Methanol Chemicals Company (A Saudi Joint Stock Company) PROFORMA SKELETON FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017

Transcription

1 Methanol Chemicals Company (A Saudi Joint Stock Company) PROFORMA SKELETON FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017

2 Methanol Chemicals Company (A Saudi Joint Stock Company) Contents Statement of profit or loss... 1 Statement of other comprehensive income... 2 Statement of financial position... 4 Statement of changes in equity... 6 Statement of cash flows... 7 Notes to the financial statements... 8

3 Methanol Chemicals Company (A Saudi Joint Stock Company) Assumptions and Limitations: These proforma financial statements are prepared keeping in view the following matters: Our assessment of the IFRS conversion has been based on the review of relevant accounting standards applicable to the Company; accounting standards which are not applicable have not been reviewed. The key impact areas have been identified based on the information provided and discussion made with the management of the Company. The IFRS conversion work has been finalized based on guidance on accounting standards already reviewed and finalized by SOCPA as of the date of preparation of these pro-forma skeleton financial statements. We are not responsible to update these financials for any subsequent changes announced by SOCPA with respect to different accounting standards which have not yet been reviewed by SOCPA. Our Services are advisory in nature and the it does not form part of an assurance report or opinion, nor our work or services constitute an audit, review, or other form of assurance, as those terms are identified by the International Auditing and Assurance Standards Board ( IAASB ) or the relevant local standards. Accordingly, we have not express any form of assurance on accounting matters, financial statements, or other financial information or internal controls as part of the Services. These pro-forma skeleton financial statements for the year ended 31 December 2017 has been finalized with notes and disclosures based on circumstances exits as on the date of transition i.e. 1 January 2016, management need to amend these financials for any updated information and progress made from the date of issuance of these pro-forma skeleton financial statements till actual finalization of these financials for the year ended 31 December The date of first time adoption of IFRS is in line with local rules/guidance issued by the relevant regulators; Audited financial statements of the Company for the year ended 31 December 2015 under previous GAAP are used while preparing these financial statements; These proforma financial statements should be read in conjunction with the notes to the financial statements; These proforma financial statements does not contain accounting policies and notes on derivatives and hedging accounting; The Company will early adopt the IFRS 9 Financial Instruments and IFRS 15 Revenue from Contract with Customers in its entirety; limited disclosures have been provided based on the above understanding, which can be improved when these standards will be actually implemented while finalizing these financials for the year ended 31 December 2017; and Disclosure in the financial statements for zakat is kept consistent to previous GAAP presentation.

4 Methanol Chemicals Company (A Saudi Joint Stock Company) STATEMENT OF PROFIT OR LOSS Notes Revenue 6 xx xx Cost of sales xx xx Gross profit xx xx Other operating income 6.1 xx xx Selling and marketing expenses 7 xx xx Administrative expenses 8 xx xx Other operating expenses xx xx Operating profit xx xx Finance income xx xx Finance charges xx xx Profit before Zakat xx xx Zakat expense 9 xx xx Profit for the year xx xx Earnings per share: 10 Basic profit per share xx xx Diluted profit per share xx xx 1

5 Methanol Chemicals Company (A Saudi Joint Stock Company) STATEMENT OF OTHER COMPREHENSIVE INCOME Notes Profit for the year xx xx Other comprehensive income to be reclassified to profit or loss in subsequent periods: - - Net total other comprehensive income not to be reclassified to profit or loss in subsequent periods: - - Other comprehensive income not to be reclassified to profit or loss in subsequent periods: Re-measurement gains and (losses) on defined benefit plans 20 xx xx Net total other comprehensive income not to be reclassified to profit or loss in subsequent periods: xx xx Total other comprehensive income for the year xx xx Total comprehensive income for the year xx xx 2

6 Methanol Chemicals Company (A Saudi Joint Stock Company) STATEMENT OF OTHER COMPREHENSIVE INCOME Paragraph 10 of IAS 1 suggests titles for the primary financial statements, such as statement of profit or loss and other comprehensive income or statement of financial position. Entities are, however, permitted to use other titles, such as income statement or balance sheet. IAS 1.82(a) requires disclosure of total revenue as a line item on the face of the statement of profit or loss. The Company may elect to present the various types of revenue on the face of the statement of profit or loss as currently this information is presented in the notes. IAS 1.99 requires expenses to be analysed either by their nature or by their function within the statement of profit or loss, whichever provides information that is reliable and more relevant. If expenses are analysed by function, information about the nature of expenses must be disclosed in the notes. The Company has presented the analysis of expenses by function. The Company presents operating profit in the statement of profit or loss; this is not required by IAS 1. The terms operating profit or operating income are not defined in IFRS. IAS 1.BC56 states that the IASB recognises that an entity may elect to disclose the results of operating activities, or a similar line item, even though this term is not defined. The entity should ensure the amount disclosed is representative of activities that would normally be considered to be operating. For instance, it would be inappropriate to exclude items clearly related to operations (such as inventory write-downs and restructuring and relocation expenses) because they occur irregularly or infrequently or are unusual in amount. Similarly, it would be inappropriate to exclude items on the grounds that they do not involve cash flows, such as depreciation and amortisation expenses (IAS 1.BC56). In practice, other titles, such as EBIT, are sometimes used to refer to an operating result. The Company may elect to present two statements, a statement of profit or loss and a statement of other comprehensive income or a single statement of comprehensive income combining the two elements. If a two-statement approach is adopted, the statement of profit or loss must be followed directly by the statement of comprehensive income. Re-measurement gains and losses on defined benefit plans are recognised in OCI and transferred immediately to retained earnings (see IAS 1.96 and IAS ). IAS 1.82A requires that items that will be reclassified subsequently to profit or loss, when specific conditions are met, must be Company on the face of the statement of other comprehensive income. Similarly, items that will not be reclassified must also be Company together. In order to make these disclosures, an entity must analyse whether its OCI items are eligible to be subsequently reclassified to profit or loss under IFRS. 3

7 Methanol Chemicals Company (A Saudi Joint Stock Company) STATEMENT OF FINANCIAL POSITION As at 31 December 2017 As at 1 January 2016 Notes Assets Non-current assets Property, plant and equipment 11 xx xx 1,909,821,534 Intangible assets 12 xx xx 19,884,383 xx xx 1,929,705,917 Current assets Inventory 14 xx xx 130,552,690 Trade and other receivables 15 xx xx 169,100,253 Prepayments and other assets 16 xx xx 37,447,074 Cash and short-term deposits 17 xx xx 164,094,691 Total current assets xx xx 501,194,708 Total assets xx xx 2,430,900,625 Equity and liabilities Equity Issued capital 18 xx xx 1,206,000,000 Statutory reserve 18 xx xx 116,968,764 Retained earnings xx xx (101,283,812) Total equity xx xx 1,221,684,952 Non-current liabilities Long term bank loans 13 xx xx 384,493,120 Net employee defined benefit liabilities 20 xx xx 43,540,189 xx xx 428,033,309 Current liabilities Trade and other payables 21 xx xx 31,517,109 Accrued expenses and other liabilities 22 xx xx 79,972,686 Current portion of long term bank loans 13 xx xx 320,392,569 Short term bank loan 13 xx xx 329,300,000 Provisions 23 xx xx 20,000,000 xx xx 781,182,364 Total liabilities xx xx 1,209,215,673 Total equity and liabilities xx xx 2,430,900,625 4

8 Methanol Chemicals Company (A Saudi Joint Stock Company) STATEMENT OF FINANCIAL POSITION As at 31 December 2017 IFRS 1.21 requires an entity s first IFRS financial statements to present at least three statements of financial position, two statements of profit or loss and other comprehensive income, two separate statements of profit or loss (if presented), two statements of cash flows and two statements of changes in equity and related notes, including comparative information for all statements presented. In accordance with IAS 1.60, the Company has presented current and non-current assets, and current and non-current liabilities, as separate classifications in the statement of financial position. IAS 1 does not require a specific order of the two classifications; the Company has elected to present non-current before current IAS 1 allows entities to present assets and liabilities in order of liquidity when this presentation is reliable and more relevant. 5

9 STATEMENT OF CHANGES IN EQUITY Issued capital Statutory reserve Retained earnings Total As at 1 January 2017 xx xx xx xx Profit for the period - - xx xx Other comprehensive income - - xx xx Total comprehensive income xx xx xx xx Issue of share capital (Note 18) xx xx xx xx Transfer to statutory reserve - xx xx xx Dividends - - xx xx At 31 December 2017 xx xx xx xx As at 1 January ,206,000, ,968,764 78,943,069 1,401,911,833 Profit for the period - - xx xx Other comprehensive income - - xx xx Total comprehensive income xx xx xx xx Issue of share capital (Note 18) xx xx xx xx Transfer to statutory reserve - xx xx xx Dividend - - xx xx At 31 December 2016 xx xx xx xx 6

10 Chemanol Chemicals Company Limited (A Saudi Joint Stock Company) STATEMENT OF CASH FLOWS Notes OPERATING ACTIVITIES Profit for the year xx xx Non cash adjustments to reconcile profit before Zakat to net cash flow: Depreciation of property, plant and equipment 11 xx xx Amortization of intangibles xx xx Impairment charge for credit losses on receivables xx xx Employees defined benefits provision 20 xx xx Loss/ (gain) on sale of property, plant and equipment xx xx xx xx Working capital adjustments: Increase/ Decrease in trade and other receivables xx xx Increase/ Decrease in inventories xx xx Increase/ Decrease in prepayment and other assets xx xx Increase/ Decrease in trade and other payables xx xx Increase/ Decrease in due to related parties xx xx Employees defined benefits paid 20 xx xx Zakat paid 9 xx xx Net cash generated from operating activities xx xx INVESTING ACTIVITIES Additions to property, plant and equipment 11 xx xx Proceeds from sale of property, plant and equipment xx xx Additions to intangible assets 12 xx xx Net cash used in investing activities xx xx FINANCING ACTIVITIES Repayment of short term loans xx xx Repayments of long-term loans xx xx Dividends paid 19 xx xx Net cash generated from financing activities xx xx Net changes in cash and cash equivalents xx xx Cash and cash equivalents at January 01 of the year 17 xx xx Cash and cash equivalents at December 31, 2017 xx xx (We assume that the Company does not have major cash and cash equivalents in a foreign currency) * Zakat is not covered in the definition of Income Tax as per IAS 12. As per the existing practice of the company we have taken profit for the year for preparing statement of cash flows. IAS 12 is still under review by SOCPA. 7

11 1. Corporate information The financial statements of Methanol Chemicals Company ( Chemanol or the Company ) for the year ended 31 December 2017 were authorized for issue in accordance with a resolution of the directors on. Chemanol is a Saudi Joint Stock Company registered in Saudi Arabia under Commercial Registration number dated Dhu Al- Hijjah 28, I 409H corresponding to July 31,1989. It is licensed to engage in the production of formaldehyde liquid and urea formaldehyde liquid or their mixture with different concentrations, paraformaldehyde, formaldehyde resins, hexane methylene tetramine, phenol formaldehyde resins, concrete improvers, methanol, carbon monoxide, di-methylamine, monomethylamine, tri-mon-methylamine, di-methyl formamide, di-methyl carbon, penta aritheretol, sodium formate and acetaldehyde, as per ministerial resolution number (616/Saud) dated Safar 12, 1429H, corresponding to February 19, The Company was converted from a limited liability Company into a joint stock Company in accordance with Ministerial Resolution No. 286 dated Dhul al-qa'dah 4, 1428H, corresponding November 14, Significant accounting policies 2.1 Basis of preparation The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by Saudi Organization for Certified Public Accountants ( SOCPA ). For all periods up to and including the year ended 31 December 2016, the Company prepared its financial statements in accordance with the accounting standards promulgated by SOCPA. These financial statements for the year ended 31 December 2017 are the first financial statements that the Company has prepared in accordance with IFRS as adopted by SOCPA. Refer to Note 3 for information on how the Company adopted IFRS. The financial statements have been prepared on a historical cost basis. The financial statements are presented in Saudi Riyals. 2.2 Standards earlier adopted (a) IFRS 9 Financial Instruments IFRS 9 Financial Instruments is effective for annual periods commencing on or after 1 January The Company has elected to earlier adopt IFRS 9 retrospectively from January 1, Financial statements for the period ended December 31, 2017 are the first financial statements that the Company has prepared in accordance with IFRS as adopted by SOCPA, accordingly, IFRS 1 exceptions and exemptions have been applied that are discussed in note 3. Transitional provision of IFRS 9 does not apply except for some provisions as allowed by IFRS 1 and opted by the Company. Financial assets As per the IFRS 9, the Company classified its financial assets (trade and other receivables) as measured at amortized cost based on the Company s business model to hold the financial assets to collect the contractual cash flows and contractual cash flow are solely payment of principal and interest on principal amount outstanding. The Company has not recognized any financial asset in the categories of measured at fair value through profit or loss and measured at fair value through other comprehensive income. Financial liabilities As per IFRS 9 the Company has classified its financial liabilities (bank loans and trade and other payables) as measured at amortized cost. 8

12 Impairment For trade receivables the Company applied the simplified approach permitted by IFRS 9, which requires lifetime expected credit losses to be recognized from initial recognition of the receivables. For Complete details in respect of application of IFRS 9 please refer to note 2.3(i). b) IFRS 15 Revenue from Contract with Customers IFRS 15 Revenue from Contracts with Customers was issued in May 2014 and is effective for annual periods commencing on or after 1 January The Company has elected to earlier adopt IFRS 15 retrospectively from January 1, The Company has contracts with customers (that also include marketers) in which supply of the petrochemical is the only performance obligation. The Company recognized revenue at a point in time when control of the asset is transferred to the customer that is on delivery of the goods. The Company was already recognizing the revenue on delivery of the goods under SOCPA. As per IFRS 15, revenue from contracts with the customers is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer (excluding the amounts collected on behalf of third parties). The effect of any financing component, non-cash consideration and consideration paid to customer shall also be considered. Consideration paid or payable to customers commonly takes the form of discounts coupons, and are the only deduction allowed from the amount of revenue recognized. Under previous GAAP Company was recognizing the revenue from sale of products to marketers at the netback price, after netting of certain selling and distribution expenses that the company is liable to reimburse to marketer on actual basis as pre the terms of the contract. The said expenses are not allowed to be adjusted against the revenue. In this respect, the company adopted IFRS 1 exemption related to first time application of IFRS. As per the said exemption the company has used the expedient in para C5 (a) of transitional provision of IFRS 15 and accordingly not restated contracts that have been completed before January 1, The table below show the effect of booking the revenue at gross amount on the various line items in the financial statements for the year ended December 31, Company has assessed that there is no impact on retained earnings as at January 1, The Company assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent. The Company has concluded that it is acting as a principal in all of its arrangements with customers (include marketers). December 31, 2016 Balance as per SOCPA Financial Impact Balance as per IFRS 15 Revenue Cost of revenue Gross profit The application of the new accounting policy has required management to make the following judgments: Satisfaction of performance obligations 9

13 The Company assessed each of its contracts with customers to determine whether performance obligations are satisfied over time or at a point in time in order to determine the appropriate method of recognising revenue. The Company determined that in all the agreements entered into with customers to provide petrochemicals, the performance obligation is satisfied at point in time. Determination of transaction prices The Company determined the transaction price in respect of each of its contracts with customers (including marketers) and assessed the impact,if any, of variable consideration, the existence of significant financing component, any non-cash consideration and amount paid or payable to the customers. The Company determined that there is no major impact of above items on transaction price. Transfer of control in contracts with customers The Company assessed when control over the assets that are the subject of the contract is transferred to the customers (including marketers). In the case of all contracts for providing petrochemicals, the Company determined that the control of goods is transferred to the customers (including marketers) upon delivery or shipment of the goods. The Company assessed its contracts with the customers based on specific criteria of IFRS 15 and determined that the Company is acting as principal in all the contracts with the customers (including marketers). 2.3 Summary of significant accounting policies We have added the detailed significant policies on all major IFRS adopted by SOCPA for Company reference purposes. Some of them are not applicable to the Company as per the financial statements Dec 31, (a) Current versus non-current classification Following are the significant accounting policies applied by the Company in preparing its financial statements: The Company presents assets and liabilities in the statement of financial position based on current/noncurrent classification. An asset is current when it is: Expected to be realised or intended to sold or consumed in the normal operating cycle Held primarily for the purpose of trading Expected to be realised within twelve months after the reporting period, or Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period All other assets are classified as non-current. A liability is current when: It is expected to be settled in the normal operating cycle It is held primarily for the purpose of trading It is due to be settled within twelve months after the reporting period, or There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period The Company classifies all other liabilities as non-current. b) Fair value measurement 10

14 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits from the asset s highest and best use or by selling it to another market participant that would utilise the asset in its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3 Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. The Company determines the policies and procedures for both recurring fair value measurement, and for non-recurring measurement. External valuers are involved for valuation of significant assets. The involvement of external valuers is decided by the Company after discussion and approval by the Company s Audit Committee. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained. The Company decides, after discussions with the Company s external valuers, which valuation techniques and inputs to use for each case. At each reporting date, the Company analyses the movements in the values of assets and liabilities which are required to be remeasured or re-assessed as per the Company s accounting policies. For this analysis, the Company verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents. The Company also compares the change in the fair value of each asset and liability with relevant external sources to determine whether the change is reasonable. For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy, as explained above. Fair value related disclosures for financial instruments that are measured at fair value or where fair values are disclosed are discussed in note 13. c) Revenue recognition Revenue from contracts with customers Revenue is recognised to the extent that the Company has satisfied the performance obligations under contracts for sale of goods with customers. The company has contracts with customers (that also include marketers) in which supply of the petrochemicals is the only performance obligation. The company 11

15 recognized revenue at a point in time when control of the goods is transferred to the customer, generally on delivery or shipment of the goods to the customers. The Company assessed its contracts with the customers based on specific criteria of IFRS 15 and determined that Company is acting as principal in all the contracts with the customers (including marketers). Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment, excluding taxes and duty and is recorded net of trade discounts and volume rebates. The company assesses the impact, if any, of variable consideration, the existence of significant financing component, any non-cash consideration and amount paid or payable to the customers on transaction price. Dividend Dividend is recognised in the profit and loss when: The Company s right to receive the payment is established, which is generally when shareholders approve the dividend; It is probable that the economic benefits associated with the dividend will flow to the entity; and The amount of the dividend can be measured reliably. Interest income Interest revenue is calculated using the effective interest rate method. The effective interest rate is the interest rate that exactly discounts the estimated stream of future cash payment or receipts over the expect life of the financial instrument or when appropriate over the shorter period. d) Foreign currencies The Company s financial statements are presented in Saudi Riyals which is also the functional currency of the Company. Transactions in foreign currencies are initially recorded by the Company in its functional currency using the spot rate at the date of the transaction it first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are retranslated in the functional currency using the spot rate of exchange ruling at the reporting date. Differences arising on settlement or translation of monetary items are recognized in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary measured at fair value is treated in line with the recognition of gain or loss on change in fair value in the item (i.e., the translation differences on items whose fair value gain or loss is recognized in OCI or profit or loss are also recognized in OCI or profit or loss, respectively). e) Property, plant and equipment Property, plant and equipment are stated at cost, net of accumulated depreciation and/or accumulated impairment losses, if any. Such cost includes the cost of replacing parts of the property, plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of property, plant and equipment are required to be replaced at intervals, the Company recognizes such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount 12

16 of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognized in the profit or loss as incurred. The present value of the expected cost for the decommissioning of the asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows: Number of years Buildings Leasehold improvements 5 Furniture and fixtures 7-10 Computer 4-8 Plant equipment and capital spares Plant overhaul 3 Motor vehicles 4 Catalysts More than 1 and upto 3 An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of profit or loss when the asset is derecognized. The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate. Capital work in progress is states at cost less impairment losses, if any, and is not depreciated until the asset is brought into commercial operations. f) Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses, if any. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is recognised in the statement of profit or loss when it is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over their useful economic lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the statement of profit or loss in the expense category consistent with the function of the intangible assets. Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the statement of profit or loss when the asset is derecognised. 13

17 g) Leases The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement. A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Company is classified as a finance lease. As a Lessee Finance leases that transfer to the Company substantially all of the risks and benefits incidental to ownership of the leased item, are capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in finance costs in the statement of profit or loss. A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. An operating lease is a lease other than a finance lease. Operating lease payments are recognized as an operating expense in the statement of profit or loss on a straight-line basis over the lease term. As a Lessor Leases in which the Company does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same bases as rental income. Contingent rents are recognised as revenue in the period in which they are earned. h) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. i) Financial instruments initial recognition and subsequent measurement The Group applied the classification and measurement requirements for financial instruments under IFRS 9 Financial Instruments for the year ended December 31, Refer to Note 2.2 (a) - Early adoption for further details of IFRS 9. (i) Recognition and derecognition of financial instruments A financial asset or financial liability is recognised in the balance sheet when the Company becomes a party to the contractual provisions of the instrument, which is generally on trade date. The Company derecognizes a financial asset when the contractual cash flows from the asset expire or it transfers its rights to receive contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership are transferred. Any interest in transferred financial 14

18 assets that is created or retained by the Company is recognised as a separate asset or liability. A financial liability is derecognized from the balance sheet when the company has discharged its obligation or the contract is cancelled or expires. (ii) Classification and measurement of financial instruments The Company classified its financial assets into the following measurement categories: (a) Measured at amortised cost; (b) Fair value through profit or loss; or (c) Measured at fair value through other comprehensive income; or The classification depends on the Company s business model for managing financial assets and the contractual terms of the financial assets cash flows. The Company classifies its financial liabilities as those measured at amortized cost. Financial instruments at fair value through profit or loss are recognised initially at fair value with transaction costs recognised in the income statement as incurred. All other financial instruments are recognised initially at fair value plus directly attributable transaction costs. The company initially measures the trade receivable at the transaction price as the trade receivable do not contain a significant financing component. (iii) Measurement Financial instruments measured at amortized cost A financial asset is measured at amortized cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows and the contractual terms represent contractual cash flows that are solely payments of principal and interest. The Company classifies its financial liabilities as those measured at amortized cost. Financial instruments measured at fair value through profit or loss Financial assets measured at fair value through profit or loss comprise items specifically designated as fair value through profit or loss on initial recognition and financial assets held within a business model whose objective is to hold assets in order to collect contractual cash flows and the contractual terms represent contractual cash flows that are not solely payments of principal and interest. Financial instruments held at fair value through profit or loss are initially recognised at fair value, with transaction costs recognised in the income statement as incurred. Subsequently, they are measured at fair value and any gains and losses are recognised in the income statement as they arise. Upon initial recognition, financial instruments may be designated as fair value through profit or loss. Restrictions are placed on the use of the designated fair value option and the classification can only be used: In respect of an entire contract if a host contract contains one or more embedded derivatives. If designating the financial instruments eliminates or significantly reduces measurement or recognition inconsistencies (i.e. eliminates an accounting mismatch) that would otherwise arise from measuring financial assets or liabilities on a different basis. If financial assets and liabilities are both managed and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy. On initial recognition, for a financial asset the fair value option is only applied if it eliminates an 15

19 accounting mismatch that would otherwise arise from measuring items on a different basis. The above fair value option criteria remains unchanged for a financial liability. Financial instruments held for trading A financial instrument is classified as held for trading, if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative not in a qualifying hedge relationship. Trading derivatives and trading securities are classified as held for trading and recognised at fair value. Investments at fair value through other comprehensive income (FVOCI) Debt instruments Investments in debt instruments are measured at fair value through other comprehensive income where they have: contractual terms that give rise to cash flows on specified dates, that represent solely payments of principal and interest on the principal amount outstanding; and are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. These debt instruments are initially recognised at fair value plus direct attributable transaction costs and subsequently measured at fair value. Gains and losses arising from changes in fair value are included in other comprehensive income within a separate component of equity. Impairment gains or losses, interest revenue and foreign exchange gains and losses are recognised in profit and loss. Upon disposal, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to the income statement. Equity instruments Investment in equity instruments are measured at fair value through other comprehensive income, where an irrevocable election has been made by the management on initial recognition. The Company can make an irrevocable election (on an instrument-by-instrument basis) to designate investments in equity instruments as at FVTOCI. Designation as at FVTOCI is not permitted if the equity investment is held for trading. Amounts presented in other comprehensive income are not subsequently transferred to profit or loss. Dividends on such investments are recognised in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment. Fair value reserve includes the cumulative net change in fair value of equity investment measured at FVTOCI. When such equity instruments are derecognised, the related cumulative amount in the fair value reserve is transferred to retained earnings. Investments in debt instruments classified as at amortised cost: Debt instruments that meet the following conditions are subsequently measured at amortised cost less impairment loss: the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and the contractual terms of the instrument give rise on specified dates to cash flows that are solely payments of principal and commission on the principal amount outstanding. (iv) Offsetting Financial assets and liabilities are offset and the net amount is presented in the balance sheet when the Company has a legal right to offset the amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously. (v) Impairment of financial instruments 16

20 At each reporting date, the Company applies a three-stage approach to measuring expected credit losses (ECL) on financial assets accounted for at amortized cost and FVOCI, lease receivable, contract asset, certain loan commitments and financial guarantees to which to impairment requirements of IFRS 9 are applicable. Assets migrate through the following three stages based on the change in credit quality since initial recognition: i) Stage 1: 12-months ECL For exposures where there has not been a significant increase in credit risk since initial recognition and that are not credit impaired upon origination, the portion of the lifetime ECL associated with the probability of default events occurring within the next 12 months is recognized. ii) Stage 2: Lifetime ECL not credit impaired For credit exposures where there has been a significant increase in credit risk since initial recognition but that are not credit impaired, a lifetime ECL is recognized. iii) Stage 3: Lifetime ECL credit impaired Financial assets are assessed as credit impaired when one or more events that have a detrimental impact on the estimated future cash flows of that asset have occurred. For financial assets that have become credit impaired, a lifetime ECL is recognized and interest revenue is calculated by applying the effective interest rate to the amortized cost (net of provision) rather than the gross carrying amount. Objective evidence that financial assets are impaired can include significant financial difficulty of the borrower, default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. The company considers the probability of default upon initial recognition of asset and whether there has been a significant increase in credit risk on an ongoing basis throughout each reporting period. To assess whether there is a significant increase in credit risk the company compares the risk of a default occurring on the asset as at the reporting date with the risk of default as at the date of initial recognition. It considers available reasonable and supportive forwarding-looking information. Especially the following indicators are incorporated: Actual or expected significant adverse changes in business, financial or economic conditions that are expected to cause a significant change to the borrower s ability to meet its obligations Actual or expected significant changes in the operating results of the borrower Significant increases in credit risk on other financial instruments of the same borrower Significant changes in the expected performance and behavior of the borrower, including changes in the payment status of borrowers and changes in the operating results of the borrower Macroeconomic information (such as market interest rates or growth rates) Past due information adjusted for future information Regardless of the analysis above, a significant increase in credit risk is presumed if a debtor is more than 30 days past due in making a contractual payment. This is a rebuttable assumption 17

21 The company considers evidence of impairment at both a specific asset and collective level. All individually significant financial instruments found not to be specifically impaired are then collectively (with similar risk characteristics) assessed for any impairment that has been incurred but not yet identified. Impairment losses for a financial instrument are recognised in the statement of profit or loss and reflected in impairment for credit losses. Interest on impaired assets continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through the statement of profit or loss. The loss allowance in respect financial assets measured at FVTOCI shall be recognised in other comprehensive income and shall not reduce the carrying amount of the financial asset in the statement of financial position. When an asset is uncollectible, it is written off against the related provision. Such assets are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off reduce the amount of the expense in the income statement. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the provision. The amount of the reversal is recognised in the income statement. The Company measures the loss allowance at an amount equal to lifetime expected credit losses for all trade receivables and contracts assets that result from contracts with the customers. j) Impairment of non-financial assets Disclosures relating to impairment of non-financial assets are summarized in the following notes: Accounting policy disclosures Note 2.3 (j) Disclosures for significant assumptions Note 4 Property, plant and equipment Note 11 Intangible assets Note 12 The Company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or CGU s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or group of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. The Company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Company s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year. 18

22 Impairment losses o are recognized in the statement of profit or loss in expense categories consistent with the function of the impaired asset, except for properties previously revalued with the revaluation taken to OCI. For such properties, the impairment is recognized in OCI up to the amount of any previous revaluation. For asset, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Company estimates the asset s or CGU s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of profit or loss unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. Intangible assets with indefinite useful lives are tested for impairment annually as at 31 December at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be impaired. k) Inventories Inventories are measured at the lower of cost and net realizable value. The cost of inventories is principally based on the weighted average principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. l) Cash and cash equivalents Cash and cash equivalents in the statement of financial position comprise cash at banks, cash on hand and short-term deposits with a maturity of three months or less, net of outstanding bank overdrafts which are subject to an insignificant risk of changes in value. m) Convertible preference shares Convertible preference shares are separated into liability and equity components based on the terms of the contract. On issuance of the convertible preference shares, the fair value of the liability component is determined using a market rate for an equivalent non-convertible bond. This amount is classified as a financial liability measured at amortised cost (net of transaction costs) until it is extinguished on conversion or redemption. The remainder of the proceeds is allocated to the conversion option that is recognised and included in equity. Transaction costs are deducted from equity. The carrying amount of the conversion option is not remeasured in subsequent years. Transaction costs are apportioned between the liability and equity components of the convertible preference shares, based on the allocation of proceeds to the liability and equity components when the instruments are initially recognised. n) Treasury shares Own equity instruments that are reacquired (treasury shares) are recognised at cost and deducted from equity. No gain or loss is recognised in the profit or loss on the purchase, sale, issue or cancellation of the Company s own equity instruments. Any difference between the carrying amount and the consideration, if reissued, is recognised in the share premium. Voting rights related to treasury shares are nullified for the Company and no dividends are allocated to them. Share options exercised during the reporting period are satisfied with treasury shares. 19