on a regular basis. -18-

21 FOR THE YEAR ENDED DECEMBER 31, 20. RISK MANAGEMENT (Continued) The table below shows the maximum exposure to credit risk for the components of the balance sheets: Gross Gross maximum maximum Bank balances 2,827,136 67,423,836 Long term investments 3,554,180,594 3,363,159,198 Advances to property owners 39,144,200 54,387,506 Due from related parties 1,427, ,436 3,597,579,288 3,485,719,976 Commission rate risk Commission rate risk is the uncertainty of future earnings resulting from fluctuations in commission rates. The risk arises when there is a mismatch in the assets and liabilities which are subject to commission rate adjustment within a specified period. The most important source of such rate risk is the Company's leasing activities, where fluctuations in commission rates, if any, are reflected in the statement of income. Commission rate gap is a common measure of commission rate risk. A positive gap occurs when more assets than liabilities are subject to rate changes during a prescribed period of time. A negative gap occurs when liabilities exceed assets subject to rate changes during a prescribed period of time. Increase / decrease in basis point + / -25 bps 6,196,446 6,136,821 Liquidity risk Liquidity risk is the risk that the Company will be unable to meet its net funding requirements. Liquidity risk can be caused by market disruptions or credit downgrades, which may cause certain sources of funding to dry up immediately. Management monitors the maturity profile of the Company's assets and liabilities based on the remaining period at the balance sheet date to the contractual maturity date to ensure that adequate liquidity is maintained. -19-

22 FOR THE YEAR ENDED DECEMBER 31, 20. RISK MANAGEMENT (Continued) All liabilities other than end of service benefits are contractually payable on a current basis. The table below shows an analysis of financial assets and liabilities according to when they are expected to be recovered or settled: Less than 12 months More than 12 months Less than 12 months More than 12 months Cash and bank balances 2,827,136-2,827,136 67,297,336-67,297,336 Long term investments 184,215,312 3,369,965,282 3,554,180, ,011,916 3,181,147,282 3,363,159,198 Accrued finance leases income receivable 20,889,586-20,889,586 22,780,793-22,780,793 Prepaid expenses and other assets 10,200,513-10,200,513 7,617,126-7,617,126 Deferred origination fees 2,944,879 32,641,305 35,586,184 2,351,798 27,093,426 29,445,224 Properties available for sale 272, , , ,385 Advances to property owners 39,144,200-39,144,200 54,387,506-54,387,506 Due from related parties 1,427,358-1,427, , ,436 Total assets 261,921,369 3,402,606,587 3,664,527, ,468,296 3,208,240,708 3,545,709,004 Less than 12 months More than 12 months Less than 12 months More than 12 months Liabilities Tawaruq financing facilities 154,783,699 2,323,794,514 2,478,578, ,880,400 2,334,848,148 2,454,728,548 Accounts payable 2,071,326-2,071,326 4,109,503-4,109,503 Advance payments received from customers 11,965,743-11,965,743 37,807,558-37,807,558 Due to related parties , ,717 Accrued expenses and other liabilities 31,854,091-31,854,091 15,196,043-15,196,043 Provision for zakat and income tax 9,599,222-9,599,222 7,285,897-7,285,897 Provision for end-ofservice indemnities - 3,044,318 3,044,318-2,175,266 2,175,266 Total liabilities 210,274,081 2,326,838,832 2,537,112, ,524,118 2,337,023,414 2,521,547,532 Net 51,647,288 1,075,767,755 1,127,415, ,944, ,217,294 1,024,161,

23 FOR THE YEAR ENDED DECEMBER 31, 21. OPERATING LEASE COMMITMENTS Commitments for minimum lease payments under operating lease are as follows: Less than one year 1,940,505 2,440,505 One to five years 1,500,000 4,302,405 Total 3,440,505 6,742,910 Operating lease payments represent rentals payable by the Company for office premises. Payment under operating lease recognized as an expense during the year amounted to 2,437,239 (: 3,232,772). 22. COMMITEMENT AND CONTINGENCIES At December 31,, the Company has contingencies related to outstanding letter of guarantee issued by the Company in its normal course of business amounting to 45,638,701 issued in favor of DZIT related to the zakat and tax assessments raised for previous years (refer to note 12). The Company faces during its normal activity some lawsuits and other claims related to the nature of its activity, however, significant claims are not expected to result from the outstanding lawsuits as at the financial statements date. 23. COMPARATIVE FIGURES Where applicable, certain figures for have been reclassified to conform with the presentation in the current year. 24. APPROVAL OF FINANCIAL STATEMENTS These financial statements were approved by the Board of Directors on March 15,