Kencana Agri Limited. Annual Report Sustainable. Growth

Transcription

1 Kencana Agri Limited Annual Report 2008 Sustainable Growth

2 Our Business and Operations Kencana s integrated value chain comprises plantations, palm oil mills, kernel crushing plants, bulking facilities and logistics services, as well as a renewable biomass power plant to support and complement our plantation operations. Plantation Processing Our oil palm plantations are strategically located in Sumatera and Kalimantan regions in Indonesia. As at 31 December 2008, we have a total land bank (including Plasma Programme) of 109,215 hectares, of which 33,428 hectares are planted. We have two palm oil mills and two kernel crushing plants, with one of each located in our plantations in Sumatera and Kalimantan respectively. No. of Mills: 2 Total Production Capacity: 120 MT/hour Total Annual Processing Capacity: 684,000 MT Plantation Palm Oil Mills Total Land Bank 109,215 ha (1) Nucleus (2) : 96,843 ha, Plasma (2) : 12,372 ha. Total Planted Area 33,428 ha (1) Nucleus (2) : 25,089 ha, Plasma (2) : 8,339 ha. Note: 1. As at 31 December Please refer to page 10 for more details Kernel Crushing Plant No. of Kernel Crushing Plants: 2 Total Production Capacity: 435 MT/day Total Annual Processing Capacity: 108,315 MT West Malaysia East Malaysia Singapore Bangka West Kalimantan East Kalimantan Oil palm estate Oil palm estate with palm oil mill and kernel crushing plant Bulking terminal Biomass power generation Belitung Indonesia South Kalimantan

3 Growth Excellence Integrity Products Supporting Businesses Our main products are Crude Palm Oil (CPO) and Crude Palm Kernel Oil (CPKO). CPO is derived from Fresh Fruit Bunches, whilst CPKO is derived from palm kernels. Our products are typically sold to reputable trading companies, refineries, oleochemical companies among others, in Indonesia, Malaysia and other countries. Our bulking terminals and logistic services complement or support our plantation operations by providing storage facilities and transportation for our products. The electricity generated by our renewable biomass power plant in Bangka is mainly sold to a state-owned electricity company (PLN). This power plant has also been approved as a CDM project, which allows us to sell carbon credits attributable to the power plant. Crude Palm Oil Bulking Terminal Logistics Crude Palm Kernel Oil Biomass Power Plant Location: Bangka Capacity: 6.0 MW The plant utilises waste products recycled from palm oil mills such as empty palm fruit bunches and palm kernel shells, as fuel for the generation of green electricity.

4 Contents 01 Vision and Mission 02 Corporate Profile 03 Milestones 04 Chairman s Statement 06 Financial and Operational Highlights 11 Corporate Structure 12 Environment and Corporate Social Responsibility 14 Board of Directors 16 Executive Officers 17 Financial Contents

5 Our Vision To be a leading sustainable palm oil producer and supplier of choice for both local and global markets. Our Mission To expand our plantation business through sustainable and environmentally friendly best management practices whilst reinforcing our responsibility as a good corporate citizen.

6 Corporate Profile has streamlined its integrated plantation operations in the oil palm plantations, palm oil mills, kernel crushing plants, as well as bulking and logistics facilities. Moving forward, Kencana will continue to adopt a prudent approach in managing cash flows and expenditures, and improving the Group s operational efficiency, infrastructure and product quality. At the same time, Kencana will continue to pursue its expansion plans, which include new plantings, acquisition of new land bank and/or mature plantations, and expansion of production capacity. With these strategies in place, Kencana is well-positioned to take advantage of growing long term demand of palm oil products and opportunities as the Group s oil palms mature. Kencana Tower, Jakarta (Indonesia) Kencana Agri Limited ( Kencana ) is a fast-growing producer of crude palm oil ( CPO ) and crude palm kernel oil ( CPKO ) with oil palm plantations strategically located in the Sumatera and Kalimantan regions in Indonesia. Mr. Henry Maknawi, Chairman and CEO of the Group, spearheaded Kencana s rapid growth and expansion from an initial land bank of 9,000 hectares in 1995 to over 109,000 hectares with planted area of over 33,000 hectares (including land under plasma programme), as of 31 December In line with its business strategies and future expansion plans towards becoming a leading palm oil producer of choice for both local and international markets, Kencana has successfully listed its shares on the Main Board of the Singapore Stock Exchange on 25 July 2008 (SGX-ST Stock Code: F9M). Kencana s key competitive strengths include among others, a significant cultivable land bank with new planting potential (about 70% of total land bank has not been planted), potential revenue from maturing oil palms in the near future (about 70% of planted area are immature and young), a proven and recognised track record in plantation cultivation and management, and an integrated value-chain that allows the Group to operate more efficiently and effectively. In order to achieve better operational synergies, the Group As part of Kencana s commitment to good corporate citizenship, the Group engages in various Corporate Social Responsibility ( CSR ) programmes to improve the social and economic welfare of the local communities. In addition, Kencana is a strong supporter of sustainable environmentally-friendly practices such as applying zero burning and zero waste management policies as well as eco-friendly pest management practices (such as the use of owls and gall flies to control pest population and weeds respectively), and undertaking social and environmental impact assessment prior to any new plantings. As a testament to the Group s commitment to environmentally-friendly business practices, Kencana is proud to pioneer the first commercialised biomass power plant project in Indonesia which sells green electricity to PLN (Indonesia s state owned electricity company). Located within the Group s plantation in Sumatera, the 6 MW biomass power plant utilises waste products from palm oil mills, such as empty fruit bunches ( EFB ) and palm kernel shells, as fuel for the generation of green electricity. In addition, the renewable biomass power plant has been registered as a Clean Development Mechanism ( CDM ) project, which allows the Group to sell carbon credits attributable to the project. As a member of the Roundtable on Sustainable Palm Oil ( RSPO ), Kencana strives to pursue long-term and sustainable oil palm cultivation practices for the benefit of all stakeholders. For further information, please visit: 0 Kencana Agri Limited

7 Milestones 2008 On 25 July 2008, Kencana Agri Limited was successfully listed on the Main Board of the Singapore Stock Exchange. Became member of the RSPO. Biomass power plant (Bangka) registered by the board of the United Nations Framework Convention on Climate Change as a Clean Development Mechanism project In 2006, PT Sawindo Kencana was classified as good plantation class with the highest score among 18 large scale plantation companies by the Provincial Government of Bangka Belitung. In 2006, PT Alam Raya Kencana Mas was awarded a plantation class of very good based on a merit point system for plantation companies operating in the region by The Governor of the province of South Kalimantan. Entered 1-year renewable contract to supply green electricity from the biomass power plant on Bangka Island to PLN. In 2006, started planting in newly acquired land bank in East Kalimantan Renewable Biomass Power Plant In 2005, began construction of the first biomass power plant on Bangka Island to produce green electricity using recycled materials from our operations, part of our Corporate Social Responsibility initiative to supplement energy to the local community in power scarce areas. In 2004, began commercial production of CPKO with capacity of 300 MT/day in South Kalimantan. In 2004, began commercial logistics operations by building and operating our first barge. In 2003, began commercial production of CPO with capacity of 45 MT/ hour in South Kalimantan. In 2002, began operating bulking terminal with capacity of 19,500 MT for storage of CPO and CPKO in Belinyu, Bangka Island. In 2002, began commercial production of CPKO with capacity of 100 MT/day on Bangka Island, Sumatera. In 2001, began commercial production of CPO with capacity of 30 MT/hour on Bangka Island, Sumatera. In 1996, began cultivation of oil palm plantation in Sumatera, and in 1998, South Kalimantan Our founder, current Chairman and CEO Mr. Henry Maknawi started the Kencana Group with acquisition of 9,000 hectares of land bank on Bangka Island, Sumatera. Annual Report

8 Chairman s Statement I am delighted to present to you Kencana Agri s inaugural annual report as a listed company. I also look forward to sharing with you our achievements in the financial year ended 31 December 2008 ( FY2008 ) as well as our strategies and business plans for the road ahead. Dear Shareholders, FY2008 is indeed a momentous and memorable year during which we accomplished several important milestones in our history, in particular, our listing on the Main Board of the Singapore Stock Exchange on 25 July also saw us expanding our total land bank and planted area (including Plasma Programme) to more than 109,200 hectares and 33,400 hectares respectively. Our significant land bank offers great new planting potential. With 70% of our planted area currently immature or young, we can expect significant growth as these plants mature and as we continue our planting programme. I am also pleased to share that we received approval from the United Nations Framework Convention on Climate Change to sell carbon credits for our first renewable biomass power plant in Bangka. This plant is the first commercialised renewable biomass project in Indonesia that generates and sells green electricity to PLN, an Indonesian state-owned electricity company. Despite the current tough economic environment, we achieved satisfactory operational performance in FY2008. Our revenue for FY2008 increased by 51% to US$104.9 million on the back of higher sales volume and Crude Palm Oil ( CPO ) prices in Excluding 0 Kencana Agri Limited

9 changes in fair value of biological assets and one-off IPO and restructuring expenses, Kencana achieved steady growth of 9% increase in our operating profit to US$17.9 million and 22% rise in net profit to US$12.4 million in FY2008. managing our capital expenditure and improving the Group s operational efficiency and product quality whilst pursuing our expansion plans that include new plantings and acquiring new land banks and/or mature plantations. Dividend In view of Kencana s strong performance and in appreciation of the support of the Group s shareholders, the Board of Directors has proposed a first and final dividend of 0.3 Singapore cents per share for FY2008. Looking Ahead To this end, in March 2009 we have announced the addition of almost 80,000 ha of land bank in the Sulawesi regions, bringing our total land bank to over 189,000 hectares. In the course of the year, we intend to increase our planted area by approximately 3,000 to 5,000 hectares, and more if conditions are favourable. With our growth strategies in place, I believe that Kencana is well-positioned to take advantage of long term demand as our oil palms mature. We strongly believe that we are in the right industry given the long-term nature of the oil palm itself - the economic life span of an oil palm tree is typically about 25 years, plus the fact that palm oil is a basic and versatile food product. As the world population continues to grow, the need for palm oil products will continue to increase and the palm oil industry will continue to be a sustainable and versatile industry that can endure the impact of the current financial and economic crisis. Although the palm oil industry has felt the impact of current global economic crisis, with CPO price and demand declining in the short and medium term, we remain confident that we are in a good position to face the challenges ahead given the strong industry fundamentals. In addition, actions taken by the two largest oil palm producing countries, Indonesia and Malaysia, to reduce export tax and encourage replanting programs will also help provide support for CPO prices. In line with our business strategy moving forward, we will continue to adopt a prudent approach to Sincere Appreciation I would like to express my heartfelt gratitude to our dedicated and committed management team and staff, business partners, customers, bankers, and everyone who contributed to our success and growth, as well as our listing on the Singapore Exchange in I would also like to thank my fellow Directors on the Board for their strong support and invaluable advice as we forge ahead to our next phase of growth. Last but not least, a big thank you to all our shareholders and investors for your patience and confidence in Kencana and we look forward to delivering greater growth going forward as we execute our expansion plans. Henry Maknawi Chairman and Chief Executive Officer Annual Report

10 Financial and Operational Highlights The global economic landscape was challenging in 2008 and the trading environment for crude palm oil ( CPO ) was very volatile with CPO prices reaching record heights and plunging in the last quarter of the year. Despite this turbulent environment, Kencana delivered steady growth in our operational performance for the year ended 31 December 2008 ( FY2008 ). Revenue Financial Highlights S$ million % Income Statement In FY2008, revenue for the Group increased by 51% to US$104.9 million from US$69.3 million due to an increase in sales volume and CPO prices in Despite recording higher cost of sales mainly caused by higher purchase prices and volume of raw materials, as well as general expenses, Kencana achieved steady growth of 9% increase in our operating profit (excluding changes 0.0 in fair value of biological assets) from US$16.4 million in FY2007 FY2008 FY2007 to US$17.9 million in FY Kencana Agri Limited 06 Kencana Agri Limited

11 Operating Profit (excluding changes in fair value of biological assets) S$ million % 17.9 On a net profit level, stripping away changes in fair value of biological assets, and one-off IPO and restructuring expenses, the Group achieved a 22% increase in net profit after tax to US$12.4 million in FY2008 from US$10.2 million in FY FY2007 FY2008 Net Profit after Tax (excluding changes in fair value of biological assets, and one-off IPO and restructuring expenses) S$ million FY % 12.4 FY2008 On inclusion of changes in fair value of biological assets, which went from a gain of US$41.9 million in FY2007 to a loss of US$0.5 million in FY2008, and one-off IPO and restructuring expenses of US$1.7 million, net profit after tax for FY2008 fell 74% to US$10.3 million and earnings per share dropped to 1.2 US cents. The fair value of biological assets is a non-cash item which we have to include in our financial statements as we have adopted the Singapore Financial Reporting Standard 41 Agriculture. The fair value changes are prepared by an independent valuer, that take into account factors such as CPO prices, discount rates, maturity of oil palm plantations, and general industry outlook. Whilst any gain or loss due to changes in fair value of biological assets does impact our bottomline, it is noncash and non-operational in nature, and neither impacts nor reflects our operational performance or our cash position. Annual Report

12 Financial and Operational Highlights (cont d) Balance Sheet USD 000 FY2006 FY2007 FY2008 Current Assets 17,939 19,153 36,735 Non-current Assets 84, , ,188 Current Liabilities 22,689 17,304 23,570 Non-current Liabilities 31,346 58,313 41,153 Shareholders Equity 48,748 78, ,200 Total assets of the Group increased by US$20.7 million to US$174.9 million as at end 2008 despite a 16% drop in US$/Rupiah exchange rate in FY2008. The increase was mainly attributed to an increase in cash, and trade and other receivables. Kencana continued to improve our gearing due to a larger capital base after the Group s IPO. Group net asset value per share in FY2008 increased by 10% to 11.0 US cents as at 31 December Kencana Agri Limited

13 Cash Flow USD 000 FY2006 FY2007 FY2008 Net cash from operating activities 6,525 22,384 (3,477) Net cash used in investing activities (10,389) (11,644) (22,924) Net cash from/(used in) financing activities 6,669 (4,520) 34,493 Net increase in cash 548 2,662 6,910 Cash at end of year 1,351 5,941 12,433 Net cash from operating activities fell mainly due to an increase in trade and other receivables caused by higher input VAT, advances given to Plasma farmers and prepayment for the Group s corporate income tax, purchases and vessels; coupled with a decrease in trade and other payables balance as we increased our prepayment to FFB and kernel suppliers in order to secure supplies at more favourable prices. Nevertheless, the Group s financial position remained strong as at 31 December 2008 with US$12.4 million in cash and cash equivalents. Annual Report

14 Financial and Operational Highlights (cont d) Operational Highlights In hectares FY2006 FY2007 FY2008 (unless otherwise stated) Planted Area Total (Nucleus + Plasma) 22,320 29,863 33,428 Nucleus (total) 16,790 22,607 25,089 Mature 7,412 8,408 12,277 Immature 9,378 14,199 12,812 Plasma 5,530 7,256 8,339 Age Profile 0-3 years (Immature) 9,378 14,199 12, years (Young) , years (Mature) 7,412 7,412 7,412 Above 20 years Total 16,790 22,608 25,090 Distribution of Planted Areas-Nucleus Bangka 5,544 5,562 5,616 Kalimantan 11,246 17,046 19,473 Total 16,790 22,608 25,089 Production Volume (Tonnes) FFB (Nucleus) 136, , ,392 FFB (Plasma + external parties) 225, , ,889 Total 362, , ,281 Crude Palm Oil (CPO) (MT) 72,462 64,557 66,017 Crude Palm Kernel Oil (CPKO) (MT) 20,963 28,485 24,323 Sales Volume (Tonnes) Crude Palm Oil (CPO) (MT) 76,737 66,874 92,149 Crude Palm Kernel Oil (CPKO) (MT) 22,653 27,120 29,318 Note: * In 2008, approximately 3,869 Ha of young oil palm trees came into maturity and of which 891 Ha were declared mature only in December Plasma Programme: An initiative by the Indonesian Government to encourage plantation owners in Indonesia to provide assistance to surrounding villagers (small landholders) in order to benefit them socially and economically with increasing income and better welfare. Under the plasma programme, Kencana is committed to develop, and thereafter supervise the operation of the land of the villagers, and to purchase all of the Fresh Fruit Bunch ( FFB ) produced at prices set by a price committee that is established by the Indonesian Government. Nucleus: Land bank owned and developed by Kencana. 10 Kencana Agri Limited

15 Corporate Structure Kencana Agri Limited Plantation Sawindo Agri Pte. Ltd. 100% PT Sawit Permai Lestari 100% Plantation Kencana Plantations Pte. Ltd. 100% PT Wira Palm Mandiri 100% Logistics & Bulking Kencana Logistics Pte. Ltd. 100% PT Bumi Permai Sentosa 100% Power Generation Kencana Bio-energy Pte. Ltd. 100% PT Cahaya Permata Gemilang 95.0% Annual Report

16 Environment and Corporate Social Responsibility We strongly believe that our environmentally-friendly practices and corporate social responsibility ( CSR ) initiatives are key aspects of our sustainable business model. Environmentally-friendly Practices We are cognizant of the environmental impact that plantations may have, and we have been deeply committed to the implementation of environmentally friendly practices in our plantations since our establishment. In addition, we are a member of the Roundtable on Sustainable Palm Oil ( RSPO ). Our environmentally friendly practices include: replace with new pic Recycling waste products (EFB) Zero Waste Management: We apply a zero waste management policy by recycling waste products from our production facilities. The Empty Fruit Bunches ( EFB ) and liquid waste / effluent from our palm oil mills are applied as fertiliser in the plantations. In addition, the EFB and kernel shells are used as a biomass fuel source by our power plant. Our first renewable biomass power plant is a green project as it reduces carbon emissions, and is the first commercialised renewable biomass project in Indonesia that generates and sells green energy to PLN (Indonesia s state-owned electricity company). We have also received approval to sell carbon credits for this plant. Environmental Impact Assessment: Prior to any expansion of our plantation and mill operations, we will undertake a comprehensive and participatory independent social and environmental impact assessment in order to comply with prevailing governmental rules and regulations. The results will be incorporated into the planning and management of new plantings. We are mindful that some aspects of the plantation and mill management could have environmental and conservation impacts. Thus, prior to any expansion of our plantation and mill operations, we will undertake an assessment to identify any potential negative impact before proceeding. Other practices: We also adopt ecofriendly pest management practices such as the use of owls and gall flies to control pest population and weeds respectively. Zero Burning: We adhere strictly to a zero burning policy in our land-clearing methods to avoid polluting the air and causing a health hazard in the region. 12 Kencana Agri Limited

17 Corporate Social Responsibility (CSR) As part of our commitment to improve the social and economic welfare of the local communities in the areas where we operate, we have been implementing a multi-pronged CSR programme. We believe that through these community development programmes, we are able to establish good rapport with the local community, which is one of the key factors in ensuring the success of our plantation management. Our CSR initiatives include: Plasma Programme: Through our Plasma Programme, over 3,500 local villagers have now become new plantation owners instead of being employed as plantation workers. As plantation owners, local villagers benefit socially and economically with increasing incomes and better welfare such as training and education in oil palm cultivation. We believe that the improvement in their income will have a multiplier effect on the economy of the entire local communities. Education Initiatives: Since 2000, we have offered over 500 scholarships to children in the local communities. Scholarship recipients comprise the top three students from the local schools, as well as orphans or children from single-parent households, and they are offered employment opportunities with us when they graduate. We also contribute to the local schools by sponsoring local teachers. Healthcare Services: We have been collaborating with local hospitals and clinics since 2000 to provide free basic medical services, such as medical check-ups, to the local communities. Participation in Social and Cultural Activities: We value the diversified culture of Indonesia, and to further foster cultural values, we sponsor and participate in traditional events and social functions. We also contribute to the social and cultural welfare of the local communities by helping to build and repair places of worship such as mosques, churches and temples. In this way, we are able to maintain strong ties with the local communities. Annual Report

18 Board of Directors Henry Maknawi Chairman and CEO Mr Henry Maknawi is the Group s Chairman and CEO, and is responsible for formulating the overall business strategies and policies for the group. Since he founded the Group s plantation operations in 1995, Mr Maknawi has spearheaded the expansion of the group and he continues to be instrumental in setting the Group s strategic direction and driving growth. Prior to establishing the Group, Mr Maknawi founded a major stationery manufacturing company, as well as a property development business. In November 1994, Mr Maknawi was awarded the Primaniyarta award, which is the highest award from the Indonesian Government given to local exporters for their achievements in increasing non-oil and gas exports. Tengku Alwin Aziz Vice-Chairman and Non-Executive Director Tengku Alwin Aziz is the Group s Vice-Chairman and Non-Executive Director. He has been an Independent Commissioner of PT London Sumatra Indonesia Tbk, an Indonesian-listed company in the palm oil and rubber industry, since He was appointed by the Indonesian authorities as an interim President Director of PT Bank Umum Nasional from 1998 to 1999 to oversee the restructuring of the bank. He also served as an Executive Director of Bank Dagang Negara from 1992 to 1997 and as President Commissioner of various finance companies from 1990 to From 1990 to 1992, Tengku Aziz held the post of Managing Director of Staco International Financial Ltd in Hong Kong. He graduated from Universitas Sumatera Utara, Medan in 1968 with an Economics degree majoring in Accountancy. Ratna Maknawi Deputy CEO Ms Ratna Maknawi is the Group s Deputy CEO, and is responsible for managing the operations of the Group. Ms Maknawi has been with the Group since 1995, and played a key role in the rapid expansion of the Group. Ms Maknawi has previously held key leadership positions in various subsidiaries within the Group. She graduated Cum Laude in 1993 from the University of Wisconsin - Whitewater, USA with a Bachelor of Business Administration majoring in Accounting. 14 Kencana Agri Limited

19 Kent Surya Finance Director Soh Yew Hock Lead Independent Director Leung Yew Kwong Independent Director Mr Kent Surya is the Finance Director of the Group, and is responsible for the treasury and cash flow management, corporate finance, audit, and tax compliance and financial reporting functions of the Group. Mr Surya has held senior finance positions in various subsidiaries within the Group since he joined the Group in Prior to joining the Group, Mr Surya served in various positions in the finance and banking sector for over 14 years, and also served as the Chief Operating Officer, and later as Deputy CEO, of Hutrindo Group, a diversified business group engaged mainly in the Forestry and Timber industry. He graduated in 1983 with a degree in civil engineering from the University of Tarumanagara and obtained a Masters in Business Administration from the Insititut Management Prasetya Mulya, Jakarta-Indonesia in Mr Soh Yew Hock is the Lead Independent Director of the Group with extensive experience in commerce and industry. He previously served as head of finance and corporate affairs of Guthrie Berhad (now known as Guthrie GTS Limited) and WBL Corporation Limited respectively. Presently an independent director of Asia Dekor Holdings Limited and Lead independent director of Japan Residential Assets Manager Limited, Mr Soh has previously served as a director of WBL Corporation Ltd and several of its subsidiaries, associates and joint ventures in USA, Asia, Peoples Republic of China, Taiwan and Australia, a director of MFS Technology Limited and Deputy Chairman of O Connors Berhad (now known as OCB Berhad). Mr Soh was also CEO/Managing Director of Wearnes International (1994) Limited from 1993 to Mr Soh is a Fellow of the Institute of Certified Public Accountants (Singapore), Certified Practising Accountants (Australia), Association of Chartered Certified Accountants (UK) and the Chartered Institute of Marketing (UK). He holds a Bachelor of Accountancy degree from the University of Singapore (now National University of Singapore) and is a graduate of the Chartered Institute of Marketing (UK) and the Advanced Management Program of Harvard Business School. Mr Leung Yew Kwong is an Independent Director of the group. Presently a partner specialising in tax law in Wong Partnership LLP, Mr Leung had previously worked with the Inland Revenue Authority of Singapore (IRAS) and its predecessor from 1975 to He last held the posts of Chief Legal Officer and Chief Valuer in IRAS concurrently, where he dealt with all the taxes administered by IRAS, namely income tax, GST, stamp duty, property tax and estate duty. He was awarded the Public Administration Medal (Silver) when he was in the Civil Service. Mr Leung has been in legal practice specialising in tax since 2004 and was called to the Singapore Bar in He received a Colombo Plan Scholarship to study at the University of Auckland, New Zealand, where he obtained a Diploma in Urban Valuation in Mr Leung has a Masters of Science in Urban Land Appraisal from the University of Reading, UK and a Masters of Business Administration from the National University of Singapore. He has authored and coauthored a number of books on various taxes and is also an Adjunct Associate Professor in the Department of Real Estate at the National University of Singapore. He is recognised as a leading individual by The Asia Pacific Legal 500, 2006/2007 and listed as one of the Hot 100 lawyers of 2006 by Asian Legal Business. Annual Report

20 Executive Officers from left to right Chua Voon Hai, Ajis Chandra, CS Kwang Kay, Ooi Min Choo, Albert Maknawi. CS Kwang Kay, Chief Operating Officer Mr CS Kwang Kay (also known as Chua) is the Group s Chief Operating Officer, and is responsible for overseeing the group s overall operational activities. Mr Chua has over 30 years of experience in the plantation business, which has seen him hold senior positions at Harrisons & Crosfield Co, Ltd, Ban Len Sdn Bhd, Sabah Land Development and PBB Oil Palms Berhad ( PPBOP, previously owned by Kuok Group, now part of Wilmar Group). Mr Chua has also served as a board member in various PPBOP subsidiaries and as chairman and director of Suburmas Plantation Sdn. Bhd. Mr Chua left PPBOP in 2007 as chief operating officer after having played a pioneering role in the company s entry into the plantation business in East Malaysia. Mr Chua is a member of the Incorporated Society of Planters and a committee member of the Palm Oil Association (East Malaysia). He graduated from the University of Allahabad, India in 1975 with a Bachelor of Science in Agriculture with first class honours. Ooi Min Choo, Head of Plantations Mr Ooi Min Choo is the Group s Head of Plantations, and is responsible for the operational management of the Group s plantation activities. He has over 30 years of experience managing both new and mature plantations in Malaysia and Indonesia. Prior to his appointment with the Group, Mr Ooi was an Assistant General Manager overseeing large scale oil palm planting for several PBB Oil Palms Berhad ( PPBOP, previously owned by Kuok Group, now part of Wilmar Group) subsidiaries in Central Kalimantan, Indonesia. Mr Ooi is a member of the Incorporated Society of Planters ( ISP ) and completed ISP s professional papers relating to tree crops and milling between 1986 to Albert Maknawi, Head of Engineering and Processing Mr Albert Maknawi is the Group s Head of Engineering and Processing, and is in charge of overseeing the group s overall engineering operations. Since he joined the Group in 2004, he has held leadership positions in various subsidiaries within the Group, including being in charge of managing daily operations and maintenance of mills, purchasing of plant and equipment, as well as the development and construction of renewable biomass power plant operations in Bangka and Belitung. Mr Maknawi is the founder and project leader responsible for the construction of the Group s power plants. He was instrumental in obtaining approval for the validation of the Bangka biomass power plant as a Clean Development Mechanism ( CDM ) project in January Mr Maknawi was also responsible for successfully negotiating the power purchase agreement with PLN, a state-owned electricity company, to sell electricity generated from the biomass plant. He graduated from the University of Melbourne, Australia in 2004 with a Bachelor of Engineering (Honours) and a Bachelor of Commerce. Ajis Chandra, Head of Bulking and Logistics Mr Ajis Chandra is the Group s Head of Bulking and Logistics and has been in charge of managing the bulking and logistics operations of the Group since his appointment in Mr Chandra was previously with the Lippo Group for over 10 years, serving in various positions in the banking and insurance businesses of the Lippo Group in Indonesia, Malaysia and Vietnam. During his tenure with the Lippo Group, he was also assigned as Representative to operate the Representative Offices of PT Lippo Bank Tbk. in Malaysia and Vietnam. Mr Chandra obtained a Bachelor s degree in Commerce in 1987 and two Masters Degrees in Accountancy and Commerce in 1988 and 1989 respectively, from the University of Wollongong, Australia. Chua Voon Hai, Financial Controller Mr Chua Voon Hai is the Group s Financial Controller, and is responsible for the Group s finance and accounts department. Mr Chua has extensive experience and financial knowledge related to the palm oil industry. Prior to his appointment with the Group, Mr Chua handled internal and external reporting, tax, financing and IT related matters at Wilmar Group and Kuok Oils and Grains KOG Group for more than 10 years. During his tenure with the KOG Group, he was seconded to China working as Finance Manager in one of their manufacturing subsidiaries in Tianjin. He was later assigned to represent group finance, working as ERP project manager as well as taking care of all ERP related matters from financial/reporting and controls requirements. Mr Chua graduated from Emile Woolf College, London in 1991 and is a fellow of the Association of Chartered Certified Accountants (UK). 16 Kencana Agri Limited

21 Financial Contents Corporate Governance Report 18 Use of Proceeds from Initial Public Offering 31 Directors Report 32 Statement by Directors 35 Independent Auditors Report 36 Consolidated Income Statement 38 Balance Sheets 39 Statement of Changes in Equity 40 Consolidated Cash Flow Statement 43 Notes to the Financial Statements 44 Information on Shareholdings 92 Notice of Annual General Meeting 94 Proxy Form

22 Corporate Governance Report The Board of Kencana Agri Limited (the Company ) and its Management are committed to ensuring high standards of corporate governance so as to ensure transparency, to protect shareholders interests and promote investors confidence. Steps have been taken, as far as practicable, towards the compliance of the recommendations in the Code of Corporate Governance (the Code ) This report outlines the Company s corporate governance structure, policies and practices that took place since the listing of the Company in July 2008 with specific reference to the relevant provisions of the Code. BOARD MATTERS The Board s Conduct of Affairs Principle 1: Every company should be headed by an effective Board to lead and control the Company. The Board is collectively responsible for the success of the company. The Board works with Management to achieve this and the Management remains accountable to the Board. The Board currently consists of 6 members, comprising two independent non executive directors, a non executive director and three executive directors. Together, the directors bring a wide range of business, financial and legal experience relevant to the Group. Henry Maknawi Alwin Aziz Ratna Maknawi Kent Surya Soh Yew Hock Leung Yew Kwong Chairman and Chief Executive Officer Vice Chairman and Non Executive Director Deputy Chief Executive Officer Finance Director Lead Independent Director Independent Director The Board is entrusted with the responsibility of the overall management of the Company. The principal functions of the Board are: a) Approving corporate objectives, plans, strategies, policies and financial objectives of the Group and monitoring the performance of Management. b) Overseeing the processes for evaluating the adequacy of internal controls, risk management, financial reporting and compliance. c) Approving nominations and appointments of Board directors, committee members and key personnel. d) Approving annual budgets, investments, capital expenditures, major acquisitions and divestments proposals. 18 Kencana Agri Limited

23 Corporate Governance Report The Board meets regularly to review the Group s performance, to deliberate on specific issues including major acquisitions and disposals, to approve the annual budget and to approve the release of the quarterly, half yearly and year end financial results. There is an objective decision making process, which allows each Director to engage in constructive discussion and make decisions in the best interests of the Company. The Board also has informal discussions and/or meetings outside of formal board meetings. The Company s Articles of Association provide for the Board to convene meetings by telephone or video conference or similar communication modes. A total of 2 board meetings were held in the year The details of attendance of the formal meetings by individual Directors are as follows: Number of meetings held Number of meetings attended Henry Maknawi 2 2 Kent Surya 2 2 Ratna Maknawi 2 2 Alwin Aziz 2 2 Soh Yew Hock 2 2 Leung Yew Kwong 2 2 To assist the Board in the execution of its duties, the Board has established various Board Committees, namely the Nominating Committee ( NC ), the Remuneration Committee ( RC ) and the Audit Committee ( AC ). Each of these committees is empowered to make decisions on matters within its terms of reference. Board members are apprised of the business and operations of the Company on a regular basis either through formal or informal meetings and discussions. They are also encouraged to attend seminars and receive training to improve themselves in the discharge of their duties as directors. The Company works closely with professionals to provide its directors with changes to relevant laws, regulations and accounting standards. The Company has adopted internal guidelines on matters requiring its approval, which include all matters of strategic importance, corporate governance practices, legal and regulatory compliances, risk management, annual budgets, investment proposals and major transactions. Newly appointed directors are given briefings on the business activities of the Group and its strategic directions. Annual Report

24 Corporate Governance Report Board Composition and Guidance Principle 2: There should be a strong and independent element on the Board, which is able to exercise objective judgment on corporate affairs independently, in particular, from Management. No individual or small group of individuals should be allowed to dominate the Board s decision making. The Company endeavours to maintain a strong and independent element on the Board. As at the date of this report, one third of the Board members are independent directors. The independent directors have confirmed that they do not have any relationship with the Company or its related companies or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director s independent business judgment in the best interests of the Company. The Nominating Committee ( NC ) has reviewed and determined that the said directors are independent. The independence of each director is reviewed annually by the NC. The Board is of the opinion that its current size of 6 Board members is both effective and efficient. This conclusion was drawn after taking into consideration the nature and size of the Company s business and operations. Together, the Board members possess a balanced field of core competencies such as accounting and finance, legal, business and management experience and the requisite industry knowledge to lead the Company. Details of the Board members qualifications and experience are presented in this Annual Report under the heading Board of Directors on pages 14 to 15. Chairman and Chief Executive Officer Principle 3: There should be a clear division of responsibilities at the top of the Company the working of the Board and the executive responsibility of the Company s business which will ensure a balance of power and authority, such that no one individual represents a considerable concentration of power. The Chairman and Chief Executive Officer ( CEO ) of the Company is Mr. Henry Maknawi. The Board, after careful consideration, is of the opinion that the need to separate the roles of the Chairman and CEO is not necessary for the time being. The presence of a strong independent element and the participation of the independent directors ensure that Mr. Henry Maknawi does not have unfettered powers of decision. This has been reflected in the Board and Committee meetings where the independent Directors have participated actively in the decision making process. A Lead Independent Director, Mr. Soh Yew Hock, has been appointed, since the listing of the Company, to be an alternative avenue for shareholders and other directors to raise their concerns where raising through the normal channels of the Chairman has failed to resolve. The Chairman s duties and responsibilities include: (a) (b) Leading the Board to ensure it is effective in its role; Setting directions for the Company and scheduling of meetings to enable the Board to perform its duties responsibly; 20 Kencana Agri Limited

25 Corporate Governance Report (c) (d) (e) (f) (g) Ensuring the proper conduct of meetings and accurate documentation of the proceedings; Ensuring the smooth and timely flow of information between the Board and Management; Ensuring compliance with internal polices and guidelines of the Company and high standards of corporate governance; Ensuring effective communication with shareholders through investors relationship channels and timely announcements of Company s development; Encouraging constructive relations between the Board and Management as well as between all directors. In addition to the above duties, the Chairman will assume duties and responsibilities as may be required from time to time. Board Membership Principle 4: There should be a formal and transparent process for the appointment of new directors to the Board. The Nominating Committee ( NC ) is established and it comprises 3 members, the majority of whom, including the Chairman, are non executive independent directors. Chairman : Leung Yew Kwong Member : Soh Yew Hock Member : Henry Maknawi The NC is established for the purposes of ensuring that there is a formal and transparent process for all Board appointments. It has adopted written terms of reference defining its membership, administration and duties. The NC met once in 2008, attended by Mr. Leung Yew Kwong, Mr. Soh Yew Hock and Mr. Henry Maknawi. The duties of the NC are as follows: (a) (b) (c) (d) To make recommendations to the Board on all Board appointments, including development of a set of criteria for director appointments, which includes qualifications of director; ability to exercise sound business judgments, relevance to the Company and the industry and appropriate personal qualities; To re nominate directors having regard to the director s contribution and performance (e.g. attendance, participation and critical assessment of issues deliberated upon by the Board) including, if applicable, as an independent director; To determine annually whether or not a director is independent; To decide how the Board s performance may be evaluated and propose objective performance criteria; and Annual Report

26 Corporate Governance Report (e) To assess the effectiveness of the Board as a whole. The Articles of Association of the Company currently require one third of the directors to retire and subject themselves to re election by the shareholders in every Annual General Meeting. In addition, all directors of the Company (including the CEO) shall retire from office at least once every three years. The details of the Board members qualifications and experience including the year of initial appointment and election are presented in this Annual Report under the heading Board of Directors on pages 14 to 15. Name of Directors Appointment Date of Initial Appointment Date of Last Re election Directorship in Listed Companies Henry Maknawi Executive 30 May June 2008 Kencana Agri Limited Kent Surya Executive 30 May June 2008 Kencana Agri Limited Ratna Maknawi Executive 26 September 18 June 2008 Kencana Agri Limited 2007 Alwin Aziz Non Executive 30 May June 2008 Kencana Agri Limited Soh Yew Hock Non-Executive/ Independent 30 May June 2008 Kencana Agri Limited Asia Dekor Holdings Limited Japan Residential Assets Manager Limited Leung Yew Kwong Board Performance Non Executive/ Independent 30 May June 2008 Kencana Agri Limited Principle 5: There should be a formal assessment of the effectiveness of the Board as a whole and the contribution by each director to the effectiveness of the Board. The NC has adopted a process for assessing the performance of the Board as a whole instead of individual assessment. The performance appraisal includes qualitative and quantitative factors including Board structure, conduct of meetings, corporate strategy and planning, risk management and internal control, and so on. The NC undertakes the Board performance appraisal annually and the appraisal results are presented to and tabled during the Board meeting. Although the Code proposes certain financial indicators as performance criteria, such as the Company s share price performance, the Board is of the opinion that the performance criteria should be geared toward evaluating the performance of the Board and the directors in discharging its principal responsibilities, upholding high standards of corporate governance and strategic oversight of the Company s business rather than the specific performance of the Company s share price and other financial indicators. 22 Kencana Agri Limited

27 Corporate Governance Report Access to Information Principle 6: In order to fulfill their responsibilities, board members should be provided with complete, adequate and timely information prior to board meetings and on an on going basis. The Board is furnished with Board papers prior to any Board meeting. These papers are issued in sufficient time to enable the Directors to obtain additional information or explanations from the Management, if necessary. The Board papers include minutes of the previous meeting, reports relating to investment proposals, budgets, financial results announcements and reports from committees, internal and external auditors. The Directors may communicate directly with the Management team and the Company Secretary on all matters whenever they deem necessary. The Company Secretary attends Board meetings and is responsible for the recording of the proceedings. The Company currently does not have a formal procedure for Directors to seek independent professional advice for the furtherance of their duties. However, directors may, on a case to case basis, propose to the Board for such independent professional advice, the cost of which may be borne by the Company. The Company has a transparent policy wherein directors are welcomed to request further information or informal discussions and make recommendations on any aspect of the Company s operations or business issues. REMUNERATION MATTERS Procedures for Developing Remuneration Policies Principle 7: There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his own remuneration. The Remuneration Committee ( RC ) is established and it comprises 3 members, all non executive and majority of whom, including the Chairman, are independent directors. Chairman : Soh Yew Hock Member : Leung Yew Hock Member : Alwin Aziz Although no member of the RC has direct expertise in the field of executive compensation, they possess direct experience managing groups of staff working under them in their own business areas, and hence would invariably have to deal with compensation issues from time to time in the course of their work. The RC will seek professional advice when necessary in discharging its duties and responsibilities. Annual Report

28 Corporate Governance Report The RC is established for the purposes of ensuring that there is a formal and transparent procedure for fixing the remuneration packages of individual directors. The overriding principle is that no director should be involved in deciding his own remuneration. It has adopted written terms of reference that defines its membership, roles and functions and administration. The RC held one meeting in The details of the attendance are as follows: Number of meetings held Number of meetings attended Soh Yew Hock 1 1 Leung Yew Kwong 1 1 Alwin Aziz 1 1 The duties of the RC are as follows: (a) (b) (c) to review and make recommendations to the Board the employment terms and remuneration (including share options and other benefits) of Executive Directors; to review the remuneration packages of employees related to any director and/or substantial shareholder of the Group; to oversee the payment of fees to non executive directors and to ensure, as far as is possible, that the quantum is commensurate with the non executive directors contribution to the Board and the Company; Level and Mix of Remuneration Principle 8: The level of remuneration should be appropriate to attract, retain and motivate the directors needed to run the company successfully but companies should avoid paying more for this purpose. A significant proportion executive directors remuneration should be structured so as to link rewards to corporate and individual performance. The Company will be developing a remuneration framework for Executive Directors and senior management staff. The framework will cover directors fees, basic salaries, allowances, bonuses and benefits in kind, taking into consideration factors, such as the Company s performance, the economic scenario, market practices and the individual s contributions to the Company. Non executive directors will be paid a fee for their board services and appointment to board committees. While the remuneration frameworks are not subject to shareholders approval, the directors fees for the non executive directors will be subject to the approval of shareholders at AGMs. 24 Kencana Agri Limited

29 Corporate Governance Report Disclosure on Remuneration Principle 9: Each company should provide clear disclosure of its remuneration policy, level and mix of remuneration, and the procedures for setting remuneration in the Company s annual report. It should provide disclosure in relation to its remuneration policies to enable investors to understand the link between remuneration paid to directors and key executives, and performance. Remuneration of Directors of the Company A breakdown, showing the level and mix of each individual director s remuneration payable for the financial year ended 31 December 2008, is as follows: Fee (1) (%) Salary & fixed allowance (%) Bonus & incentives (%) Other Benefits (%) S$250,000 to S$500,000 Henry Maknawi Ratna Maknawi Kent Surya Below S$250,000 Alwin Aziz Soh Yew Hock Leung Kew Kwong (1) Director fees are payable in 2009 after approval by shareholders in the AGM The Company had entered into separate Service Agreements with the three Executive Directors, namely, Mr. Henry Maknawi, Ms Ratna Maknawi and Mr. Kent Surya, for an initial term of three years commencing from the Listing Date, which will continue thereafter. The service agreements may be terminated by not less than six months notice in writing served by either party on the other. Total (%) Annual Report

30 Corporate Governance Report Remuneration of Key Executives of the Company Salary & fixed allowance (%) Bonus & incentives (%) Other Benefits (%) S$250,000 to S$500,000 Chua S.Kwang Kay Below S$250,000 Ooi Min Choo Ajis Chandra (a) Chua Voon Hai Albert Maknawi (b) Remuneration of employee who is an immediate family member of a Director or CEO Total (%) Salary & fixed allowance (%) Bonus & incentives (%) Other Benefits (%) Above S$150,000 Eddy Maknawi (c) Total (%) (a) (b) (c) Mr Ajis Chandra is the husband of Ms Ratna Maknawi. Mr Albert Maknawi is the son of Mr Henry Maknawi. Mr Eddy Maknawi is the brother of Mr Henry Maknawi and of Ms Ratna Maknawi. Apart from the above, the Company does not have any employee whose remuneration exceeded S$150,000 for FY2008 who is an immediate family member of a director or CEO. The Board is of the opinion that the information as disclosed above would be sufficient for shareholders to have an adequate appreciation of the Company s compensation policies and practices and therefore does not intend to issue a separate remuneration report, the contents of which would be largely similar. ACCOUNTABILITY AND AUDIT Accountability Principle 10: The Board should present a balanced and understandable assessment of the company s performance, position and prospects. For the financial performance reporting via the SGXNET, announcement to SGX ST and the Annual Report to the shareholders, the Board has a responsibility to present a balanced and understandable assessment of the Group s performance, financial position including the prospects of the Group. 26 Kencana Agri Limited

31 Corporate Governance Report The Board ensures that the Management maintains a sound system of internal control to safeguard the shareholders investment and the Group s assets. The Management will provide all members of the Board with management reports and financial statements on regular basis. Board papers are given prior to any Board meeting to facilitate effective discussion and decision making. Audit Committee Principle 11: The Board should establish an Audit Committee ( AC ) with written terms of reference which clearly set out its authority and duties. The AC comprises 3 members, all non executive and the majority of whom, including the Chairman are independent directors. Chairman Member Member Soh Yew Hock Leung Yew Kwong Alwin Aziz The Chairman, Mr. Soh Yew Hock, has extensive experience in commerce. The other members of the AC possess experience in finance, legal and business management. At least two members have the appropriate accounting or related financial management experience or expertise. The Board is of the opinion that the members of the AC have sufficient financial management expertise and experience in discharging their duties. The role of the AC is to assist the Board with discharging its responsibility to safeguard the Company s assets, maintain adequate accounting records and develop and maintain effective systems of internal controls. In accordance with the terms of reference adopted by the AC, the AC shall perform the following main functions: (a) (b) (c) (d) (e) Discuss with the external auditors, prior to the commencement of audit, the audit plan which states the nature and scope of the audit. Review with external auditors, their evaluation of the system of internal accounting controls, the Management Letter and Management s response thereon. Review of the independence and objectivity of the external auditors and nomination of their re appointment as auditors of the Company Review of the adequacy of the Company s internal controls, and the effectiveness of the Company s internal audit function, the internal audit program including the scope and results of the internal audit. Review of interested person transactions (as defined in Chapter 9 of the Listing Manual of SGX ST) Annual Report

32 Corporate Governance Report (f) (g) Review of quarterly, half yearly and annual financial results, including review of the significant financial reporting issues and judgments so as to ensure the integrity of the financial statements of the Company and any formal announcements relating to the Company s financial performance. Undertake any other functions that are requested by the Board, as may be required by statute or the Listing Manual. In performing the above functions, the AC confirms that it has full access to and co operation from Management and is given full discretion to invite any Director to attend its meetings. In addition, the AC has also been given reasonable resources to enable it to perform its functions properly. The AC meets with the external auditors, without the presence of management, at least once a year. The AC has conducted an annual review of the volume of non audit services to satisfy itself that the nature and extent of such services will not prejudice the independence and objectivity of the external auditors before recommending their re nomination to the Board. The Company has implemented a Whistle blowing Policy, which serves to encourage and provide a channel to employees to report in good faith and in confidence, concerns about possible improprieties. The objective of such arrangement is to ensure independent investigation of such matters and appropriate follow up action. During the year 2008, the AC met two times and the details of attendance are as follows: Number of meetings held Number of meetings attended Soh Yew Hock 2 2 Leung Yew Kwong 2 2 Alwin Aziz 2 2 Internal Control/ Internal Audit Principle 12: The Board should ensure that the Management maintains a sound system of internal controls to safeguard the shareholders investments and the company s assets. Principle 13: The Company should establish an internal audit function that is independent of the activities it audits. The Board is responsible for maintaining a sound system of internal controls to safeguard shareholders interests. Effective internal controls not only refer to financial controls but include business risk assessment and response, operational and compliance controls among others. The Company is in the process of developing its own risk management framework which identifies, reviews, and monitors different categories of risks including financial, operational, market, regulatory and human related, and how such risks can be addressed by instituting control measures. The AC acknowledges that internal audit function is essential to assist in obtaining the assurance it requires regarding the effectiveness of the system of internal control. 28 Kencana Agri Limited

33 Corporate Governance Report The Company currently has an in house internal audit department for reviewing and implementing appropriate internal accounting controls, risk management and good corporate governance. The Head of internal audit department is a qualified member of The Institute of Internal Auditors Jakarta Chapter and Indonesian Accountant Association. The in house internal audit department reports directly to the AC who will approve the internal audit plans and policies. During the year 2008, the AC is satisfied that the internal audit on systems and controls are adequate in view of the current nature and scope of operations of the Company. The AC will continue to assess the adequacy of internal audit function annually. COMMUNICATION WITH SHAREHOLDERS Principle 14: Companies should engage in regular, effective and fair communication with shareholders. The Company endeavours to communicate regularly, effectively and fairly with its shareholders. Results are published via SGXNET and are usually followed by a news release. Price sensitive information is first publicly released, either before the Company meets with any group of investors or analysts or simultaneously with such meetings. Results are announced or issued within the mandatory period and are available on the Company s website. The Company does not practise selective disclosure. The Company communicates with its shareholders through its corporate website kencanaagri.com. In addition, the Company has engaged a public relations firm to assist in its communication with shareholders. Principle 15: Companies should encourage greater shareholder participation at AGMs, and allow shareholders the opportunity to communicate their views on various matters affecting the Company. Annual reports and notices of AGM are sent to all shareholders. The notice is also published in the local newspapers and made available on the SGXNET. At the AGM, the shareholders are given the opportunity to express their views and raise any queries regarding the Company. Each item of special business included in the notice of meeting will be accompanied by the relevant explanatory notes. This is to enable the shareholders to understand the nature and effect of the proposed resolutions. In addition, the Chairman of the respective committees and the external auditors will be present at the AGM to address any queries from the shareholders. Annual Report

34 Corporate Governance Report DEALINGS IN SECURITIES The Company has devised and adopted its own internal Code of Conduct on dealing in the securities of the Company (the Code ). This code will provide guidance to the Group s directors and employees on their dealings in its securities. Under the Code, Officers are prohibited from dealings in the Company s securities while in possession of price sensitive information, and during the period commencing two weeks before the announcement of the Company s financial statements for each of the first three quarters of its financial year, and one month before the announcement of the Company s full year financial statements. Officers of the Group are required to confirm annually their compliance with the Code of Best Practices. The Company has complied with the Code for the financial year ended 31 December INTERESTED PERSON TRANSACTIONS The Company has adopted internal guidelines in respect of any transactions with interested persons and has set out the procedures for review and approval of the Company s interested person transactions. The main objective is to ensure that all interested person transactions are conducted on arm s length basis and on normal commercial terms and will not be prejudicial to our shareholders. The Company monitors all its interested person transactions closely and all interested person transactions are subject to review by the Audit Committee on a quarterly basis. There is no material contract of the Group involving the interests of the CEO, each director or controlling shareholder of the Company as at the end of the financial year. The aggregate value of interested person transactions entered into during the year is as follows: Name of interested person Aggregate value of all interested person transactions during the financial year under review (excluding transactions less than S$100,000 and transactions conducted under shareholders mandate pursuant to Rule 920) Nil NA NA Aggregate value of all interested person transactions conducted under shareholders mandate pursuant to Rule 920 (excluding transactions less than S$100,000) 30 Kencana Agri Limited

35 Use of Proceeds from Initial Public Offering As at 31 December 2008, the utilisation of IPO proceeds in relation to the invitation in respect of 200,000,000 new shares is as follows: Intended use of net proceeds Establishment of new planting for existing land, and acquiring rights for additional land banks for companies holding land banks or mature plantations Build new palm oil mills and maintaining and improving the Infrastructure of our plantations Amount allocated () Amount utilised () Balance amount () 20,913 8,975 11,938 6,970 6,970 0 Repayment of loans from financial institutions 12,469 12,469 0 Total 40,352 28,414 11,938 Annual Report

36 Directors Report Directors Report The directors of the company are pleased to present their report together with the audited financial statements of the company and of the group for the financial year ended 31 December Directors at Date of Report The directors of the company in office at the date of this report are: Henry Maknawi Appointed on 30 May 2008 Ratna Maknawi Tengku Alwin Aziz Appointed on 30 May 2008 Kent Surya Appointed on 30 May 2008 Soh Yew Hock Appointed on 30 May 2008 Leung Yew Kwong Appointed on 30 May Arrangements to Enable Directors to Acquire Benefits by Means of the Acquisition of Shares and Debentures Neither at the end of the financial year nor at any time during the financial year did there subsist any arrangement whose object is to enable the directors of the company to acquire benefits by means of the acquisition of shares or debentures in the company or any other body corporate. 3. Directors Interests in Shares and Debentures The directors of the company holding office at the end of the financial year had no interests in the share capital of the company and related corporations as recorded in the register of directors shareholdings kept by the company under section 164 of the Companies Act, Cap. 50 except as follows: Name of directors and companies in which interests are held At beginning of year or date of appointment if later At end of year At beginning of year or date of appointment if later At end of year Number of shares at no par value Direct interest Deemed interest Kencana Holdings Pte Ltd (The ultimate parent company) Henry Maknawi 1 7,486, Ratna Maknawi 1 1,246,865-32,766 Tengku Alwin Aziz - 384, Kencana Agri Limited (The company) Henry Maknawi 1 37,099, ,580,640 Ratna Maknawi - 5,506, ,600 Tengku Alwin Aziz - 1,675, Kent Surya - 1,037, Soh Yew Hock - 200, Leung Yew Kwong - 400, Kencana Agri Limited

37 Directors Report 3. Directors Interests in Shares and Debentures (Cont d) By virtue of section 7 of the Companies Act, Cap. 50, Henry Maknawi is deemed to have an interest in the company as disclosed above and in all the related corporations of the company. The directors interests as at 21 January 2009 were the same as those at the end of the year. 4. Contractual Benefits of Directors Since the beginning of the financial year, no director of the company has received or become entitled to receive a benefit which is required to be disclosed under section 201(8) of the Companies Act, Cap. 50, by reason of a contract made by the company or a related corporation with the director or with a firm of which he is a member, or with a company in which he has a substantial financial interest except as disclosed in the financial statements. Certain directors of the company received remuneration from related corporations in their capacity as directors and or executives of those related corporations. There were certain transactions (shown in the financial statements under related party transactions) with a corporation/corporations in which certain directors have an interest. 5. Options to Take up Unissued Shares During the financial year, no option to take up unissued shares of the company or any corporation in the group was granted. 6. Options Exercised During the financial year, there were no shares of the company or any corporation in the group issued by virtue of the exercise of an option to take up unissued shares. 7. Unissued Shares under Option At the end of the financial year, there were no unissued shares under option. 8. Audit Committee The members of the audit committee at the date of this report are as follows: Soh Yew Hock Leung Yew Kwong Tengku Alwin Aziz (Chairman of Audit Committee and Independent Director) (Independent Director) (Vice Chairman and Non-Executive Director) The audit committee performs the functions specified by section 201B (5) of the Companies Act. Among others, it performed the following functions: Reviewed with the independent external auditors their audit plan; Reviewed with the independent external auditors their evaluation of the company s internal accounting control, and their report on the financial statements and the assistance given by the company s officers to them; Annual Report

38 Directors Report 8. Audit Committee (Cont d) Reviewed with the internal auditors the scope and results of the internal audit procedures; Reviewed the financial statements of the group and the company prior to their submission to the directors of the company for adoption; and Reviewed the interested person transactions (as defined in Chapter 9 of the Listing Manual of SGX). Other functions performed by the audit committee are described in the report on corporate governance included in the annual report and it includes an explanation of how auditors objectivity and independence is safeguarded when the independent auditors provide nonaudit services. The audit committee has recommended to the Board of Directors that the independent auditors, RSM Chio Lim LLP, be nominated for re-appointment as independent auditors at the next annual general meeting of the company. 9. Independent Auditors The independent auditors, RSM Chio Lim LLP, have expressed their willingness to accept reappointment. 10. Subsequent Developments Save as disclosed in the notes to financial statements, there are no other subsequent developments subsequent to the release of the group s and company s preliminary financial statements, as announced on 24 February 2009, which could materially affect the group operating and financial performance as of the date of this report. On Behalf of the Directors Henry Maknawi Director Kent Surya Director Singapore, 3 April Kencana Agri Limited

39 Statement by Directors In the opinion of the directors, the accompanying financial statements set out on pages 38 to 91 are drawn up so as to give a true and fair view of the state of affairs of the group and of the company as at 31 December 2008 and the results, changes in equity and cash flows of the group and the changes in equity of the company for the year ended on that date and at the date of this statement there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due. On Behalf of the Board of Directors Henry Maknawi Director Kent Surya Director Singapore, 3 April 2009 Annual Report

40 Independent Auditors Report To the Members of Kencana Agri Limited We have audited the accompanying financial statements of Kencana Agri Limited and its subsidiaries (the group) set out on pages 38 to 91, which comprise the balance sheets of the group and the company as at 31 December 2008, and the income statement, statement of changes in equity and cash flow statement of the group, and statement of changes in equity of the company for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the provisions of the Singapore Companies Act, Cap. 50 ( the Act ) and Singapore Financial Reporting Standards. This responsibility includes: (a) (b) (c) devising and maintaining a system of internal accounting controls sufficient to provide a reasonable assurance that assets are safeguarded against loss from unauthorised use or disposition; and transactions are properly authorised and that they are recorded as necessary to permit the preparation of true and fair income statement and balance sheet and to maintain accountability of assets; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Independent Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Singapore Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 36 Kencana Agri Limited

41 Independent Auditors Report To the Members of Kencana Agri Limited Opinion In our opinion, (a) (b) the consolidated financial statements of the group and the balance sheet and the statement of changes in equity of the company are properly drawn up in accordance with the provisions of the Act and Singapore Financial Reporting Standards so as to give a true and fair view of the state of affairs of the group and of the company as at 31 December 2008 and the results, changes in equity and cash flows of the group and the changes in equity of the company for the year ended on that date; and the accounting and other records required by the Act to be kept by the company and by those subsidiaries incorporated in Singapore of which we are the independent auditors have been properly kept in accordance with the provisions of the Act. RSM Chio Lim LLP Public Accountants and Certified Public Accountants Singapore 3 April 2009 Partner in charge of audit: Peter Jacob Effective from year 31 December 2007 Annual Report

42 Consolidated Income Statement Year ended 31 December 2008 Group Notes Revenue 4 104,888 69,280 Cost of Sales (77,796) (45,826) Gross Profit 27,092 23,454 Other Items of Income Interest Income Other Credits Other Items of Expense Distribution Costs (2,394) (1,781) Administrative Expenses (9,262) (4,561) Finance Cost 6 (3,076) (2,797) Other Charges 5 (453) (1,928) (Loss) / Gain on Fair Value Changes in Biological Assets 12 (503) 41,898 Profit before Tax from Continuing Operations 12,477 54,556 Income Tax Expense 8 (2,153) (15,354) Profit from Continuing Operations, Net of Tax 10,324 39,202 Profit Attributable to Owners of the Parent, Net of Tax 10,324 39,202 Loss Attributable to Minority Interest, Net of Tax * * 10,324 39,202 Earnings Per Share Earnings per Share Currency Unit Cents Cents Basic Diluted * Less than US$1,000 The accompanying notes form an integral part of these financial statements. 38 Kencana Agri Limited

43 Balance Sheets As at 31 December 2008 Group Company Notes ASSETS Non-Current Assets Property, Plant and Equipment 11 26,874 19,869 Biological Assets , ,649 Investments in Subsidiaries 13 52,539 Land Use Rights 14 3,054 2,480 Other Assets 17 1,288 1,043 Financial Assets Total Non-Current Assets 138, ,041 52,539 Current Assets Inventories 15 6,418 5,171 Trade and Other Receivables 16 11,920 4,491 6 Other Assets 17 5,964 3,550 1,416 Cash and Cash Equivalents 18 12,433 5, Total Current Assets 36,735 19, ,416 Total Assets 174, ,194 53,515 1,416 EQUITY AND LIABILITIES Equity Share Capital 19 55,774 19,110 55,774 * Other Reserve 2,553 Translation Reserve (21,288) (4,328) (15) (15) Retained Earnings/(Accumulated Losses) 73,161 63,795 (2,821) (398) Equity, Attributable to Equity Holders of the Parent 110,200 78,577 52,938 (413) Minority Interest * Total Equity 110,200 78,577 52,938 (413) Non-Current Liabilities: Deferred Tax Liabilities 8 22,075 26,073 Finance Leases Other Financial Liabilities 20 18,124 31,660 Other Liabilities Total Non-Current Liabilities 41,153 58,313 Current Liabilities: Income Tax Payable 2, Trade and Other Payables 21 7,347 11, ,829 Finance Leases Other Financial Liabilities 20 13,255 3,383 Other Liabilities ,168 Total Current Liabilities 23,570 17, ,829 Total Liabilities 64,723 75, ,829 Total Equity and Liabilities 174, ,194 53,515 1,416 The accompanying notes form an integral part of these financial statements. * Less than US$1,000. Annual Report

44 Statements of Changes in Equity Year ended 31 December Minority Total Attributable to equity holders of the Parent 4. interest equity 5. Share Other Translation Retained Parent 6. Group capital reserve reserves earnings sub-total Current Year: 10. Balance at 1 January ,110 (4,328) 63,795 78, * 78,577 Items of Income and Expense Recognized Directly in Equity: 12. Exchange Differences on Translating IDR Functional Currency to US$ Presentation Currency (11,264) (11,264) 13. * (11,264) Exchange Differences arising from Quasi Equity Loans to Subsidiaries (5,696) (5,696) 14. (5,696) Net Expense Recognized Directly in Equity (16,960) (16,960) 15. * (16,960) Profit for the Year 10,324 10, * 10,324 Total Recognized Income and Expenses for the Year (16,960) 10,324 (6,636) 17. (6,636) Other Movements in Equity: 18. Dividends Paid (b) (958) (958) 19. (958) Changes Resulting from Restructuring Exercise (6,130) 2,553 (3,577) 20. (3,577) Issue of Share Capital (Note 19) 44,526 44, ,526 Share Issuance Expenses (Note 19) (1,732) (1,732) 22. (1,732) Balance at 31 December ,774 2,553 (21,288) 73, , ,200 * Less than US$1, The accompanying notes form an integral part of these financial statements. 40 Kencana Agri Limited

45 Statements of Changes in Equity Year ended 31 December 2008 Attributable to equity holders of the Parent Minority interest 28. Share Other Translation Retained Parent 29. Group capital reserve reserves earnings sub-total Previous Year: 33. Balance at 1 January 2007 (a) 18,755 (1,289) 31,282 48, * 48,748 Items of Income and Expense Recognized Directly in Equity: Exchange Differences on Translating IDR Functional Currency to US$ Presentation Currency (3,039) (3,039) 36. (3,039) Net Expense Recognized Directly in Equity (3,039) (3,039) 37. (3,039) Profit for the Year 39,202 39, * 39,202 Total Recognized Income and Expenses for the Year (3,039) 39,202 36, * 36,163 Other Movements in Equity: 40. Dividends Paid (b) (2,025) (2,025) 41. (2,025) Capital Distribution to Shareholders Arising from the Liquidation of an Entity (4,664) (4,664) Total equity (4,664) Issue of Share Capital (Note 19) Balance at 31 December 2007 (a) 19,110 (4,328) 63,795 78, * 78,577 * Less than US$1, (a) The share capital, share application money, translation reserves and retained earnings represent the share capital, share application money, translation reserves and retained earnings of the subsidiaries prior to the Restructuring Exercise (Note 1). (b) Final dividend of 0.12 cents net of income tax (2007: 0.25 cents) per share was paid by PT Sawindo Kencana before the restructuring exercise. The accompanying notes form an integral part of these financial statements. Annual Report

46 Statements of Changes in Equity Year ended 31 December 2008 Share Accumulated Translation Company capital losses reserves Total Current Year: Balance at 1 January 2008 * (398) (15) (413) Items of Income and Expense Recognized Directly in Equity: Loss for the Year (2,423) (2,423) Total Expenses for the Year (2,423) (2,423) Changes Resulting from Restructuring Exercise 12,980 12,980 Issue of Share Capital 44,526 44,526 Share Issuance Expenses (Note 19) (1,732) (1,732) Balance at 31 December 2008 (Note 19) 55,774 (2,821) (15) 52,938 Previous Year: Shares Issued at Date of Incorporation * * Items of Income and Expense Recognized Directly in Equity: Exchange Differences on Translating IDR Functional Currency to US$ Presentation Currency Financial Statements (15) (15) Net Expense Recognized Directly in Equity (15) (15) Loss for the Year (398) (398) Total Expenses for the Year (398) (398) Balance at 31 December 2007 * (398) (15) (413) * Less than US$1,000 The accompanying notes form an integral part of these financial statements. 42 Kencana Agri Limited

47 Consolidated Cash Flow Statement Year ended 31 December 2008 Group Cash Flows From Operating Activities Profit before Tax 12,477 54,556 Adjustments: Interest Income (150) (161) Interest Expense 3,076 2,797 Depreciation of Property, Plant and Equipment 1,979 1,945 Amortisation of Land Rights Loss / (Gains) on Fair Value Changes in Biological Assets 503 (41,898) (Gain) / Loss on Futures Contracts (695) 677 Post-employment Benefits Operating Cash Flows before Changes in Working Capital 17,354 18,059 Inventories (1,247) (634) Trade and Other Receivables (7,429) 6,390 Other Assets (2,659) (3,423) Other Liabilities (925) (2,697) Trade and Other Payables (5,126) 5,509 Net Cash Flows (Used in) / from Operations before Interest and Tax (32) 23,204 Income Taxes Paid (3,445) (820) Net Cash Flows (Used in) / from Operating Activities (3,477) 22,384 Cash Flows From Investing Activities Purchase of Property, Plant and Equipment (Note 18B) (11,323) (3,595) Additions to Biological Assets (10,667) (7,559) Purchase of Land Use Rights (1,084) (651) Interest Received Net Cash Used in Investing Activities (22,924) (11,644) Cash Flows From Financing Activities Proceeds from Issue of Shares (Note 19) 42, Cash Restricted in Use Over 3 Months 1,913 (1,899) (Decrease) / Increase in Borrowings (4,502) 3,714 Decrease in Finance Leases (790) (596) Dividend Paid (958) (2,025) Interest Paid (3,964) (4,069) Net Cash Flows from / (Used in) Financing Activities 34,493 (4,520) Net Effect of Exchange Rate Changes in Consolidating Subsidiaries (1,182) (3,558) Net Increase in Cash and Cash Equivalents 6,910 2,662 Cash and Cash Equivalents, Cash Flow Statement, Beginning Balance 3,999 1,337 Cash and Cash Equivalents, Cash Flow Statement, Ending Balance (Note 18A) 10,909 3,999 The accompanying notes form an integral part of these financial statements Annual Report

48 Notes to the Financial Statements For the financial year ended 31 December General The company is incorporated in Singapore with limited liability. The financial statements are presented in United States dollars and they cover the parent and the group s subsidiaries. The financial statements were approved and authorised for issue by the board of directors on 3 April The company is an investment holding company. It is listed on the Singapore Exchange Securities Trading Limited. The principal activities of the subsidiaries are described in the notes to the financial statements below. The registered office address is: 3 Shenton Way, #10-06 Shenton House, Singapore Restructuring Exercise Prior to the company s invitation in respect of new shares, a restructuring exercise was carried out to rationalise and streamline the corporate structure, resulting in the company becoming the holding company of the group. The details of restructuring exercise are set out in the company s prospectus dated 17 July 2008 and have not been reproduced in these financial statements. 2. Summary of Significant Accounting Policies Accounting Convention The financial statements have been prepared in accordance with the Singapore Financial Reporting Standards ( FRS ) as well as all related Interpretations to FRS ( INT FRS ) as issued by the Singapore Accounting Standards Council and the Companies Act, Cap 50. The financial statements are prepared on a going concern basis under the historical cost convention except where an FRS requires an alternative treatment (such as fair values) as disclosed where appropriate in these financial statements. Basis of Presentation The restructuring exercise involved companies under common control. The consolidated financial statements have been prepared using the pooling-of-interests method. Such manner of presentation reflects the economic substance of the combining entities as a single economic enterprise, although the legal parent-subsidiary relationship was only established just prior to the public listing of the company. Accordingly, the group s consolidated financial statements for the financial years ended 31 December 2007 and 2008 have been prepared as if the group had been in existence prior to the restructuring exercise. The assets and liabilities are brought into the consolidated balance sheets at the existing carrying amounts. The figures of the group for the financial years ended 31 December 2007 and 2008 represent the combined results, state of affairs, changes in equity and cash flows as if the group had existed since 1 January Kencana Agri Limited

49 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (cont d) Basis of Presentation (cont d) The consolidation accounting method is used for the consolidated financial statements that include the financial statements made up to the balance sheet date for the years ended 31 December 2007 and 2008 of the company and of those companies it controls. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities accompanying a shareholding of more than one half of the voting rights or the ability to appoint or remove the majority of the members of the board of directors or to cast the majority of votes at meetings of the board of directors. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. Subsidiaries include unincorporated and special purpose entities. The consolidated financial statements are the financial statements of the group presented as those of a single economic entity. The consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. All significant intragroup balances and transactions, including income, expenses and dividends, are eliminated in full on consolidation. The results of the entities acquired or disposed of or controlled are combined from the respective dates of acquisition or control up to the dates of disposal. On disposal the attributable amount of goodwill, if any, is included in the determination of the gain or loss on disposal. The company's financial statements have been prepared on the same basis, and as permitted by the Companies Act, Cap. 50, no income statement is presented for the company. Basis of Preparation of the Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires the management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The estimates and assumptions are reviewed on an ongoing basis. Apart from those involving estimations, management has made judgements in the process of applying the entity s accounting policies. The areas requiring management s most difficult, subjective or complex judgements, or areas where assumptions and estimates are significant to the financial statements, are disclosed at the end of this footnote, where applicable. Business Combinations The business combination involved entities or businesses under common control that is, a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. The business combination in such situation is accounted for under the pooling-of-interests or merger method. Under the pooling-of-interests method, the combined assets, liabilities and reserves of the pooled enterprises are recorded at their existing carrying amounts at the date of amalgamation. The excess or deficiency of amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) over the amount recorded for the share capital acquired is to be adjusted to the merger reserve. Annual Report

50 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Business Combinations (cont d) For entities not under common control, business combinations are accounted for by applying the purchase method. The cost of a business combination includes the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree; plus any costs directly attributable to the business combination. Any excess of the cost over the acquirer s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities so recognised is accounted for as goodwill. The excess of acquirer s interest in the net fair value of acquiree s identifiable assets, liabilities and contingent liabilities over cost is accounted for as negative goodwill. The acquiree s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under FRS 103 are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with FRS 105 Non-Current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortised but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. An impairment loss in respect of goodwill is not reversed. There was no negative goodwill. There were no acquisitions during the year that had to be accounted for under FRS103. Minority Interest The minority interest in the net assets and net results of consolidated subsidiary are shown separately in the consolidated balance sheet and consolidated income statement. Any minority interest in the acquiree (subsidiary) is initially measured at the minority s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Losses applicable to the minority in excess of the minority s interest in the subsidiary s equity are allocated against the interests of the group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. Revenue Recognition The revenue amount is the fair value of the consideration received or receivable from the gross inflow of economic benefits during the year arising from the course of the ordinary activities of the entity and it is shown net of any related sales taxes, estimated returns, discounts and volume rebates. Revenue from the sale of goods is recognised when significant risks and rewards of ownership are transferred to the buyer, there is neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold, and the amount of revenue and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Revenue from rendering of services that are of short duration is recognised when the services are completed. Rental revenue is recognised on a time-proportion basis that takes into account the effective yield on the asset on a straight-line basis over the lease term. Interest is recognised using the effective interest method. Dividend from equity instruments is recognised as income when the entity s right to receive payment is established. 46 Kencana Agri Limited

51 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Employee Benefits Certain subsidiaries of the group are required to provide for employee service entitlements in order to meet the minimum benefits required to be paid to qualified employees as required under existing manpower regulations in Indonesia. Short-term employee benefits are recognised at an undiscounted amount where employees have rendered their services to the group during the accounting periods. Post employment benefits are recognised at discounted amounts when the employees have rendered their services to the group during the accounting periods. Liabilities and expenses are measured using actuarial techniques which include constructive obligations that arise from the group s common practices. In calculating the liabilities, the benefits are discounted by using the projected unit credit method. Termination benefits are recognised when, and only when, the group is committed to either; (a) terminate the employment of an employee or group of employees before the normal retirement date; or (b) provide termination benefits as a result of an offer made in order to encourage voluntary redundancy. This plan is in addition to the contributions to government managed retirement benefit plans such as the Central Provident Fund in Singapore which specifies the employer s obligations which are dealt with as defined contribution retirement benefit plans. Contributions to defined contribution retirement benefit plans are recorded as an expense as and when they fall due. The entity s legal or constructive obligation is limited to the amount that it agrees to contribute to the fund. For employee leave entitlement the expected cost of short-term employee benefits in the form of compensated absences is recognised in the case of accumulating compensated absences, when the employees render service that increases their entitlement to future compensated absences; and in the case of non-accumulating compensated absences, when the absences occur. A liability for bonuses is recognised where the entity is contractually obliged or where there is constructive obligation base on past practice. Income Tax The income taxes are accounted using the asset and liability method that requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequence of events that have been recognised in the financial statements or tax returns. The measurements of current and deferred tax liabilities and assets are based on provisions of the enacted or substantially enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. Income tax expense represents the sum of the tax currently payable and deferred tax. Current and deferred income taxes are recognised in the income statement except that when they relate to items that initially bypass the income statement and are taken to equity, in which case they are similarly taken to equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same income tax authority. The carrying amount of deferred tax assets is reviewed at each end of the reporting year and is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realised. A deferred tax amount is recognised for all temporary differences, unless the deferred tax amount arises from the initial recognition of an asset or liability in a transaction which (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). A deferred tax liability is not recognised for all taxable temporary differences associated with investments in subsidiaries because (a) the company is able to control the timing of the reversal of the temporary difference; and (b) it is probable that the temporary difference will not reverse in the foreseeable future. Annual Report

52 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Foreign Currency Transactions The functional currency of the company and all of its subsidiaries except for Sawindo Agri Pte Ltd is the Indonesian Rupiah ( IDR ) as it reflects the primary economic environment in which these entities operate. The functional currency of Sawindo Agri Pte Ltd is US$. Transactions in foreign currencies are recorded in the functional currency at the rates ruling at the dates of the transactions. At each balance sheet date, recorded monetary balances and balances measured at fair value that are denominated in foreign currencies are reported at the rates ruling at the balance sheet and fair value dates respectively. All realised and unrealised exchange adjustment gains and losses are dealt with in the income statement. The presentation currency is the United States dollar as the financial statements are meant primarily for international users. For the United States dollar financial statements assets and liabilities are translated at year end rates of exchange and the income and expense items are translated at average rates of exchange for the year. The resulting translation adjustments (if any) are accumulated in a separate component of shareholders' equity. The translation of IDR amounts into US$ amounts for the years ended is included solely for the convenience of readers and has been made at the rates of US$1 to IDR9,419 and US$1 to IDR 10,950 for 2007 and 2008 respectively, the approximate rates of exchange at the end of each year. The average rates used were US$1 to IDR9,136 and US$1 to IDR9,692 for 2007 and 2008 respectively. Such translation should not be construed as a representation that the US$ amounts could be converted into IDR at the above rates or other rates. Translation of Financial Statements of Other Entities Each entity in the group determines the appropriate functional currency as it reflects the primary economic environment in which the entity operates. In translating the financial statements of an investee for incorporation in the consolidated financial statements the assets and liabilities denominated in currencies other than the functional currency of the company are translated at year end rates of exchange and the income and expense items are translated at average rates of exchange for the year. The resulting translation adjustments (if any) are accumulated in a separate component of equity until the disposal of that investee. Borrowing Costs All borrowing costs that are interest and other costs incurred in connection with the borrowing of funds that are directly attributable to the acquisition, construction or production of a qualifying asset that necessarily take a substantial period of time to get ready for their intended use or sale are capitalised as part of the cost of that asset until substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Other borrowing costs are recognised as an expense in the period in which they are incurred. The interest expense is calculated using the effective interest method. 48 Kencana Agri Limited

53 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Property, Plant and Equipment Depreciation is provided on a straight-line basis to allocate the gross carrying amounts less their residual values over their estimated useful lives of each part of an item of these assets. The annual rates of depreciation are as follows: Freehold land Depreciation is not provided Leasehold buildings 5% to 6.25% Plant, fixtures and equipment 25% Vessels 6.25% Assets under construction Depreciation is not provided until the asset is available for use. An asset is depreciated when it is available for use until it is derecognised even if during that period the item is idle. Fully depreciated assets still in use are retained in the financial statements. Property, plant and equipment are carried at cost on initial recognition and after initial recognition at cost less any accumulated depreciation and any accumulated impairment losses. The gain or loss arising from the derecognition of an item of property, plant and equipment is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item and is recognized in the income statement. The residual value and the useful life of an asset is reviewed at least at each financial year-end and, if expectations differ significantly from previous estimates, the changes are accounted for as a change in an accounting estimate, and the depreciation charge for the current and future periods are adjusted. Cost also includes acquisition cost, any cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Subsequent cost are recognized as an asset only when it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement when they are incurred. Land Use Rights Land rights that have a limited useful life are depreciated in a manner that reflects the benefits to be derived from these rights. Costs associated with the legal transfer or renewal for titles of land rights, such as legal fees, land survey and re-measurement fees, taxes and other related expenses, are deferred and amortised using the straight-line method over the legal terms of the related land rights of thirty-five years. Annual Report

54 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Advances/Guarantees under the Plasma Programme The Indonesian Government requires oil palm plantations to develop the surrounding local plantation areas held by small landholders when applying for land rights for oil palm plantations. This form of assistance to local small landholders is generally known as the Plasma Programme. Under the Plasma Programme, a plantation developer transfers a designated land area to the small landholders, who then operate the plasma plantation under the supervision of the plantation developer. Certain subsidiaries of the group have implemented the Plasma Programme using plantation business cooperatives scheme (Kredit Koperasi Primer Anggota or KKPA ), cooperation in local community palm oil plantation scheme (Kebun Kelapa Sawit Rakyat or KKSR ), and independent plasma scheme (Plasma Mandiri). Under the KKPA scheme, the villagers typically occupy the land and the group helps to develop the land and manage the oil palms to maturity. The development costs are funded by bank loans, which are guaranteed by the group using the aforementioned land certificates and/or other appropriate forms of security as collateral. Upon maturity of the oil palms, the land will be maintained and managed by the villagers or in the future by the group. The harvested fresh fruit bunches ( FFB ) will then be sold to the group. The villagers will repay the loan facilities from a portion of the FFB sale price. The group obtains a power of attorney to manage the accounts of the villagers into which all monies from the sale of FFB will be deposited. This power of attorney allows the group to withdraw funds from such accounts to pay for all the villagers operating costs and expenses. Under the KKSR scheme, the villagers also typically occupy the land. The group will provide seedlings and the regional authorities will provide fertiliser to the villagers. Post-harvest, the FFB will be sold to the group and part of the sale proceeds will be paid to the group and the regional authorities as payment for the seedlings and fertiliser respectively. Plasma Mandiri is a scheme whereby the group will provide the seedlings to the villagers and the villagers will plant and maintain the plantations. Post-harvest, the FFB will be sold to the group and part of the sale proceeds will be paid to the group as payment for the seedlings provided. There is no governmental involvement under this scheme. Costs incurred during development up to conversion of the oil palm plantations and temporary funding to the villagers for working capital purposes are included in other receivables in the balance sheets. The funds received from the designated banks on behalf of villagers for the development and operations of the plantations are included in other payables in the balance sheets. Biological Assets Biological assets are stated at fair values less estimated point-of-sale costs. These include mature and immature oil palm plantations. Oil palm trees have an average life that ranges from 23 to 25 years, with the first three years as immature and the remaining years as mature. In general, an oil palm plantation takes about 3 (three) years to reach maturity from the time seedlings are planted. 50 Kencana Agri Limited

55 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Biological Assets (cont d) As market determined prices or values are not readily available for plantations in their present condition, the group uses the present value of expected net future cash flows (excluding any future cash flows for financing the assets, taxation, or re-establishing plantations after harvest) from the asset, discounted at a current market determined pre-tax rate in determining the fair values. The fair value of the oil palm plantations is estimated by reference to independent professional valuations using the discounted cash flows of the underlying biological assets. The expected cash flows from the whole life cycle of the oil palm plantations is determined using the market price of the estimated yield of the agriculture produce, being fresh palm fruit bunches ( FFB ), net of maintenance and harvesting costs and any costs required to bring the oil palm plantations to maturity. The estimated yield of the oil palm plantations is affected by the age of the oil palm trees, the location, soil type and infrastructure. The market price of the fresh palm fruit bunches is largely dependent on the projected market price of the processed products after harvest, being crude palm oil ( CPO ) and crude palm kernel oil ( CPKO ). Point-of-sale costs include all costs that would be necessary to sell the assets. Gains or losses arising on initial recognition of plantations at fair value less estimated point-of-sale costs and from the change in fair value less estimated point-of-sale costs of plantations at each reporting date are included in the income statement for the period in which they arise. Leased Assets Leases are classified as finance leases if substantially all the risks and rewards of ownership are transferred to the lessee. All other leases are classified as operating leases. At the commencement of the lease term, a finance lease is recognised as an asset and as a liability in the balance sheet at amounts equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine, the lessee s incremental borrowing rate is used. Any initial direct costs of the lessee are added to the amount recognised as an asset. The excess of the lease payments over the recorded lease liability are treated as finance charges which are allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are incurred. The assets are depreciated as owned depreciable assets. Leases where the lessor effectively retains substantially all the risks and benefits of ownership of the leased assets are classified as operating leases. For operating leases, lease payments are recognised as an expense in the income statement on a straight-line basis over the term of the relevant lease unless another systematic basis is representative of the time pattern of the user's benefit, even if the payments are not on that basis. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. Rental income from operating leases is recognised in the income statement on a straight-line basis over the term of the relevant lease unless another systematic basis is representative of the time pattern of the user's benefit, even if the payments are not on that basis. Initial direct cost incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. Annual Report

56 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Subsidiaries A subsidiary is an entity including unincorporated and special purpose entity that is controlled by the group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities accompanying a shareholding of more than one half of the voting rights or the ability to appoint or remove the majority of the members of the board of directors or to cast the majority of votes at meetings of the board of directors. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. In the company s own separate financial statements, the investments in subsidiaries are stated at cost less any provision for impairment in value. Impairment loss recognised in profit or loss for a subsidiary is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognised. The net book values of the subsidiaries are not necessarily indicative of the amounts that would be realised in a current market exchange. Impairment of Non-Financial Assets Irrespective of whether there is any indication of impairment, an annual impairment test is performed at the same time every year on an intangible asset with an indefinite useful life or an intangible asset not yet available for use. The carrying amount of other non-financial assets is reviewed at each reporting date for indications of impairment and where an asset is impaired, it is written down through the income statement to its estimated recoverable amount. The impairment loss is the excess of the carrying amount over the recoverable amount and is recognised in the income statement unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. The recoverable amount of an asset or a cashgenerating unit is the higher of its fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). At each reporting date non-financial assets other than goodwill with impairment loss recognised in prior periods are assessed for possible reversal of the impairment. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Financial Assets Initial recognition and measurement and derecognition of financial assets: A financial asset is recognised on the balance sheet when, and only when, the entity becomes a party to the contractual provisions of the instrument. The initial recognition of financial assets is at fair value normally represented by the transaction price. The transaction price for financial asset not classified at fair value through income statement includes the transaction costs that are directly attributable to the acquisition or issue of the financial asset. Transaction costs incurred on the acquisition or issue of financial assets classified at fair value through profit or loss are expensed immediately. The transactions are recorded at the trade. Irrespective of the legal form of the transactions performed, financial assets are derecognised when they pass the substance over form based derecognition test prescribed by FRS 39 relating to the transfer of risks and rewards of ownership and the transfer of control. 52 Kencana Agri Limited

57 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Financial Assets (cont d) Subsequent measurement: Subsequent measurement based on the classification of the financial assets in one of the following four categories under FRS 39 is as follows: #1. Financial assets at fair value through profit or loss: Assets are classified in this category when they are incurred principally for the purpose of selling or repurchasing in the near term (trading assets) or are derivatives (except for a derivative that is a designated and effective hedging instrument) or have been classified in this category because the conditions are met to use the fair value option and it is used. These assets are carried at fair value by reference to the transaction price or current bid prices in an active market. All changes in fair value relating to assets at fair value through profit and loss are recognised directly in the income statement. They are classified as non-current assets unless management intends to dispose of the investment within 12 months of the end of the reporting year. #2. Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Assets that are for sale immediately or in the near term are not classified in this category. These assets are carried at amortised costs using the effective interest method (except that short-duration receivables with no stated interest rate are normally measured at original invoice amount unless the effect of imputing interest would be significant) minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility. Impairment charges are provided only when there is objective evidence that an impairment loss has been incurred as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and 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. The methodology ensures that an impairment loss is not recognised on the initial recognition of an asset. Losses expected as a result of future events, no matter how likely, are not recognised. For impairment, the carrying amount of the asset is reduced through use of an allowance account. The amount of the loss is recognised in the income statement. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. Typically the trade and other receivables are classified in this category. #3. Held-to-maturity financial assets: As at year end date there were no financial assets classified in this category. #4. Available for sale financial assets: As at year end date there were no financial assets classified in this category. Cash and Cash Equivalents Cash and cash equivalents include bank and cash balances, on demand deposits and any highly liquid debt instruments purchased with an original maturity of three months or less. For the cash flow statement the item includes cash and cash equivalents less cash subject to restriction and bank overdrafts payable on demand that form an integral part of cash management. Annual Report

58 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Derivatives All derivatives are initially recognised and subsequently carried at fair value. The policy is to use derivatives only for non-speculative purposes. Derivatives are entered into in order to hedge some transactions. Where all the strict hedging criteria prescribed by FRS 39 are not met, even though the transaction has its economic and business rationale, hedge accounting cannot be applied. As a result, changes in the fair value of those derivatives are recognised directly in the income statement and the hedged item follows normal accounting policies. The group has committed sales contracts for crude palm oil and palm kernel cake that are entered into as part of its processing and sale activities. The price and physical delivery of the sales are fixed in the contracts and these contracts are not recognised in the consolidated financial statements until physical deliveries take place. The group enters into futures contracts for its crude palm oil to hedge fluctuations in commodity prices. Prices on commodity exchanges are quoted up to 3 to 5 months forward. The gains or losses arising from matched non-physical delivery futures contracts of crude palm oil are recognised immediately in the income statement. Outstanding forward and future contracts of crude palm oil are valued at their fair values at the balance sheet date. Where available, quoted market prices are used as a measure of fair values for the outstanding contracts. Where the quoted market prices are not available, fair values are based on management s best estimate and are arrived at by reference to the market prices of other contracts that are substantially similar. Unrealised losses arising from the valuation are set off against unrealised gains on an aggregate basis. Financial Liabilities Initial recognition and measurement: A financial liability is recognised on the balance sheet when, and only when, the entity becomes a party to the contractual provisions of the instrument. The initial recognition of financial liability is at fair value normally represented by the transaction price. The transaction price for financial liability not classified at fair value through income statement includes the transaction costs that are directly attributable to the acquisition or issue of the financial liability. Transaction costs incurred on the acquisition or issue of financial liability classified at fair value through profit or loss are expensed immediately. The transactions are recorded at the trade date. Financial liabilities including bank and other borrowings are classified as current liabilities unless there is an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting year. Subsequent measurement: Subsequent measurement based on the classification of the financial liabilities in one of the following two categories under FRS 39 is as follows: 1. Financial liabilities at fair value through profit or loss: Financial liabilities are classified in this category when they are incurred principally for the purpose of selling or repurchasing in the near term (trading liabilities) or are derivatives (except for a derivative that is a designated and effective hedging instrument) or have been classified in this category because the conditions are met to use the fair value option and it is used. All changes in fair value relating to liabilities at fair value through profit and loss are charged to the income statement as incurred. 54 Kencana Agri Limited

59 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Financial Liabitilies (cont d) 2. Other financial liabilities: All liabilities, which have not been classified in the previous category fall into this residual category. These liabilities are carried at amortised cost using the effective interest method. Trade and other payables and borrowings are classified in this category. Items classified within trade and other payables are not usually re-measured, as the obligation is usually known with a high degree of certainty and settlement is short-term. Financial Guarantees A financial guarantee contract requires that the issuer makes specified payments to reimburse the holder for a loss when a specified debtor fails to make payment when due. Financial guarantee contracts are initially recognised at fair value and are subsequently measured at the greater of (a) the amount determined in accordance with FRS 37 and (b) the amount initially recognised less, where appropriate, cumulative amortisation recognised in accordance with FRS 18. Fair Value of Financial Instruments The carrying values of current financial assets and financial liabilities approximate their fair values due to the short-term maturity of these instruments. Disclosures of fair value are not made when the carrying amount current financial instruments is a reasonable approximation of fair value. The fair values of non-current financial instruments may not be disclosed separately unless there are significant items at the end of the reporting year and in the event the fair values are disclosed in the relevant notes. The maximum exposure to credit risk is the fair value of the financial instruments at the end of the reporting year. The fair value of a financial instrument is derived from an active market. The appropriate quoted market price for an asset held or liability to be issued is usually the current bid price without any deduction for transaction costs that may be incurred on sale or other disposal and, for an asset to be acquired or liability held, the asking price. Inventories Inventories are measured at the lower of cost (weighted average) and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. A write down on cost is made for where the cost is not recoverable or if the selling prices have declined. Cost includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Equity Equity instruments are contracts that give a residual interest in the net assets of the company. Ordinary shares are classified as equity. Equity instruments are recognised at the amount of proceeds received net of incremental costs directly attributable to the transaction. The shares have no par value. Dividends on equity are recognised as liabilities when they are declared. Interim dividends are recognised when paid. Annual Report

60 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Provisions A liability or provision is recognised when there is a present obligation (legal or constructive) as a result of a past event, 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. Provisions are made using best estimates of the amount required in settlement and where the effect of the time value of money is material, the amount recognised is the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. Changes in estimates are reflected in the income statement in the period they occur. Segment Reporting A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. Critical Judgements, Assumptions and Estimation Uncertainties The critical judgements made in the process of applying the accounting policies that have the most significant effect on the amounts recognised in the financial statements and the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting year, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. These estimates and assumptions are periodically monitored to ensure they incorporate all relevant information available at the date when financial statements are prepared. However, this does not prevent actual figures differing from estimates. Biological Assets: The group carries its oil palm plantations at fair value less estimated point-of-sale costs, which require extensive use of accounting estimates and assumptions. Significant components of fair value measurement were determined using assumptions and estimates including determination of future cash flows expected to be generated from the continued use of such assets, average lives of plantations, period of being immature and mature plantations, yield per hectare, annual discount rates and projected selling prices of CPO and CPKO (see Note 12). The amount of the changes in fair values would differ if there are changes to the assumptions and estimates used. Any changes in fair values of these plantations would affect the group s balance sheet, income statement and equity. It is impracticable to disclose the extent of the possible effects. It is reasonably possible, based on existing knowledge, that outcomes within the next financial year that are different from assumptions could require a material adjustment to the carrying amount of the balances affected. The carrying amounts of the group s biological assets as at 31 December 2007 and 2008 were US$111,649,000 and US$106,277,000 respectively. Property, Plant and Equipment: The group has property, plant and equipment stated at carrying values of US$19,869,000 and US$26,874,000 as at 31 December 2007 and 2008 respectively. An assessment is made at each reporting date whether there is any indication that the asset may be impaired. If any such indication exists, an estimate is made of the recoverable amount of the asset. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. It is impracticable to disclose the extent of the possible effects. 56 Kencana Agri Limited

61 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Critical Judgements, Assumptions and Estimation Uncertainties (cont d) Property, Plant and Equipment: (cont d) It is reasonably possible, based on existing knowledge, that outcomes within the next financial year that are different from assumptions could require a material adjustment to the carrying amount of the balances affected. Useful Lives of Plant and Equipment: The estimates for the useful lives and related depreciation charges for plant and equipment is based on commercial and production factors which could change significantly as a result of technical innovations and competitor actions in response to market conditions. The depreciation charge is increased where useful lives are less than previously estimated lives, or the carrying amounts written off or written down for technically obsolete assets that have been abandoned or sold. It is impracticable to disclose the extent of the possible effects. It is reasonably possible, based on existing knowledge, that outcomes within the next financial year that are different from assumptions could require a material adjustment to the carrying amount of the balances affected. The carrying amounts of the specific assets affected by this assumption were US$16,221,000 and US$15,602,000 respectively as at 31 December 2007 and Land Use Rights: The group holds location permits or Ijin Lokasi in respect of plantation land in Indonesia allocated by the Indonesian Government. Upon the completion of the acquisition of such land, the group will be entitled to begin the process of application for Business Usage Rights ( Hak Guna Usaha or HGU ) certificates over such land. The Ijin Lokasi may not be extended by the Indonesian Government and will automatically expire if the group fails to acquire the land covered in the Ijin Lokasi within the stipulated validity period of the said Ijin Lokasi. In such an event, the group may lose their rights granted by the Indonesian Government under the Ijin Lokasi in respect of the remaining area covered by the original Ijin Lokasi. At the date of this report, the group is in the final process of obtaining HGU certificates for conversion in respect of 44,073 hectares of Kadastral land. Kadastral land is land that is measured to determine the actual land area for the HGU title based on the application submitted by the group. The group is also in the process of acquiring and clearing land held under their land bank prior to the issuance of Kadastral for such land. Prior to the issuance of the HGU certificates, such land is considered as uncertified land. Pending the issue of HGU certificates, the group is permitted to physically occupy and build on the uncertified land and to plant and harvest crops. However, as the administration of land laws and regulations may be subject to a certain degree of discretion by the Indonesian Government authorities, there is no assurance with certainty that the relevant authorities would not take a different approach or view as regard the uncertified land, its use, registration and future disposal for value. Should the relevant authorities take a different approach or view as regards the same and the group is unable to convert the uncertified land to HGU certified land, the group s interest in the uncertified land as well as the use of such land may be adversely affected. At 31 December 2008, the uncertified land amounted to 44,073 hectares (see Note 14). Income Taxes: The group has exposure to income taxes in mainly 2 jurisdictions, Indonesia and Singapore. Significant judgement is involved in determining the group-wide provision for income taxes. There are certain transactions and computations for which the ultimate determination is uncertain during the ordinary course of business. The group recognises liabilities for expected tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recognised, such differences will have an impact on the income tax and deferred tax provisions in the period in which such determination is made. The carrying amounts of the group s current and deferred tax liabilities as at 31 December 2008 were US$2,327,000 and US$22,075,000 respectively. Annual Report

62 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Critical Judgements, Assumptions and Estimation Uncertainties (cont d) Deferred Income Taxes: Management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and the extent to which deferred tax assets can be recognised. A deferred tax asset is recognised if it is probable that sufficient taxable income will be available in the future against which the temporary differences and unused tax losses can be utilised. Management also considers future taxable income and tax planning strategies in assessing whether deferred tax assets should be recognised in order to reflect changed circumstances as well as tax regulations. As a result, due to their inherent nature, it is likely that deferred tax calculation relates to complex fact patterns for which assessments of likelihood are judgmental and not susceptible to precise determination. The amount of the deferred tax liability at the end of the reporting year was US$22,075,000. Pension and Employee Benefits: The determination of the group s obligations and cost for pension and employee benefits liability is dependent on its selection of certain assumptions used by independent actuaries in calculating such amounts. Those assumptions include among others, discount rates, future annual salary increase, annual employee turnover rate, disability rate, retirement age and mortality rate. Actual results that differ from the assumptions are recognised immediately in the income statement as and when they occur. While the group believes that its assumptions are reasonable and appropriate, significant differences in the group s actual experience or significant changes in the assumptions may materially affect its estimated liabilities for pensionable and employee benefits and net employee benefits expense. The carrying amounts of the estimated liabilities for employee benefits as at 31 December 2007 and 2008 were US$288,000 and US$355,000 respectively. Environmental Regulations: The main environmental concerns relate to the discharge of effluent arising from the milling of FFB and clearance of land and forest for developing the group s plantations. The main social concern relates to possible conflicts that may arise with local communities in the areas around the plantations. Any environmental claims or failure to comply with any present or future regulations could result in the imposition of fines, the suspension or a cessation of the group s operations. The group s plantations are subject to both scheduled and unscheduled inspections by various Indonesian government agencies, each of whom may have differing perspectives or standards from the others. These agencies have the power to examine and control the group s compliances with their environmental regulations, including the imposition of fines and revocation of licenses and land rights. However, governmental agencies may adopt additional regulations that would require the group to spend additional funds on environmental matters. Environmental regulations and social practices in Indonesia tend to be less stringent than in developed countries. It is possible that these regulations could become more stringent in the future and compliance with them may involve incurring significant costs. This may consequently have an adverse effect on the group s operations. Any failure to comply with the laws and regulations could subject the group to further liabilities. It is impracticable to disclose the extent of the possible effects of the above matters on the consolidated financial statements of the group. Advances/Guarantees Under the Plasma Programme: The group has provided guarantees in respect of loans granted by banks to villagers under the Plasma Programme. The villagers will repay the bank loans from the sale proceeds of FFB. In the event the villagers default on their obligations to repay the bank loans, the banks may call upon the guarantees, which have been provided by the group to the banks to secure the loans of the villagers. Details of the bank guarantees provided are disclosed in Note 26 to these financial statements. 58 Kencana Agri Limited

63 Notes to the Financial Statements For the financial year ended 31 December Summary of Significant Accounting Policies (Cont d) Critical Judgements, Assumptions and Estimation Uncertainties (cont d) Estimated impairment of subsidiary: When a subsidiary is in net equity deficit and has suffered operating losses a test is made whether the investment in the investee has suffered any impairment, in accordance with the stated accounting policy. This determination requires significant judgement. An estimate is made of the future profitability of the investee, and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, and operational and financing cash flow. It is impracticable to disclose the extent of the possible effects. It is reasonably possible, based on existing knowledge, that outcomes within the next financial year that are different from assumptions could require a material adjustment to the carrying amount of the balances affected. The carrying amount of the investments in subsidiaries at the end of the reporting year affected by the assumption is $52,539, Related Party Transactions A related party is an entity or person that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common or joint control with, the entity in governing the financial and operating policies, or that has an interest in the entity that gives it significant influence over the entity in financial and operating decisions. It also includes members of the key management personnel or close members of the family of any individual referred to herein and others who have the ability to control, jointly control or significantly influence by or for which significant voting power in such entity resides with, directly or indirectly, any such individual. This includes parents, subsidiaries, fellow subsidiaries, associates, joint ventures and post-employment benefit plans, if any. #3.1 Related companies: The company is a subsidiary of Kencana Holdings Pte Ltd, incorporated in Singapore that is also the company's ultimate parent company. Related companies in these financial statements include the members of the ultimate parent company's group of companies. There are transactions and arrangements between the company and members of the group and the effects of these on the basis determined between the parties are reflected in these financial statements. The current intercompany balances are unsecured without fixed repayment terms and interest unless stated otherwise. For non-current balances an interest is imputed unless stated otherwise based on the prevailing market interest rate for similar debt less the interest rate if any provided in the agreement for the balance. For financial guarantees a fair value is imputed and is recognised accordingly if significant where no charge is payable. Intragroup transactions and balances that have been eliminated in these combined financial statements are not disclosed as related party transactions and balances below. #3.2 Other related parties: There are transactions and arrangements between the company and related parties and the effects of these on the basis determined between the parties are reflected in these financial statements. The current related party balances are unsecured without fixed repayment terms and interest unless stated otherwise. For non-current balances an interest is imputed unless stated otherwise based on the prevailing market interest rate for similar debt less the interest rate if any provided in the agreement for the balance. For financial guarantees a fair value is imputed and is recognised accordingly if significant where no charge is payable. Annual Report

64 Notes to the Financial Statements For the financial year ended 31 December Related Party Transactions (Cont d) #3.2 Other related parties: (cont d) Significant related party transactions: In addition to transactions and balances disclosed elsewhere in the notes to the financial statements,this item includes the following: Group Company Lease related services (66) (37) Receiving of service expense (1,363) (526) Related party refers to a partnership that is under common control by some of the directors of the company. #3.3 Key management compensation: Group Salaries and other short-term employee benefits 1, Other post-employment benefits 8 The above amounts are included under employee benefits expense. Included in the above amounts are the following items: Group Remuneration of directors of the subsidiaries Fees to directors of the company 97 Remuneration of directors of the company Key management personnel are directors and those persons having authority and responsibility for planning, directing and controlling the activities of the group, directly or indirectly. The above amounts for key management compensation are for all the directors of the company. #3.4. Other receivables from and other payables to related parties: The trade transactions and the trade receivables and payables balances arising from sales and purchases of goods and services are disclosed elsewhere in the notes to the financial statements. The movements in other receivables from and other payables to related parties are as follows: Shareholders Group Other receivables/(other payables): Balance at 1 January 7,262 Amounts paid out during the year Amounts paid in during the year (2,460) Capital distribution to shareholders arising from the liquidation of an entity (4,664) Foreign currency alignment (138) Balance at end of year - debit 60 Kencana Agri Limited

65 Notes to the Financial Statements For the financial year ended 31 December Related Party Transactions (Cont d) #3.4. Other receivables from and other payables to related parties: (cont d) Other related parties Group Other receivables/(other payables): Balance at 1 January Amounts paid out during the year Amounts paid in during the year (372) (1) Foreign currency alignment Balance at end of year - debit / (credit) (210) 3 Other related parties Company Other receivables/(other payables): Balance at beginning of year (570) Amounts paid out during the year 570 Amounts paid in during the year (570) Foreign currency alignment Balance at end of year (credit) (570) 4. Revenue Sale of goods 102,624 68,511 Rendering of services 1, Rental income Total 104,888 69, Other Credits and (Other Charges) Unrealised gain/(loss) on futures contracts (677) Gain/(loss) on non-physical delivery futures contracts (439) Compensation from outside parties Gain on sale of consumables Loss on inventories difference (45) 8. Foreign exchange transactions loss (252) 9. (773) Other income Others (156) 11. (39) Net (1,818) 13. Presented in the income statement as: 14. Other Credits Other Charges (453) 16. (1,928) Net (1,818) Annual Report

66 Notes to the Financial Statements For the financial year ended 31 December Finance Cost Interest expense 3,076 2, Employee Benefits Expense Employee benefits expense 3,861 2,845 Contribution to defined contribution retirement plans Other post-employment benefits (Note 23) Other employee benefits Total employee benefits expense 4,209 3, Income Tax Current (4,782) (648) Deferred 2,629 (14,706) Total tax expense (2,153) (15,354) The income tax expense varied from the amount of income tax expense determined by applying the applicable Indonesian income tax rate to profit before income tax as a result of the following differences: Tax rate reconciliation: Profit before Tax 12,477 54,556 Income tax expense at the statutory rate (3,743) (16,367) Non-(allowable) / taxable items (242) 139 Tax exemptions 18 Effect of different tax rates in different countries 1,680 Deferred tax assets valuation allowance (104) (191) Deferred tax assets written off (140) Prior years tax loss carryforwards utilised 1,518 Change in tax rate 493 Underprovision of income tax from prior periods (175) Other items less than 3% each 60 (453) Total tax expense (2,153) (15,354) Effective tax rate 17.26% 28.14% Companies in Indonesia are generally subject to progressive tax rates up to a maximum of 30%. There are no income tax consequences of dividends to shareholders of the company. 62 Kencana Agri Limited

67 Notes to the Financial Statements For the financial year ended 31 December Income Tax (Cont d) On 22 January 2009 the Singapore government announced a change in the national income tax rate from 18.0% to 17.0%. The new rate will apply to current and deferred tax assets and liabilities from results for the year ending in Deferred tax: The deferred tax amounts are as follows: Balance sheet 1. Net change in income statement Deferred tax liabilities: 3. Excess of net book value of plant and equipment (927) (509) Foreign exchange losses arising from quasi-equity 5. loans given to subsidiaries (593) (593) Fair value changes in biological assets and others (24,143) (26,449) 6. 2,306 (12,488) (24,736) (27,376) 7. 2,640 (12,997) Foreign currency alignment included in equity 2,646 1, Total deferred tax liabilities (22,090) (26,093) 9. 2,640 (12,997) 10 Deferred tax assets: 11 Tax loss carryforwards (1,518) Deferred tax assets valuation allowance (456) (352) 13 (104) (191) (11) (1,709) Foreign currency alignment included in equity (2) (8) 15 Total deferred tax assets (11) (1,709) Net total of deferred tax assets/(liabilities) (22,075) (26,073) 18 2,629 (14,706) It is impracticable to estimate the amount expected to be settled or used within one year. 9. Dividends in Equity Share In respect of the current year, the directors propose that a final dividend of S$0.3 cents per share with a total of US$2,082,000 be paid to shareholders after the annual general meeting to be held on 29 April There are no income tax consequences. This dividend is subject to approval by shareholders at the next annual general meeting and has not been included as a liability in these financial statements. The proposed dividend for 2008 is payable in respect of all ordinary shares in issue at the end of the reporting year and including the new qualifying shares issued up to the date the dividend becomes payable. 10. Earnings per Share The earnings per share for the years ended 31 December 2008 and 2007 are calculated by dividing the group s profit for the year of US$10,324,000 and US$39,202,000 respectively by the weighted average number of shares of 885,168,008 in issue during Both basic and diluted earnings per share are the same as there are no dilutive ordinary share equivalents outstanding during the years ended 31 December 2008 and Annual Report

68 Notes to the Financial Statements For the financial year ended 31 December Property, Plant and Equipment Group Freehold Leasehold Assets under Plant, fixtures and land buildings construction Vessels equipment Total Cost: At 1 January ,532 2,050 2,479 16,693 26,762 Additions 167 2,751 1,622 4,540 Transfer from/(to) 242 (1,075) 833 Foreign exchange (223) (86) (105) (720) (1,134) alignment At 1 January ,718 3,640 2,374 18,428 30,168 Additions 1,124 11, ,528 Disposal (1) (1) Transfer from/(to) 957 (2,411) 1,454 Foreign exchange (1) (1,038) (1,564) (332) (2,891) (5,826) alignment At 31 December ,761 11,265 2,042 17,794 37,869 Depreciation: At 1 January , ,754 8,254 Depreciation for the year ,723 2,452 Foreign exchange (51) (9) (347) ( 407) alignment At 1 January , ,130 10,299 Depreciation for the year ,188 2,480 Foreign exchange (293) (48) (1,443) (1,784) alignment At 31 December , ,875 10,995 Net book value: At 1 January ,157 2,050 2,354 9,939 18,508 At 31 December ,792 3,640 2,131 10,298 19,869 At 31 December ,957 11,265 1,726 8,919 26,874 Assets under construction represent partial payment for the construction of the following assets: 2008 Group 2007 Leasehold properties Plant and equipment 10,289 3,116 11,265 3,640 The depreciation expenses are charged as follows: Biological assets (Note 12) Cost of sales Administrative expenses Total Year , ,452 Year , , Kencana Agri Limited

69 Notes to the Financial Statements For the financial year ended 31 December Property, Plant and Equipment (Cont d) Certain property, plant and equipment have been pledged as security for the bank facilities (see Notes 20). Certain items are under finance lease agreements (see Note 20) Borrowing costs capitalised amounted to US$107,000 and nil for the financial years ended 31 December 2007 and 2008 respectively. Accumulated borrowing costs capitalised included above amounted to US$126,000 as at 31 December The borrowing costs capitalised represent the actual interest incurred on the bank borrowings to finance the construction of property, plant and equipment. 12. Biological Assets 2008 Group 2007 At beginning of year 111,649 64,461 Additions 10,667 7,559 Capitalisation of depreciation (Note 11) Capitalisation of interest 888 1,272 Increase/(decrease) in fair value less estimated point-of-sale (503) 41,898 costs Foreign currency alignment (16,925) (4,048) At end of year 106, ,649 Mature oil palm trees produce Fresh Fruit Bunches ( FFB ), which are used to produce CPO and CPKO. The fair value of the biological assets was determined by PT Asian Appraisal Indonesia, a firm of independent professional valuers on 27 February 2009 using the discounted future cash flows of the underlying plantations. The expected future cash flows of the oil palm plantations are determined using the forecast market price of FFB, which is largely dependent on the projected selling prices of CPO and CPKO in the market. The significant assumptions made in determining the fair values of the oil palm plantations are as follows: (i) (ii) (iii) (iv) Oil palm trees have an average life that ranges from 23 to 25 years, with the first three years as immature and the remaining years as mature; Yield per hectare of oil palm trees is based on the guidelines issued by the Indonesian Oil Palm Research Institute (Pusat Penelitian Kelapa Sawit), which varies with the average age of oil palm trees; The discount rates used in 2007 and 2008 are 18% and 19% per annum, respectively, (such discount rates represent the asset specific rate for the group s plantation operations which are applied in the discounted future cash flows calculations); and The projected selling prices of CPO and CPKO from 2007 to 2008 are based on Rotterdam CIF prices. If the projected selling prices of CPO and CPKO used in the above valuation had been 10% lower, the carrying value of the biological assets would need to be reduced by US$13,903,000. Annual Report

70 Notes to the Financial Statements For the financial year ended 31 December Biological Assets (Cont d) (a) Analysis of biological assets: At the end of the financial year, biological assets comprise oil palm trees as follows: (b) Group Planted area: - mature () 77,122 92,164 - immature () 29,155 19, , ,649 Planted area: - mature (hectares) 12,277 8,409 - immature (hectares) 12,812 14,199 25,089 22,608 Analysis of palm oil production: During the financial years 2007 and 2008, the group harvested approximately 171,000 and 166,000 tonnes of FFB respectively, which had fair values less estimated point-of-sale costs of US$19,857,000 and US$20,741,000 respectively. (c) (d) At the balance sheet dates at 31 December 2007 and 2008, the fair values of biological assets of the Group mortgaged as security for bank borrowings amounted to US$71,251,000 and US$90,785,000 respectively. The interest capitalised is the actual interest incurred on the bank borrowings to finance the development of oil palm plantations. 13. Investments in Subsidiaries 2008 Company 2007 Movements during the year: Additions 12,981 Quasi-equity loans 39,558 52,539 Net book value of subsidiaries 69,928 Analysis of above amount denominated in non-functional currency: United States dollars 52,539 The quasi-equity loans are interest-free loans to subsidiaries for which any significant settlement is neither planned nor likely to occur in the foreseeable future. They are, in substance, part of the company s net investment in the subsidiaries. 66 Kencana Agri Limited

71 Notes to the Financial Statements For the financial year ended 31 December Investment in Subsidiaries (cont d) The subsidiaries held by the company as of the date of this report are listed below: Name of subsidiaries, country of incorporation, place of operations and principal activities Cost in books of the company Percentage of equity held by group % % Kencana Bio-energy Pte. Ltd. ( KB ) (d) (a) (Incorporated on 29 December 2006) Singapore Investment holding Kencana Logistics Pte. Ltd. ( KL ) (d) (a) (Incorporated on 29 December 2006) Singapore Investment holding Kencana Plantations Pte. Ltd. ( KP ) (d) 2, (a) (Incorporated on 29 December 2006) Singapore Investment holding Sawindo Agri Pte. Ltd. ( SA ) (d) 10, (a) (Incorporated on 29 December 2006) Singapore Trading and investment holding 12,981 The following subsidiaries are held through the above subsidiaries: PT Sawindo Kencana ( SWK ) (b) (a) (Incorporated on 16 September 1994) Indonesia Agribusiness PT Alamraya Kencana Mas ( AKM ) (b) (a) (Incorporated on 9 December 1996) Indonesia Agribusiness PT Kencana Agro Jaya ( KAJ ) (b) (a) (Incorporated on 16 August 2002) Indonesia Agribusiness PT Agro Inti Kencanamas ( AIK ) (b) (a) (Incorporated on 25 March 1997) Indonesia Agribusiness PT Agri Eastborneo Kencana ( AEK ) (b) (a) (Incorporated on 9 March 2004) Indonesia Agribusiness Annual Report

72 Notes to the Financial Statements For the financial year ended 31 December Investment in Subsidiaries (cont d) Name of subsidiaries, country of incorporation, place of operations and principal activities Percentage of equity held by group % % PT Indotrust ( IDT ) (b) (a) (Incorporated on 13 September 2002) Indonesia Bulking PT Sawit Kaltim Lestari ( SKL ) (b) (a) (Incorporated on 9 March 2004) Indonesia Agribusiness PT Agrojaya Tirta Kencana ( ATK ) (b) (a) (Incorporated on 25 March 1997) Indonesia Agribusiness PT Listrindo Kencana ( LK ) (b) (a) (Incorporated on 8 December 2003) Indonesia Power generation PT Belitung Energy ( BE ) (c) (a) (Incorporated on 8 August 2006) Indonesia Power generation PT Agro Mas Lestari ( AML ) (c) (a) (Incorporated on 19 February 2007) Indonesia Agribusiness PT Agro Sawit Mas Lestari ( ASML ) (c) (a) (Incorporated on 9 March 2004) Indonesia Agribusiness PT Bumi Permai Sentosa ( BPS ) (c) (a) (Incorporated on 22 February 2007) Indonesia Wholesaler of shipping-related products PT Cahaya Permata Gemilang ( CPG ) (c) (a) (Incorporated on 22 February 2007) Indonesia Wholesaler of electricity-related products PT Langgeng Nusa Makmur ( LNM ) (c) (a) (Incorporated on 16 February 2007) Indonesia Agribusiness 68 Kencana Agri Limited

73 Notes to the Financial Statements For the financial year ended 31 December Investment in Subsidiaries (cont d) Name of subsidiaries, country of incorporation, place of operations and principal activities Percentage of equity held by group % % PT Palm Makmur Sentosa ( PMKS ) (c) (a) (Incorporated on 19 February 2007) Indonesia Agribusiness PT Sawit Permai Lestari ( SPL ) (c) (a) (Incorporated on 16 February 2007) Indonesia Wholesaler of plantation-related products PT Sawindo Cemerlang ( SCEM ) (c) (a) (Incorporated on 4 September 2006) Indonesia Agribusiness PT Wira Mas Permai ( WMP ) (c) (a) (Incorporated on 16 February 2007) Indonesia Agribusiness PT Wira Palm Mandiri ( WPM ) (c) (a) (Incorporated on 19 February 2007) Indonesia Wholesaler of plantation-related products PT Wira Sawit Mandiri ( WSM ) (c) (a) (Incorporated on 13 January 2006) Indonesia Agribusiness PT Pelayaran Asia Marine ( PAM ) (b) (a) (Incorporated on 17 October 2003) Indonesia Logistics (a) (b) (c) (d) On the basis that the group had existed since 1 January See Note 2 Basis of Presentation. Audited by member firm of RSM International of which RSM Chio Lim LLP, Singapore is a member. The name of the member firm is RSM AAJ Associates, Jakarta Unaudited as it is immaterial. Audited by RSM Chio Lim LLP, a member of RSM International. Annual Report

74 Notes to the Financial Statements For the financial year ended 31 December Land Use Rights Group Cost: At 1 January ,155 Additions 651 Foreign currency alignment (91) At 1 January ,715 Additions 1,084 Foreign currency alignment (504) At 31 December ,295 Accumulated depreciation: At 1 January Amortisation for the year 55 Foreign currency alignment (10) At January Amortisation for the year 44 Foreign currency alignment (38) At 31 December Net book value: At 1 January ,965 At 31 December ,480 At 31 December ,054 The amortisation expenses are charged to income statement and included in administrative expenses. The land rights have been pledged as security for the bank facilities (see Note 20). As at 31 December 2008, the Group s land rights covering a total land area of 63,743 hectares, represent Business Usage Rights ( Hak Guna Usaha or HGU ) that have been applied for. Out of these land rights, the certificates for 19,670 hectares were obtained before 31 December 2008 while the land rights certificates covering the remaining area of 44,073 hectares are still in the progress of preparation as at the date of this report. The group has been given a permit to arrange for land clearing for oil palm plantation purposes. The land rights will be amortised once the titles are issued to the group. The legal terms of the group s existing certified land rights expire in various years. The details are as follows:- Land rights Expire in years 19,374 hectares hectares ,073 hectares Certificates have yet to be received as of the date of this report 70 Kencana Agri Limited

75 Notes to the Financial Statements For the financial year ended 31 December Inventories Group Raw materials, consumables and supplies 3,848 2,762 Finished goods and goods for resale (CPO and CPKO) 2,570 2,409 6,418 5,171 Changes in inventories of finished goods (increase) / decrease (161) (447) Raw materials and consumables used included in cost of sales 37,338 36, Inventories are pledged as security for the bank facilities (see Note 20). 16. Trade and Other Receivables Group 5. Company Trade receivables: 7. Outside parties 5,978 1, Sub-total 5,978 1, Other receivables: 12. Other related parties (Note 3) Staff advances VAT receivable 2, Advances under Plasma Programme (Note 26) 2,667 1, Other receivables Sub-total 5,942 2, Total trade and other receivables 11,920 4, Staff advances are unsecured, without interest and are on fixed equal monthly repayment terms. The trade receivables have been pledged as security for the bank facilities (see Note 20). Annual Report

76 Notes to the Financial Statements For the financial year ended 31 December Other Assets Group 20 Company Deferred listing expenses 1, ,416 Prepayments 7,252 3, ,252 4, ,416 Other Assets: 27 Current 5,964 3, ,416 Non-Current 1,288 1, ,252 4, ,146 Included in prepayments are the following: Group 31 Company Prepaid rent to a related party (Note 25) 1,342 1,097 Advance payments made for the purchase of 3, kernel Others 2,349 1, ,252 3, Deferred listing expenses in 2007 represented expenditures, stated at cost, incurred in relation to the company s public listing. These expenditures have been set off against share capital and / or expensed in Cash and Cash Equivalents Group 37 Company Not restricted in use 12,433 4, Restricted in use (a) 1,913 12,433 5, Interest earning balances 7,499 4, The rates of interest for the cash on interest earning balances were as follows:- Group 43 Company 2008 % 2007 % % 2007 % Interest rates 1 to 3 3 to to 3 (a) This is for bank balances held by bankers to cover bank facilities provided. See Note Kencana Agri Limited

77 Notes to the Financial Statements For the financial year ended 31 December Cash and Cash Equivalents (Cont d) 18A. Cash and Cash Equivalents in Cash Flow Statement: 2008 Group 2007 Balance as in the balance sheet 12,433 5,941 Cash restricted in use over 3 months (1,913) Bank overdrafts (Note 20) (1,524) (29) Cash and cash equivalents for cash flow statement purposes at end year 10,909 3,999 18B. Non-Cash Transactions: During the year there were acquisitions of property, plant and equipment with a total cost of US$1,250,000 (2007: $547,000) acquired by means of finance leases. 19. Share Capital Number of shares issued Share capital 000 Ordinary shares of no par value: Balance at beginning of year 1 January ,686 18,755 Issuance of shares 2, Balance at end of 31 December ,965 19,110 Additional issuance shares issued on restructuring exercise 794,080 (6,130) Total share capital after restructuring exercise 798,045 12,980 Issue of shares from public offering 200,000 44,526 Shares issuance expenses (1,732) Balance at end of year 31 December ,045 55,774 As set out in Note 1, the company completed a Restructuring Exercise on 19 June The issued share capital of the company on completion of the Restructuring Exercise was US$12,980,000. The ordinary shares carry no right to fixed income. The only externally imposed capital requirement is that, for the company to maintain its listing on the Singapore Stock Exchange, it has to have share capital with at least a free float of 10% of the shares. The company met the capital requirement on its initial listing and the rules limiting treasury shares purchases mean it will automatically continue to satisfy that requirement, as it did throughtout the year. Management receives a report from the registrars frequently on substantial share interests showing the non-free float and it demonstrated continuing compliance with 10% limit throughout the year. The objectives when managing capital are: to safeguard the company s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk. The company sets the amount of capital in proportion to risk. The management manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the management may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt. Annual Report

78 Notes to the Financial Statements For the financial year ended 31 December Share Capital (Cont d) The primary objective for capital management is to ensure a strong credit and healthy capital ratios to support its business and maximise shareholder value. The management does not set a target level of gearing but uses capital opportunistically to add value for shareholders. The key discipline adopted is to widen the margin between the return on capital employed and the cost of that capital. The management monitors the capital on the basis of the debt-to-adjusted capital ratio. This ratio is calculated as net debt / adjusted capital (as shown below). Net debt is calculated as total borrowings less cash and cash equivalents. Adjusted capital comprises all components of equity (i.e. share capital, and retained earnings) Group 2007 Net debt: All current and non-current borrowings including finance leases 32,356 34,903 Less cash and cash equivalents (12,433) (5,941) Net debt 19,923 28,962 Net capital: Equity 110,200 78,577 Net capital 110,200 78,577 Debt-to-adjusted capital ratio 18% 37% The reduction in the debt-to-adjusted capital ratio during 2008 resulted primarily from the increase in the issue of shares. In connection with the initial public offering during the year, the independent auditors were paid fees totalling US$330,000 for their services as reporting accountants. The share issue expenses totalled US$1,732, Other Financial Liabilities 2008 Group 2007 Non-current: Bank loans - secured (Note 20C) 18,124 26,660 Bank loans - unsecured (Note 20C) 5,000 Finance leases (Note 20B) Non-current, total 18,723 31,952 Current: Bank overdrafts secured (Note 20A) 1, Bank loans - secured (Notes 20A and 20C) 11,256 2,561 Bank loans - unsecured (Note 20A) Finance leases (Note 20B) Derivative financial instruments (Notes 24 and 27) Current, total 13,653 3,628 Total 32,376 35, Kencana Agri Limited

79 Notes to the Financial Statements For the financial year ended 31 December Other Financial Liabilities (Cont d) 20A Bank Overdrafts and Bank Loans - current: The bank overdrafts and other banking facilities are covered by way of: (a) (b) joint and several personal guarantees of directors and shareholders; or corporate guarantees from a related party and negative pledges on certain fixed deposits, inventories, trade receivables, land rights, properties, vessels, plant and equipment of the group. The range of floating rate interest rates paid were as follows: Group Bank overdrafts secured 8.25% to 24.00% 8.75% to 15.00% Bank loans secured 10.70% to 18.18% 7.84% to 13.00% Bank loans unsecured 11.90% to 15.24% 7.84% to 9.75% 20B Finance Leases Group 2008 Minimum payments Finance Charges Present value Minimum lease payments payable: Due within one year 515 (117) 398 Due within 2 to 5 years 663 (64) 599 Total 1,178 ( 181) 997 Net book value of plant and equipment under finance leases 1, Minimum payments Finance charges Present value Minimum lease payments payable: Due within one year 295 (50) 245 Due within 2 to 5 years 329 (37) 292 Total 624 (87) 537 Net book value of plant and equipment under finance leases 1,129 It is a policy to lease certain of its plant and equipment under finance leases. The average lease term is 3 to 4 years. The fixed rate of interest for finance leases is about 5.40% to 9.0 % (2007: 7.60% to %) per year. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. All lease obligations are denominated Indonesian Rupiah and United States dollars. The obligations under finance leases are secured by the lessor's charge over the leased assets. Annual Report

80 Notes to the Financial Statements For the financial year ended 31 December Other Financial Liabilities (Cont d) 20C Bank Loans Non-current 2008 Group 2007 Investment loan A (Effective) secured Investment loan B (Effective) secured 5,866 7,764 Investment loan C (Effective) secured 4,853 3,273 Investment loan D (Interest during construction) secured Investment loan E (Interest during construction) secured 1,079 1,602 Investment loan F (Interest during construction) secured Investment loan G secured 541 Investment loan H secured 2,354 Investment loan I (Effective) secured 4,971 Investment loan J secured 104 Bank loan secured Term loan I secured 266 Term loan II secured 913 1,062 Term loan III unsecured 2,000 Term loan IV unsecured 3,000 Term loan V secured 2,000 Term loan VI secured 4,000 Term loan VII secured 1,000 Term loan VIII secured 3,819 Term loan IX secured 1,636 Term loan X secured ,877 33,893 The borrowings are repayable as follows : Amounts due within a year 3,753 2,233 Total current portion 3,753 2,233 Total non-current portion 18,124 31,660 The non-current portion is payable as follows: Due within 2 to 5 years 12,536 28,479 After 5 years 5,588 3,181 Total non-current portion 18,124 31, Kencana Agri Limited

81 Notes to the Financial Statements For the financial year ended 31 December Other Financial Liabilities (Cont d) 20C Bank Loans Non-current (cont d) The range of floating interest rates which approximate the weighted effective interest rates paid were as follows: Investment loan A (Effective) secured Investment loan B (Effective) secured Investment loan C (Effective) secured Investment loan D (Interest during construction) secured Group % to 13.75% 12.00% to 14.00% 12.00% to 14.00% 12.00% to 13.75% 12.00% to 14.00% 12.00% to 14.00% 13.00% to 15.00% 13.50% to 16.00% % to 16.00% 13.00% to 15.00% 13.50% to Investment loan E (Interest during construction) secured 16.00% Investment loan F (Interest during 13.00% to construction) secured 16.00% Investment loan G secured 8.00% Investment loan H secured Sibor +3.25% 12.00% to Investment loan I (Effective) secured 14.00% 12.00% to Investment loan J secured 14.00% 12.00% to 7.84% to Bank loan secured 14.00% 15.74% Term loan I secured Sibor+4% Term loan II secured 15.00% to 16.90% 13.80% Term loan III unsecured Sibor +3.50% Term loan IV unsecured Sibor +3.50% Term loan V secured 7.84% to 9.75% Term loan VI secured 7.84% to 9.75% Term loan VII secured 7.84% to 9.75% Term loan VIII secured Sibor +3.00% Term loan IX secured Sibor +3.00% Term loan X secured Sibor +3.00% The investment loans A and D are covered by negative pledges on fixed deposits, certain inventories, trade receivables, land rights, and property, plant and equipment. The investment loans are repayable by quarterly instalments according to the loan repayment schedules from banks. The investment loans will be fully repaid by year Annual Report

82 Notes to the Financial Statements For the financial year ended 31 December Other Financial Liabilities (Cont d) 20C Bank Loans Non-current (cont d) (i) Investment loan A (Effective) The purpose of the loan is to finance the construction of a CPO mill inclusive of all the related facilities such as building construction, vehicles and heavy duty equipment. The funds are drawn down quarterly in accordance with progress payments for the first 5 years. The payment of interest expenses is conducted in 2 ways: 1. During the construction period which is 4.5 years in accordance with the loan agreement, the interest rates are 13.00% to 15.00% and 12.00% to 13.75% per annum for 2007 and 2008 respectively and charged quarterly. During this period, 65% of the interest charged is capitalised with the investment loan (See investment loan D - Interest during construction), and the remaining 35% is payable in the current period. 2. After the construction period, the floating interest rates are 13.00% to 15.00% and 12.00% to 13.75% per annum for 2007 and 2008 respectively and no interest charged is capitalised with the investment loan (See investment loan D - Interest during construction). (ii) Investment loan D (Interest during construction) The investment loan (Interest during construction) credit facility is the accumulated interest charges capitalised during the construction period. As stated above, the payment obligation for 65% of the total interest charges is postponed until the end of the construction period which is up to the end of the 4.5 year period limit. The investment loans B and E are covered by negative pledges on certain inventories, trade receivables, land rights, and properties, plant and equipment. The investment loans are repayable by quarterly instalments according to the loan repayment schedules from banks. The investment loans will be fully repaid by year (i) Investment loan B (Effective) The purpose of the loan is to finance the construction of a CPO mill inclusive of all the related facilities such as building construction, vehicles and heavy duty equipment. The funds are drawn down quarterly in accordance with progress payments for the first 5 years. The payment of interest expenses is conducted in 2 ways: 1. During the construction period which is 4.5 years in accordance with the loan agreement, the interest rates are 13.50% to 16.00% and 12.00% to 14.00% per annum for 2007 and 2008 respectively and charged quarterly. During this period, 65% of the interest charged is capitalised with the investment loan (See investment loan E - Interest during construction), and the remaining 35% is payable in the current period. 78 Kencana Agri Limited

83 Notes to the Financial Statements For the financial year ended 31 December Other Financial Liabilities (Cont d) 20C Bank Loans Non-current (cont d) 2. After the construction period, the floating interest rates are 13.50% to 16.00% and 12.00% to 14.00% per annum for 2007 and 2008 respectively and no interest charged is capitalised with the investment loan (See investment loan E - Interest during construction). (ii) Investment loan E (Interest during construction) The investment loan (Interest during construction) credit facility is the accumulated interest charges capitalised during the construction period. As stated above, the payment obligation for 65% of the total interest charges is postponed until the end of the construction period which is up to the end of the 4.5 year period limit. The investment loans C and F are covered by personal guarantees from shareholders and directors and by negative pledges on biological assets and land rights. The investment loans are repayable by quarterly instalments according to the loan repayment schedules from banks. The investment loans repayment will commence in year 2011 and will be fully repaid by year (i) Investment loan C (Effective) The purpose of the loan is to finance the construction of a CPO mill inclusive of all the related facilities such as building construction, vehicles and heavy duty equipment. The funds are drawn down quarterly in accordance with progress payments for the first 5 years. The payment of interest charges is conducted in 2 ways: 1. During the construction period which is 4.5 years in accordance with the loan agreement, the floating interest rate is 13.00% to 16.00% and 12.00% to 14.00% per annum for 2007 and 2008 respectively and charged quarterly. During this period, 65% of the interest charged is capitalised with the investment loan (See investment loan F - Interest during construction), and the remaining 35% is payable in the current period. 2. After the construction period, the floating interest rate is 13.00% to16.00% and 12.00% to 14.00% per annum for 2007 and 2008 respectively and no interest charged is capitalised with the investment loan (Interest during construction). (ii) Investment loan F (Interest during construction) The investment loan (Interest during construction) credit facility is the accumulated interest charges capitalised during the construction period. As stated above, the payment obligation for 65% of the total interest charges is postponed until the end of the construction period which is up to the end of 4.5 year period limit. The investment loan G is secured by the vessels of the group. The loan is repayable by quarterly instalments over 3 years from February Annual Report

84 Notes to the Financial Statements For the financial year ended 31 December Other Financial Liabilities (Cont d) 20C Bank Loans Non-current (cont d) The investment loan H is secured by the vessels of the group. The purpose of the loan is to finance the vessel construction. The floating interest rate is Sibor+3.25% and no interest charged is capitalised with the investment loan (Interest during construction). The loan is repayable by quarterly instalments by May The purpose of the investment loans I and J is to finance the development of new plantation inclusive of all the related facilities such as building construction, vehicles and heavy duty equipment. The loans are repayable by quarterly instalments by August The term loan II is repayable by monthly instalments over 5 years from January 2009 and is secured by land and buildings of the group. The term Loan X is used for working capital purposes and is repayable within 3 years from August As at 31 December 2008, one of the Indonesian subsidiaries breached certain financial ratios stipulated in a loan agreement with bank. The outstanding balance of this loan amounted to US$2,400,000 and has been classified as current liabilities as at 31 December The bank has not requested for immediate repayment of this outstanding loan at the date these financial statements are authorised for issue. 21. Trade and Other Payables Group 1. Company Trade payables: 3. Outside parties and accrued liabilities 5,106 9, ,259 Sub-total 5,106 9, , Other payables: 8. Other related party (Note 3) Related company (Note 3) Other payables 1, Provision for listing expenses 1, Sub-total 2,241 2, Total trade and other payables 7,347 11, ,829 Included in the other payables are US$331,000 and US$451,000 representing amounts payable to suppliers for the acquisition of plant and equipment at 31 December 2007 and 2008 respectively and US$67,000 and US$902,000 representing amounts payable to suppliers for construction of properties at 31 December 2007 and 2008 respectively. 22. Other Liabilities Group Employee pension benefits (Note 23) Advances from customers 243 1, , Other Liabilities: Current 243 1, Non-current , Kencana Agri Limited

85 Notes to the Financial Statements For the financial year ended 31 December Estimated Liability for Employee Benefits Besides the benefits provided under the defined contribution retirement plans, the group has recorded additional provisions for employee service entitlements in order to meet the minimum benefits required to be paid to the qualified employees, as required under existing manpower regulations in Indonesia. The amounts of such additional provisions were determined based on actuarial computations prepared by an independent firm of actuaries, PT Rileos Pratama, using the Projected Unit Credit method which is covered in their reports dated 19 December As at 31 December 2007 and 2008, the balance of the related actuarial liability for employee benefits amounted to US$288,000 and US$355,000 respectively, which is presented as Other Liabilities in the balance sheets. They are as follows: Group Present value of employee benefits obligation in addition to the defined contribution scheme Unrecognised net actuarial loss (67) (45) Foreign currency alignment 8 (9) Changes in the present value of the defined benefits obligation are as follows: Benefits obligation at beginning of year Current service costs Interest costs on benefits obligation Past services costs vested 6 2 Foreign currency alignment (53) (13) Benefits obligation at end of year The following table summarises the component of net employee benefits expense recognised in the income statement: Current service costs Interest costs on benefits obligation Past services costs vested 6 2 Net employee benefits expense (Note 7) The principal assumptions used in determining post-employment obligations for the plan are as follows: Annual discount rate : 10% in 2007 and 12% in 2008 Future annual salary increase : 6% in 2007 and 2008 Annual employee turnover rate : 5-10% in 2007 and 2008 for employees under 40 years old and decreasing linearly until 0% at the age of years Disability rate : 10% per year from mortality rate for office staff 20% per year from mortality rate for plantation staff Retirement age : 55 years of age Mortality rate : Indonesian mortality table 5 Annual Report

86 Notes to the Financial Statements For the financial year ended 31 December Derivative Financial Instruments The following are the principal derivative financial instruments. Currency derivatives: Currency derivatives are utilized to eliminate or reduce the exposure of foreign currency denominated assets and liabilities, and to hedge future transactions and cash flows. The group is a party to a variety of foreign currency forward contracts in the management of its exchange rate exposures. The instruments purchased are primarily denominated in the currencies of the group s principal markets. As a matter of principle, the group does not enter into derivative contracts for speculative purposes. At the balance sheet dates, the group had contracted to sell and purchase the following amounts under forward contracts. Group Purchase United States dollars for Indonesian Rupiah: Contractual amount 3,000 Estimated fair value 2,993 Sell United States dollars for Indonesian Rupiah: Contractual amount 5,100 Estimated fair value 5,080 Maturity period 2007 January to March 2008 Maturity period 2008 January to June 2009 The fair value of the currency derivatives is estimated above based on market values of equivalent instruments at the balance sheet date. It is based on the difference between the contractual exchange rate and the market rate at the balance sheet date. Fair value adjustments of the above derivatives of US$20,000 were made in the income statement in Fair value adjustments of the above derivatives of US$7,000 were not made in the income statement in 2007 as the amounts were not significant. 82 Kencana Agri Limited

87 Notes to the Financial Statements For the financial year ended 31 December Operating Lease Payment Commitments At the end of the reporting year the total of future minimum lease payment commitments under non-cancellable operating leases are as follows: Group Not later than one year Later than one year and not after than five years After 5 years 1,068 - Rental expenses for the year Operating lease payments represent rentals payable for certain office and warehousing premises. The leases from the owners are for 10 years from 30 June 2002 to 30 December 2012 and 25 years from 1 July 2008 to 30 June 2033 respectively. The lease rental terms are negotiated annually and rentals are subject to an escalation clause but the amount of the rent increase is not to exceed a certain percentage. Such increases are not included in the above amounts. On 13 November 2007, one of the subsidiaries has entered into a long term lease agreement for 25 years with a related party. As at 31 December 2007, the subsidiary has prepaid an initial aggregate amount of US$1,097,000 (IDR 10 billion) to the related party. In addition, the balance of the rent amounting to US$500,000 (IDR 5 billion) which is included above will be paid upon the handing over of the premises to the subsidiary in accordance with the agreement. This has taken place in the second quarter of Contingent Liabilities Corporate guarantees given by the group under the Plasma Programme Certain subsidiaries of the group have implemented the Plasma Programme using KKPA, KKSR and Plasma Mandiri. The development of plantations is financed by credit investment facilities granted by designated banks to the villagers through local cooperatives as the representatives of the villagers. The loan facilities are secured against the land certificates held by the villagers and corporate guarantees from the group. The credit facility amounts and the outstanding balances of the bank loans granted by the banks to the villagers as at 31 December 2008 and 2007 are as follows: 2008 Group 2007 Facility amounts 12,028 9,773 Outstanding balances 5,808 3,775 Upon maturity of the oil palms, the land will be maintained and managed by the villagers or in the future by the group. The harvested fresh fruit bunches ( FFB ) will then be sold to the group. The villagers will repay the loan facilities from a portion of the FFB sale price. In addition to the scheme, the group provided temporary funding to the local cooperative for working capital purposes. The cost of development of plantations, funds received from the designated banks on behalf of local cooperatives and temporary funding provided to local cooperatives as at 31 December 2007 and 2008 are as follows: Annual Report

88 Notes to the Financial Statements For the financial year ended 31 December Contingent Liabilities (Cont d) 2008 Group 2007 Cost of development of plantations 22 Advances provided to cooperatives 2,645 1,523 Total 2,667 1,523 Presented as: - Other receivables (Note 16) 2,667 1,523 Total 2,667 1, Commitments a. Capital commitments Estimated amounts committed at the balance sheet date for future capital expenditure but not recognised in the financial statements are as follows: Group Commitments for land clearing and development 1, Commitments for construction of leasehold buildings 329 Commitments to purchase plant and equipment 1,820 1,000 b. Commitments for sales The group has the following committed sales contracts for crude palm oil and palm kernel cake at 31 December The contractual or underlying principal amounts of the committed contracts with fixed pricing terms that were outstanding at the balance sheet date were as follows: 2008 Group 2007 Sale of crude palm oil and palm kernel cake 6,205 10,417 Year end fair values: - Positive fair value Negative fair value (583) (1,277) Net fair value (124) (1,066) Maturity period 2008 January to March 2009 Maturity period 2007 January to March 2008 The losses arising from these contracts are not recognised in the consolidated financial statements until physical deliveries take place. 84 Kencana Agri Limited

89 Notes to the Financial Statements For the financial year ended 31 December Commitments (cont d) c. Futures commodity contracts Futures commodity contracts are entered into to manage the fluctuations in prices of crude palm oil. The futures contracts are not designated as hedges for accounting purposes. The contractual or underlying principal amounts of the futures contracts with fixed pricing terms that were outstanding at 31 December 2008 were as follows: Group Sale of crude palm oil 13,319 3,473 Year end fair values: - Positive fair value 1,299 - Negative fair value (604) (677) Net fair value 695 (677) Maturity period 2008 January to September 2009 Maturity period 2007 April to December 2008 The unrealised gains / (losses) from these futures contracts have been recognised in the income statements in 2008 and Financial Instruments: Information on Financial Risks 28A. Classification of Financial Assets and Liabilities The following table summarises the carrying amount of financial assets and liabilities recorded at the end of the reporting year by FRS 39 categories: Group Financial assets: Cash and cash equivalents 12,433 5,941 Trade and other receivables 11,920 4,491 Financial assets at fair value through profit or loss designated as such upon recognition: Futures contracts 695 At end of year 25,048 10,432 Financial liabilities: Financial liabilities at fair value through profit or loss designated as such upon recognition: - Future commodity contracts Measured at amortised cost: - Borrowings 31,359 34,366 - Finance leases Trade and other payables 7,347 11,518 At end of year 39,723 47,098 Further quantitative disclosures are included throughout these financial statements. Disclosures for the company have not been made as the financial assets and financial liabilities are not significant. Annual Report

90 Notes to the Financial Statements For the financial year ended 31 December Financial Instruments: Information on Financial Risks (Cont d) 28B Financial Risk Management The main purpose for holding or issuing financial instruments is to raise and manage the finances for the entity s operating, investing and financing activities. The main risks arising from the entity s financial instruments are credit risk, interest risk, liquidity risk, foreign currency risk and market price risk comprising interest rate and currency risk exposures. The management has certain practices for the management of financial risks. The guidelines set up the short and long term objectives and action to be taken in order to manage the financial risks. The major guidelines are the following: 1. Minimise interest rate, currency, credit and market risk for all kinds of transactions. 2. Maximise the use of natural hedge : favouring as much as possible the natural offsetting of sales and costs and payables and receivables denominated in the same currency and therefore put in place hedging strategies only for the excess balance. The same strategy is pursued with regard to interest rate risk. 3. Enter into derivatives or any other similar instruments solely for hedging purposes. 4. All financial risk management activities are carried out and monitored by senior management staff. 5. All financial risk management activities are carried out following good market practices. 6. The entity may consider investing in shares or similar instruments only in the case of temporary excess of liquidity and such transactions have to be authorised by the board of directors. 28C Credit Risk on Financial Assets Financial assets that are potentially subject to concentrations of credit risk and failures by counterparties to discharge their obligations in full or in a timely manner consist principally of cash balances with banks, cash equivalents and trade and other receivables. The maximum exposure to credit risk is the fair value of the financial instruments at the end of the reporting year. Credit risk on cash balances with banks and derivative financial instruments is limited because the counter-parties are banks with acceptable credit ratings. All unencumbered bank deposits with the banks licensed by the Monetary Authority of Singapore are guaranteed by the Singapore Government until 31 December At the end of the year the balances with the banks in Singapore amounted to US$9,846,000. Credit risk on other financial assets is limited because the other parties are entities with acceptable credit ratings. For credit risk on receivables an ongoing credit evaluation is performed of the debtors financial condition and a loss from impairment is recognised in the income statement. There is no significant concentration of credit risk, as the exposure is spread over a large number of counter-parties and customers unless otherwise disclosed in the notes to the financial statements. The exposure to credit risk is controlled by setting limits on the exposure to individual customers and these are disseminated to the relevant persons concerned and compliance is monitored by management. 86 Kencana Agri Limited

91 Notes to the Financial Statements For the financial year ended 31 December Financial Instruments: Information on Financial Risks (Cont d) 28C Credit Risk on Financial Assets (cont d) As is disclosed in Note 18 cash and cash equivalents balances represent short term deposits with a less than 90-day maturity. As part of the process of setting customer credit limits, different credit terms are used. The average credit period generally granted to trade receivable customers is about 30 days (2007: 30 days). But some customers take a longer period to settle the amounts. The table below illustrates the ageing analysis: Group Trade receivables: Less than 30 days 5,978 1,878 At end of year 5,978 1, Concentration of trade receivables customers: Top 1 customer 2,791 1,536 Top 2 customers 4,420 1,690 Other receivables are normally with no fixed terms and therefore there is no maturity. 28D Liquidity Risk The liquidity risk is managed on the basis of expected maturity dates of the financial liabilities. The following table analyses financial liabilities by remaining contractual maturity (contractual and undiscounted cash flows): Trade and Group Borrowings Financial liabilities other payables Total 2008: Less than 1 year 13, ,347 20, years 6,835 6, years 5,701 5,701 Over 5 years 5,588 5,588 At end of year 31, ,347 38,726 Trade and Borrowings Financial liabilities other payables Total 2007: Less than 1 year 2, ,518 14, years 27,417 27, years 1,062 1,062 Over 5 years 3,181 3,181 At end of year 34, ,518 46,561 Annual Report

92 Notes to the Financial Statements For the financial year ended 31 December Financial Instruments: Information on Financial Risks (Cont d) 28D Liquidity Risk (cont d) The average credit period taken to settle trade payables is about 50 days. The other payables are with short-term durations. See Note 20B for details of the maturity of finance leases. It is expected that all the liabilities will be paid at their contractual maturity. In order to meet such cash commitments the operating activity is expected to generate sufficient cash inflows. Bank facilities: 2008 Group 2007 Undrawn borrowing facilities 16,035 8,737 The undrawn borrowing facilities are available for operating activities and to settle other commitments. Borrowing facilities are maintained to ensure funds are available for budgeted operations. A monthly schedule showing the maturity of financial liabilities and unused borrowing facilities is provided to management to assist them in monitoring the liquidity risk. 28E Interest Rate Risk The following table analyses the breakdown by type of interest rate: 2008 Group 2007 Financial assets: Floating rate 7,499 4,699 Non-interest bearing 17,549 5,733 At end of year 25,048 10,432 Financial liabilities: Floating rate 31,359 34,366 Fixed rate Non-interest bearing 7,367 12,195 At end of year 39,723 47,098 The interest rate risk exposure is mainly from changes in interest rates. The interest rate risk on financial assets is not significant. Sensitivity analysis A hypothetical increase in interest rates by 50 basis points would have an adverse effect on profit before tax of (157) (134) A hypothetical increase in interest rates by 100 basis points would have an adverse effect on profit before tax of (314) (268) A hypothetical increase in interest rates by 150 basis points would have an adverse effect on profit before tax of (470) (402) A hypothetical increase in interest rates by 200 basis points would have an adverse effect on profit before tax of (627) (536) 88 Kencana Agri Limited

93 Notes to the Financial Statements For the financial year ended 31 December Financial Instruments: Information on Financial Risks (Cont d) 28E Interest Rate Risk (cont d) The analysis has been performed for floating interest rate financial liabilities. The impact of a change in interest rates on floating interest rate financial instruments has been assessed in terms of changing of their cash flows and therefore in terms of the impact on net expenses. Also see Note 20 for interest rates. In management s opinion, the above effective interest rates are unrepresentative of the inherent interest risks as the historical exposure does not reflect the exposure in future. 28F Foreign Currency Risks There is exposure to foreign currency risk as part of its normal business. In particular, there is significantly exposure to US$ currency risk due to the large value of sales made in United States dollars. Analysis of above amount denominated in non-functional currency: Financial assets: Group Cash and cash equivalents Receivables Total At 31 December 2007: US dollars 3, ,740 At 31 December 2008: US dollars 9,470 4,599 14,069 Financial liabilities: Borrowings Finance Leases Total At 31 December 2007: US dollars 12, ,074 At 31 December 2008: US dollars 2, ,010 Sensitivity analysis: Group A hypothetical 10% increase in the exchange rate of the functional currency against the US$ would have a favourable / (adverse) effect on profit before tax of 1,229 (1,100) The analysis above has been carried out on the basis that there are no hedged transactions. In management s opinion, the above sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year end exposures do not reflect the exposures during the year. Annual Report

94 Notes to the Financial Statements For the financial year ended 31 December G Price risk The group is exposed to commodity price risk due to certain factors, such as weather, government policy, level of demand and supply in the market and the global economic environment resulting from population growth and changes in standards of living, and global production of similar and competitive crops. During its ordinary course of business, the value of its open sales and purchase commitments and inventory of raw material changes continuously in line with movements in the prices of the underlying commodity. To the extent that its open sales and purchase commitments do not match at the end of each business day, the group will be subject to price fluctuations in the commodities market. Consequently, it is the group s policy to minimise the risks arising from the fluctuations in the commodity prices by being partly self-sufficient in CPO and CPKO as this provides a hedge against such cost fluctuations. To the extent it is unable to do so, the group may minimise such risks through direct purchases of the similar commodity or through forward sales contracts. As such, it may also be exposed to commodity price risk as changes in fair value of future commodity contracts are recognised directly in the income statements. Decisions to enter into forward sales contracts must be approved by at least two directors and are currently under the purview of the group s chairman and deputy chief executive officer. The group does not enter into forward sales contracts for speculative purposes. 29. Financial Information by Segments The group operates predominantly in only one business segment, which is the plantation and palm oil segment. Accordingly, no segmental information is prepared based on business segment as it is not meaningful. The group operates primarily in Indonesia with sales made to the Indonesian market. Accordingly, an analysis of assets and profits of the group by geographical distribution has not been included for the purposes of presentation under secondary segment. 30. Changes and Adoption of Financial Reporting Standards For the year ended 31 December 2008 the following new or revised Singapore Financial Reporting Standards were adopted for the first time. The new or revised standards did not require any modification of the measurement method or the presentation in the financial statements. FRS No. Title INT FRS 111 FRS102 - Group and Treasury Share Transactions (*) INT FRS 112 Service Concessions Arrangements (*) INT FRS 114 FRS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (*) (*) Not relevant to the entity. 90 Kencana Agri Limited

95 Notes to the Financial Statements For the financial year ended 31 December Future Changes in Accounting Standards The following new or revised Singapore Financial Reporting Standards that have been issued will be effective in future. The transfer to the new or revised standards from the effective dates are not expected to result in material adjustments to the financial position, results of operations, or cash flows for the following year. FRS No. Title Effective date for periods beginning on or after FRS 1 (Revised) Presentation of Financial Statements FRS 23 Borrowing Costs FRS 103 (Revised) Business Combinations and consecutive amendments in other Standards FRS 108 Operating Segments INT FRS 113 Customer Loyalty Programs (*) INT FRS 116 Hedges of a Net Investment in a Foreign Operation INT FRS 117 Distributions of Non-cash Assets to Owners Comparative Figures (*) Not relevant to the entity. Certain reclassifications have been made to the prior year s financial statements to enhance comparability with current year s financial statements. The reclassifications were not significant. 33. Impact of the Current Financial Crisis Many countries in the region and elsewhere, including Singapore, are experiencing severe economic difficulties as a consequence of the current turmoil in the world's financial markets. This has resulted in fluctuations in foreign currency exchange rates, volatile stock and commodity prices, uncertainty of the availability of bank finance to suppliers and customers and a slowdown in growth. The current financial crisis may significantly affect, and may continue to have an adverse impact on the group's business, financial condition, results of operations, cash flows and prospects for the foreseeable future. The recoverability of the group s assets and the ability of the group to maintain or pay its debts as they mature are dependent to a large extent on the efficacy of the fiscal and other measures undertaken by these countries to achieve economic recovery. The effect of these measures are beyond the group s control. At the date of this report, the directors are not in a position to ascertain the impact, if any, on the group's financial position and results of operations arising from the current financial crisis. The financial statements for the year ended 31 December 2008 do not include any adjustments that might arise from these uncertainties. Annual Report

96 Information on Shareholdings As at 17 March 2009 Issued and fully paid capital : SGD 80,951,118 Number of shares : 998,044,720 Class of shares : Ordinary shares Voting rights : One vote per share Distribution of shareholdings SIZE OF SHAREHOLDINGS NO. OF SHAREHOLDERS % NO. OF SHARES % ,000-10, ,527, ,001-1,000, ,741, ,000,001 AND ABOVE ,776, TOTAL : 1, ,044, Shareholding held by the public Based on the information available to the Company as at 17 March 2009, approximately 23.62% of the issued ordinary shares of the Company is held by the public and, therefore, Rule 723 of the Listing Manual issued by the Singapore Exchange Securities Trading Limited is complied with. Substantial shareholders Name of shareholders Direct interest Deemed interest No. of shares % of shares No. of shares % of shares Kencana Holdings Pte. Ltd. 689,829, Henry Maknawi (1) 37,099, ,580, Note :- 1) Mr Henry Maknawi is deemed to be interested in the shares held by Kencana Holdings Pte. Ltd. by virtue of his 43.41% shareholding interest in Kencana Holdings Pte. Ltd.. Mr Henry Maknawi is also deemed to be interested in the shares held by his son and daughter. 92 Kencana Agri Limited

97 Information on Shareholdings As at 17 March 2009 Top twenty shareholders NO. NAME NO. OF SHARES % 1. KENCANA HOLDINGS PTE LTD 689,829, DBS VICKERS SECURITIES (S) PTE LTD 48,241, HENRY MAKNAWI 37,099, DBSN SERVICES PTE LTD 31,050, EMERALD EYE INVESTMENTS LIMITED 15,000, SUSANTO LIM HWA MIN 10,520, PARKER VELA ENTERPRISES LTD 10,000, LETJEN TNI (PURN.) SOEKARTO 9,177, JEANNY MAKNAWI 8,140, EDDY MAKNAWI 7,581, JOHAN MAKNAWI 6,943, JACOBUS AMIN DELAROSA 6,401, DICK PERMANA 6,384, MAYJEN TNI (PURN.) SOEPRAPTO 5,745, RATNA MAKNAWI 5,506, PT INTINUSA METROTAMA 3,750, PHILLIP SECURITIES PTE LTD 3,445, JOSEF KANDIAWAN 2,998, ALBERT MAKNAWI 2,234, DBS NOMINEES PTE LTD 2,115, TOTAL : 912,164, Annual Report

98 Notice of Annual General Meeting Kencana Agri Limited Registration Number: E (Incorporated in the Republic of Singapore) NOTICE IS HEREBY GIVEN that the 2009 Annual General Meeting of the members of the Company will be held at Elmwood Room, Level 1, Swissotel Merchant Court, 20 Merchant Road, Singapore on 29 April 2009 at a.m. to transact the following businesses: AS ORDINARY BUSINESS 1. To receive and adopt the audited financial statements of the Company and the Reports of the Directors and Auditors for the year ended 31 December To declare a final exempt (one-tier) dividend of 0.3 Singapore cents per ordinary share for the year ended 31 December To re-elect the following director retiring pursuant to the Company s Articles of Association: Resolution 1 Resolution 2 Resolution 3 Mr Alwin Aziz (Article 91) 4. To re-elect the following director retiring pursuant to the Company s Articles of Association: Resolution 4 Mr Henry Maknawi (Article 91) 5. To approve the Directors fees of SGD 140,000 for the year ended 31 December To re-appoint RSM Chio Lim LLP as the Auditors for the ensuing year and to authorise the Directors to fix their remuneration. Resolution 5 Resolution 6 AS SPECIAL BUSINESS To consider and, if thought fit, to pass the following Resolutions as Ordinary Resolutions, with or without amendments: 7. Proposed Share Issue Mandate Resolution 7 That pursuant to Section 161 of the Companies Act, Cap. 50. and subject to Rule 806 of the Listing Manual of the Singapore Exchange Securities Trading Limited ( SGX-ST ), authority be and is hereby given to the Directors of the Company to allot and issue shares and convertible securities in the capital of the Company (whether by way of rights, bonus or otherwise) at any time and upon such terms and conditions and for such purposes and to such persons as the Directors may in their absolute discretion deem fit provided that:- 94 Kencana Agri Limited

99 Notice of Annual General Meeting (i) (ii) the aggregate number of shares and convertible securities to be issued pursuant to this Resolution does not exceed 50 per cent (50%) of the total number of issued shares excluding treasury shares of the Company (as calculated in accordance with sub-paragraph (ii) below), of which the aggregate number of shares and convertible securities to be issued other than on a pro rata basis to existing shareholders of the Company does not exceed twenty per cent (20%) of the total number of issued shares excluding treasury shares of the Company (as calculated in accordance with sub-paragraph (ii) below); (subject to such manner of calculations as may be prescribed by the SGX-ST), for the purpose of determining the aggregate number of shares that may be issued under sub-paragraph (i) above, the total number of issued shares excluding treasury shares shall be based on the total number of issued shares excluding treasury shares of the Company at the time this Resolution is passed after adjusting for:- (a) (b) (c) new shares arising from the conversion or exercise of any convertible securities; new shares arising from exercising share options or vesting of share awards outstanding or subsisting at the time of the passing of the resolution approving the mandate, provided the options or awards were granted in compliance with Part VIII of Chapter 8 of the Listing Manual of SGX-ST; and any subsequent bonus issue, consolidation or sub-division of shares (iii) unless revoked or varied by the Company in general meeting, the authority conferred by this Resolution shall continue in force until the conclusion of the next Annual General Meeting or the date by which the next Annual General Meeting of the Company is required by law to be held, whichever is the earlier. [See Explanatory Note (i)] 8. And to transact any other business which may be properly transacted at an Annual General Meeting. Annual Report

100 Notice of Annual General Meeting Explanatory Note: (i) The proposed Resolution 7, if passed, will empower the Directors from the date of the above Meeting until the date of the next Annual General Meeting, to allot and issue shares and convertible securities in the Company. The number of shares and convertible securities, which the Directors may allot and issue under this Resolution shall not exceed 50% of the total number of issued shares excluding treasury shares of the Company at the time of passing this Resolution. For allotment and issue of shares and convertible securities other than on a pro-rata basis to all shareholders of the Company, the aggregate number of shares and convertible securities to be allotted and issued shall not exceed 20% of the total number of issued shares excluding treasury shares of the Company. This authority will, unless previously revoked or varied at a general meeting, expire at the next Annual General Meeting. NOTICE IS ALSO HEREBY GIVEN that the Transfer Books and Register of Members of the Company will be closed on 13 May 2009 for the purpose of determining shareholders entitlements to the proposed final dividend of 0.3 Singapore cents per ordinary share in respect of the financial year ended 31 December 2008 (the Proposed Final Dividend ). Duly completed transfers received by the Company s Registrars, Boardroom Corporate & Advisory Services Pte Ltd at 3 Church Street #08-01 Samsung Hub, Singapore up to 5.00 p.m. on 12 May 2009 will be registered before entitlements to the Proposed Final Dividend is determined. The Proposed Final Dividend, if approved by shareholders at the 2009 Annual General Meeting, will be paid on 26 May Members whose Securities Accounts with The Central Depository (Pte) Limited ( CDP ) are credited with shares at 5.00 p.m. on 12 May 2009 will be entitled to the Proposed Final Dividend. In respect of shares in Securities Accounts with CDP, the said dividend will be paid by the Company to CDP which will in turn distribute the dividend entitlements to such holders of shares in accordance with its practice. By Order Of the Board CATHERINE LIM SIOK CHING Company Secretary Date : 14 April 2009 Notes : a) A member entitled to attend and vote at this meeting is entitled to appoint a proxy to attend and vote in his stead. A proxy need not be a member of the Company. b) If a proxy is to be appointed, the form must be deposited at the registered office of the Company at 3 Shenton Way #10-06 Shenton House Singapore not less than 48 hours before the meeting. c) The form of proxy must be signed by the appointor or his attorney duly authorised in writing. d) In the case of joint shareholders, all holders must sign the form of proxy. 96 Kencana Agri Limited

101 Kencana Agri Limited Registration Number: E (Incorporated in the Republic of Singapore) PROXY FORM IMPORTANT 1. This Annual Report is also forwarded to investors who have used their CPF monies to buy shares in the Company at the request of their CPF Approved Nominees, and is sent solely for their information only. 2. The Proxy form is, therefore, not valid for use by CPF investors and shall be ineffective for all intents and purposes if used or purported to be used by them. I/We of being a member(s) of KENCANA AGRI LIMITED (the Company ), hereby appoint Name Address NRIC/Passport Number Proportion of Shareholdings and/or (delete as appropriate) Name Address NRIC/Passport Number Proportion of Shareholdings as my/our proxy/proxies to attend and to vote for me/us on my/our behalf and if necessary, to demand a poll at the 2009 Annual General Meeting of the Company to be held at Elmwood Room, Level 1, Swissotel Merchant Court, 20 Merchant Road, Singapore on Wednesday, 29 April 2009 at a.m. and at any adjournment thereof. (Please indicate with an X in the spaces provided whether you wish your vote(s) to be cast for or against the resolutions as set out in the notice of Annual General Meeting. In the absence of specific directions, the proxy/proxies will vote or abstain as he/they may think fit, as he/they will on any other matter arising at the Annual General Meeting.) No. Resolutions For Against 1 Directors Report and Audited Accounts for the year ended 31 December Declaration of a final exempt (one-tier) dividend of 0.3 Singapore cents per ordinary share for the year ended 31 December Re-election of Mr Alwin Aziz as Director 4 Re-election of Mr Henry Maknawi as Director 5 Approval of Directors fees for the year ended 31 December Re-appointment of RSM Chio Lim LLP as Auditors and authorise the directors to fix their remuneration 7 Authority to allot and issue shares and convertible securities Dated this day of 2009 Total number of Shares held Signature(s) of member(s) or common seal IMPORTANT: PLEASE READ NOTES OVERLEAF

102 NOTES : 1. Please insert the total number of shares held by you. If you have shares entered against your name in the Depository Register (as defined in Section 130A of the Companies Act, Chapter 50), you should insert that number of shares. If you have shares registered in your name in the Register of Members, you should insert that number of shares. If you have shares entered against your name in the Depository Register and shares registered in your name in the Register of Members, you should insert the aggregate number of shares. If no number is inserted, this form of proxy will be deemed to relate to all the shares held by you. 2. A member of the Company entitled to attend and vote at a meeting of the Company is entitled to appoint not more than two proxies to attend and vote on his behalf. A proxy need not be a member of the Company. 3. Where a member appoints more than one proxy, he shall specify the proportion of his shareholding to be represented by each proxy. 4. The instrument appointing a proxy or proxies must be under the hand of the appointor or his attorney duly authorised in writing. Where the instrument appointing a proxy or proxies is executed by a corporation, it must be executed either under its common seal or under the hand of its attorney or duly authorised officer. 5. A corporation which is a member of the Company may authorise by resolution of its directors or other governing body such person as it thinks fit to act as its representative at the Annual General Meeting, in accordance with its Articles of Association and Section 179 of the Companies Act, Chapter The instrument appointing a proxy or proxies, together with the power of attorney or other authority (if any) under which it is signed, or notarially certified copy thereof, must be deposited at the registered office of the Company at 3 Shenton Way #10-06 Shenton House Singapore not later than 48 hours before the time set for the Annual General Meeting. 7. The Company shall be entitled to reject the instrument appointing a proxy or proxies if it is incomplete, improperly completed or illegible or where the true intentions of the appointor are not ascertainable from the instructions of the appointor specified in the instrument appointing a proxy or proxies. In addition, in the case of members of the Company whose shares are entered against their names in the Depository Register, the Company may reject any instrument appointing a proxy or proxies lodged if such members are not shown to have shares entered against their names in the Depository Register at 48 hours before the time appointed for holding the Annual General Meeting as certified by The Central Depository (Pte) Limited to the Company. First fold AFFIX POSTAGE STAMP Kencana Agri Limited 3 Shenton Way #10-06 Shenton House Singapore Second fold Third fold Apply glue here

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105 Corporate Information BOARD OF DIRECTORS Mr. Henry Maknawi (Executive Chairman and CEO) Tengku Alwin Aziz (Vice-Chairman and Non-Executive Director) Ms. Ratna Maknawi (Deputy CEO) Mr. Kent Surya (Finance Director) Mr. Soh Yew Hock (Lead Independent Director) Mr. Leung Yew Kwong (Independent Director) Audit Committee Mr. Soh Yew Hock (Chairman) Mr. Leung Yew Kwong Tengku Alwin Aziz Remuneration Committee Mr. Soh Yew Hock (Chairman) Mr. Leung Yew Kwong Tengku Alwin Aziz Nominating Committee Mr. Leung Yew Kwong (Chairman) Mr. Soh Yew Hock Mr. Henry Maknawi COMPANY REGISTRATION NUMBER Kencana Agri Limited Registration Number: E Incorporated in the Republic of Singapore REGISTERED OFFICE 3 Shenton Way #10-06 Shenton House Singapore Phone: Fax: PRINCIPAL OFFICE Kencana Tower, 9th Floor Business Park Kebon Jeruk Jalan Raya Meruya Ilir No.88 Jakarta Barat Indonesia COMPANY SECRETARY Catherine Lim Siok Ching, ACIS, LLB(Hons)(London) SHARE REGISTRAR and share Transfer Agent Boardroom Corporate & Advisory Services Pte. Ltd. AUDITORS RSM Chio Lim LLP 8 Wilkie Road, #03-08, Wilkie Edge, Singapore Partner in Charge: Mr. Peter Jacob (a member of the Institute of Certified Public Accountants of Singapore) INDEPENDENT VALUER (BIOLOGICAL ASSETS) PT Asian Appraisal Indonesia Jalan Musi 38 Jakarta 10150, Indonesia PRINCIPAL BANKERS PT Bank Mandiri (Persero) Tbk. PT Bank DBS Indonesia PT Bank Danamon Indonesia Tbk. DBS Bank Ltd The initial public offering of the Company was sponsored by DBS Bank Ltd (the Issue Manager ). The Issue Manager assumes no responsibility for the contents of this annual report.

106 Kencana Agri Limited Registration No : E Singapore 3 Shenton Way #10-06 Shenton House Singapore Indonesia Kencana Tower, 9th Floor Business Park Kebon Jeruk Jalan Raya Meruya Ilir No.88 Jakarta Barat Indonesia www. kencanaagri. com