Report on the Audit of the Financial Statements

Transcription

1 KPMG Chartered Accountants P.O. Box 76 6 Duke Street Kingston Jamaica, W.I. +1 (876) firmmail@kpmg.com.jm INDEPENDENT AUDITORS REPORT To the Members of Report on the Audit of the Financial Statements Opinion We have audited the separate financial statements of Kingston Properties Limited ( the Company ) and the consolidated financial statements of the Company and its subsidiaries ( the Group ), set out on pages 8 to 55, which comprise the Group s and Company s statements of financial position as at, the Group s and Company s statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information. In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Group and the Company as at, and of the Group s and Company s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) and the Jamaican Companies Act. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. R. Tarun Handa Cynthia L. Lawrence Rajan Trehan Norman O. Rainford Nigel R. Chambers W. Gihan C. De Mel Nyssa A. Johnson Wilbert A. Spence Rochelle N. Stephenson KPMG, a Jamaican partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.

2 Page 2 INDEPENDENT AUDITORS REPORT (CONTINUED) To the Members of Report on the Audit of the Financial Statements (continued) Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current year. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matters and how they were addressed in our audit 1. Valuation of investment property The valuation of the Group s investment property requires significant estimation, which is impacted by uncertainty of market factors, pricing assumptions and general business and economic conditions. Our audit procedures in this area included the following: Using our own valuation specialists to assess the reasonableness of the valuation methodologies employed by management, including management experts, where applicable, and the fair value conclusions for a sample of properties at the valuation date. We considered the provisions of IFRS 13, Fair Value Measurement; reviewed the sources of data and underlying assumptions utilised to value the properties; performed a search for similar transactions and listings; and performed market participant interviews to assess potential fair value changes that occurred within the period. Evaluating the independence and qualification of management s valuation experts, where applicable, to determine that the valuations were done with appropriate independence and free of management bias. Assessing the adequacy and appropriateness of the Group s investment property disclosures, including the valuation techniques and significant unobservable inputs in accordance with IFRS 13, Fair Value Measurement.

3 Page 3 INDEPENDENT AUDITORS REPORT (CONTINUED) To the Members of Report on the Audit of the Financial Statements Key audit matters and how they were addressed in our audit (continued) 2. Taxation Recognition of current and deferred tax involves judgement and estimates, given that the Group is subject to special tax rules in respect of its investment property operations, particularly in the United States of America. Our audit procedures in this area included the following: Using our knowledge of the application of relevant tax legislation assess the Group s current and deferred tax position. Analysing and challenging the assumptions used to determine tax provisions and temporary differences for the purposes of computing deferred tax. Testing the mathematical accuracy of the computations of current and deferred tax provisions. Other information Management is responsible for the other information. The other information comprises the information included in the annual report but does not include the financial statements and our auditors report thereon. The annual report is expected to be made available to us after the date of this auditors report. Our opinion on the financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. When we read the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to The Board of Directors.

4 Page 4 INDEPENDENT AUDITORS REPORT (CONTINUED) To the Members of Report on the Audit of the Financial Statements (continued) Responsibility of Management and the Board of Directors for the Financial Statements Management is responsible for the preparation of financial statements that give a true and fair view in accordance with IFRS and the Jamaican Companies Act, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. The Board of Directors is responsible for overseeing the Group s financial reporting process. Auditors Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is included in the Appendix to this auditors report. This description, which is located at pages 6-7, forms part of our auditors report.

5 Page 5 INDEPENDENT AUDITORS REPORT (CONTINUED) To the Members of Report on additional matters as required by the Jamaican Companies Act We have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit. In our opinion, proper accounting records have been maintained, so far as appears from our examination of those records, and the financial statements, which are in agreement therewith, give the information required by the Jamaican Companies Act in the manner required. The engagement partner on the audit resulting in this independent auditors report is Nigel Chambers. Chartered Accountants Kingston, Jamaica February 28, 2019

6 Page 6 INDEPENDENT AUDITORS REPORT (CONTINUED) To the Members of Appendix to the Independent Auditors Report As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Group s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

7 Page 7 INDEPENDENT AUDITORS REPORT (CONTINUED) To the Members of Appendix to the Independent Auditors Report (continued) We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors report unless law or regulation precludes public disclosure about the matters or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

8 8 Group Statement of Profit or Loss and Other Comprehensive Income Year ended Notes Revenue - rental income 5 204,076, ,322,267 Operating expenses 6 (132,878,322) (124,325,694) Results of operating activities before other income 71,198,455 71,996,573 Other income/(expenses): (Decrease)/increase in fair value of investment property 12(b)(i) ( 4,297,479) 11,708,755 Loss on disposal of investment property 12(b)(i) ( 46,932,437) - Termination fees - 205,376 Management fees 7 5,016,964 7,957,901 Impairment loss on financial assets 16 ( 1,451,035) - Miscellaneous income 493, ,145 Operating profit 24,027,785 92,772,750 Finance income 8 18,552, ,734 Finance costs 8 ( 51,394,465) ( 42,782,716) Net finance costs 8 ( 32,841,888) ( 42,090,982) (Loss)/profit before income tax ( 8,814,103) 50,681,768 Income tax credit 9 42,754,577 28,477,048 Profit for the year 10 33,940,474 79,158,816 Other comprehensive income that may be reclassified to profit or loss: Foreign currency translation differences for foreign operations, being total other comprehensive income/(loss) 31,945,470 ( 40,074,054) Total comprehensive income for the year $ 65,885,944 39,084,762 Earnings per stock unit (cents) The accompanying notes form an integral part of the financial statements.

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10 10 Group Statement of Changes in Equity Year ended Cumulative Share Treasury translation Retained capital shares reserve earnings Total (note 18) (note 19) Balances at December 31, ,028,508,717 (5,049,311) 286,232, ,493,116 1,726,184,541 Total comprehensive income: Profit for the year ,158,816 79,158,816 Other comprehensive income: Exchange difference on translation of foreign subsidiaries, being total other comprehensive income for the year - - ( 40,074,054) - ( 40,074,054) Total comprehensive income for the year - - ( 40,074,054) 79,158,816 39,084,762 Dividends declared (note 23), being total transactions with owners ( 25,821,187) ( 25,821,187) Balances at December 31, ,028,508,717 (5,049,311) 246,157, ,830,745 1,739,448,116 Adjustment on the initial application of IFRS 9 (note 3) ( 815,740) ( 815,740) Adjusted balances as at January 1, ,028,508,717 (5,049,311) 246,157, ,015,005 1,738,632,376 Total comprehensive income: Profit for the year ,940,474 33,940,474 Other comprehensive income: Exchange difference on translation of foreign subsidiaries, being total other comprehensive income for the year ,945,470-31,945,470 Total comprehensive income for the year ,945,470 33,940,474 65,885,944 Transactions with owners of the Company: Stock units repurchased - ( 546,089) - - ( 546,089) Stock unit cancelled ( 5,049,311) 5,049, Dividends declared (note 23) ( 24,101,543) ( 24,101,543) Total transactions with owners of the Company ( 5,049,311) 4,503,222 - ( 24,101,543) ( 24,647,632) Balances at $1,023,459,406 ( 546,089) 278,103, ,853,936 1,779,870,688 The accompanying notes form an integral part of the financial statements.

11 11 Group Statement of Cash Flows Year ended Notes Cash flows from operating activities Profit for the year 33,940,474 79,158,816 Adjustments for: Income tax credit 9 ( 42,754,577) ( 28,477,048) Depreciation , ,378 Interest income 8 ( 2,085,701) ( 444,521) Interest expense 8 47,975,983 42,144,115 Decrease/(increase) in fair value of investment property 12(b)(i) 4,297,479 ( 11,708,755) Loss on disposal of investment property 46,932,437 - Loss on disposal of land - 4,400 Impairment loss on financial assets 16 1,451,035 - Unrealised foreign exchange gains ( 6,180,919) ( 6,626,418) 84,473,550 74,577,967 Changes in: Receivables ( 30,104,497) 11,231,732 Proceeds from disposal of land - 17,708,050 Accounts payable and accrued charges 413,249 ( 7,043,340) Income tax paid ( 289,300) ( 11,324,055) Net cash provided by operating activities 54,493,002 85,150,354 Cash flows from investing activities Interest received 1,854, ,308 Additions to office equipment 13 ( 4,029,314) ( 911,591) Additions to investment property (461,678,850) (417,686,468) Proceeds of disposal of investment property 201,088,963 - Net cash used in investing activities (262,765,137) (418,254,751) Cash flows from financing activities Interest paid ( 47,975,983) ( 42,144,115) Dividends paid ( 25,312,987) ( 24,363,406) Loans received 771,100, ,115,994 Loans repaid (398,405,404) ( 27,141,929) Restricted cash ( 1,496) ( 24,474,097) Treasury shares ( 546,089) - Net cash provided by financing activities 298,858, ,992,447 Net increase in cash and cash equivalents 90,586,165 13,888,050 Cash and cash equivalents at beginning of year 37,966,958 24,078,908 Cash and cash equivalents at end of year 17 $128,553,123 37,966,958 The accompanying notes form an integral part of the financial statements.

12 12 Separate Statement of Profit or Loss and Other Comprehensive Income Year ended Notes Revenue rental income 5 77,102,586 67,354,955 Operating expenses 6 ( 48,769,061) ( 41,016,129) Results of operating activities before other income/(expenses) 28,333,525 26,338,826 Increase in fair value of investment property 12(b)(i) 76,664, ,652,920 Management fees 7 5,016,964 7,957,901 Impairment losses on financial assets 15,16 ( 78,365) - Miscellaneous income 186, ,629 Operating profit 110,123, ,457,276 Finance income 8 33,938, ,073 Finance costs 8 ( 30,827,951) ( 37,603,993) Net finance income/(costs) 8 3,110,335 ( 36,915,920) Profit before income tax 113,234, ,541,356 Income tax charge 9 ( 5,332,861) ( 60,000) Profit for the year, being total comprehensive income 10 $107,901, ,481,356 The accompanying notes form an integral part of the financial statements.

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14 14 Separate Statement of Changes in Equity Year ended Share Treasury Retained capital shares earnings Total (note 18) (note 19) Balances at December 31, ,028,508,717 (5,049,311) 165,265,336 1,188,724,742 Profit for the year, being total comprehensive income ,481, ,481,356 Dividends declared (note 23), being total transactions with owners - - ( 25,821,187) ( 25,821,187) Balances at December 31, ,028,508,717 (5,049,311) 263,925,505 1,287,384,911 Adjustment on the initial application of IFRS 9 (note 3) - - ( 16,373,261) ( 16,373,261) Adjusted balances as at January 1, ,028,508,717 (5,049,311) 247,552,244 1,271,011,650 Profit for the year, being total comprehensive income ,901, ,901,205 Transactions with owners of the Company Stock units repurchased - ( 546,089) - ( 546,089) Stock unit cancelled ( 5,049,311) 5,049, Dividends declared (note 23) - - ( 24,101,543) ( 24,101,543) Total transactions with owners of the company ( 5,049,311) 4,503,222 ( 24,101,543) ( 24,647,632) Balances at $1,023,459,406 ( 546,089) 331,351,906 1,354,265,223 The accompanying notes form an integral part of the financial statements.

15 15 Separate Statement of Cash Flows Year ended Notes Cash flows from operating activities Profit for the year 107,901, ,481,356 Adjustments for: Income tax charge 9 5,332,861 60,000 Depreciation , ,047 Interest income 8 ( 2,085,701) ( 440,860) Impairment loss on financial assets 78,365 - Interest expense 8 27,474,386 24,962,617 Loss on disposal of land - 4,400 Increase in fair value of investment property 12(b)(i) ( 76,664,825) (126,652,920) 62,628,967 22,803,640 Changes in: Receivables ( 3,203,371) 6,839,427 Proceeds from disposal of land - 17,708,050 Accounts payable and accrued charges 4,451,048 ( 8,631,561) Income tax paid ( 179,491) ( 2,934,041) Owed by subsidiaries 187,514,262 14,695,045 Owed to subsidiary ( 2,183,193) ( 86,409,382) Net cash provided by/(used in) operating activities 249,028,222 ( 35,928,822) Cash flows from investing activities Interest received 2,085, ,647 Additions to property and equipment 13 ( 3,014,103) ( 104,931) Additions to investment property ( 1,207,672) (164,094,405) Investment in subsidiary 14 (461,839,855) - Net cash used in investing activities (463,975,929) (163,859,689) Cash flows from financing activities Interest paid ( 27,474,386) ( 24,962,617) Dividends paid ( 25,312,987) ( 24,363,406) Restricted cash ( 1,496) ( 301,603) Loans received 635,101, ,300,000 Repayment of loan (267,246,114) ( 11,053,884) Stock units repurchased ( 546,089) - Net cash provided by financing activities 314,520, ,618,490 Net increase in cash and cash equivalents 99,572,312 17,829,979 Cash and cash equivalents at beginning of year 19,470,464 1,640,485 Cash and cash equivalents at end of year 17 $119,042,776 19,470,464 The accompanying notes form an integral part of the financial statements.

16 16 Notes to the Financial Statements 1. Identification and principal activities Kingston Properties Limited ("the Company") is incorporated in Jamaica under the Companies Act. The Company is domiciled in Jamaica, with its registered office at 7 Stanton Terrace, Kingston 6, and the principal place of business at Building B, First Floor, Red Hills Road, Kingston 10. The Company is listed on the Jamaica Stock Exchange. The Company has two wholly-owned subsidiaries: (i) (ii) Carlton Savannah Reit (St. Lucia) Limited, incorporated in St. Lucia under the International Business Companies Act; and its wholly owned subsidiary Kingston Properties Miami LLC, incorporated in Florida under the Florida Limited Liability Company Act. KP (Reit) Jamaica Limited, incorporated in Jamaica under the Companies Act. The Company and its subsidiaries are collectively referred to as the Group. In these financial statements parent refers to the Company and intermediate parent refers to its wholly owned subsidiary, Carlton Savannah REIT (St. Lucia) Limited. The principal activity of the Group is to make accessible to investors, the income earned from the ownership of real estate properties. 2. Statement of compliance and basis of preparation (a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and the relevant provisions of the Jamaican Companies Act ( the Act ). This is the first set of the Group s annual financial statements in which IFRS 9, Financial Instruments and IFRS 15, Revenue from Contracts with Customers have been applied. Changes to significant accounting policies are described in note 3. At the date of approval of these financial statements, certain new standards were in issue but had not yet come into effect. They were not adopted early and therefore have not been taken into account in preparing these financial statements. Those which are relevant to the Group are set out below: IFRS 16, Leases, which is effective for annual reporting periods beginning on or after January 1, 2019, eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting.

17 17 2. Statement of compliance and basis of preparation (continued) (a) Statement of compliance (continued) IFRS 16, Leases (continued) Entities will be required to bring all major leases on-balance sheet, recognising new assets and liabilities. The on-balance sheet liability will attract interest; the total lease expense will be higher in the early years of a lease even if a lease has fixed regular cash rentals. Optional lessee exemption will apply to short-term leases and for low-value items with value of US$5,000 or less. Lessor accounting remains similar to current practice as the lessor will continue to classify leases as finance and operating leases. The Group is assessing the impact that the standard will have on its 2019 financial statements. IFRIC 23, Uncertainty Over Income Tax Treatments, is effective for annual reporting periods beginning on or after January 1, Earlier application is permitted. IFRIC 23 clarifies how the accounting for income tax treatments that are yet to be accepted by the tax authorities is to be applied to the determination of taxable profit/(loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. An entity has to consider whether it is probable that the relevant tax authority would accept the tax treatment, or group of tax treatments, that is adopted in its income tax filing. If the entity concludes that it is probable that the tax authority will accept a particular tax treatment in the tax return, the entity will determine taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatment included in its income tax filings and record the same amount in the financial statements. The entity will disclose uncertainty. If the entity concludes that it is not probable that a particular tax treatment will be accepted, the entity has to use the most likely amount or the expected value of the tax treatment when determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates. The decision should be based on which method provides better prediction of the resolution of the uncertainty. If facts and circumstances change, the entity is required to reassess the judgements and estimates applied.

18 18 2. Statement of compliance and basis of preparation (continued) (a) Statement of compliance (continued) IFRIC 23, Uncertainty Over Income Tax Treatments (continued) IFRIC 23 reinforces the need to comply with existing disclosure requirements regarding: - judgements made in the process of applying accounting policy to determine taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; - assumptions and other estimates used; and - potential impact of uncertainties that are not reflected in the financial statements. The Group is assessing the impact that the standard will have on its 2019 financial statements. (b) Basis of measurement The financial statements are prepared on the historical cost basis, except for investment property that is measured at fair value. (c) Functional and presentation currency The financial statements are presented in Jamaica dollars ($), the Company s functional currency, unless otherwise indicated. The financial statements of the subsidiaries, which have a different functional currency, are translated into the presentation currency in the manner described in note 4(g)(ii). (d) Use of judgements and estimates: The preparation of the financial statements in conformity with IFRS requires management to make estimates and judgements that affect the selection of accounting policies and the reported amounts of, and disclosures relating to, assets, liabilities, contingent assets and contingent liabilities at the reporting date and the income, expenses, gains and losses for the period then ended. Actual amounts could differ from those estimates. The estimates and the assumptions underlying them, are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period of the revision and future periods if the revision affects both current and future periods. The critical judgements made in applying accounting policies and the key areas of estimation uncertainty that have the most significant effect on the amounts recognised in the financial statements, and or that have a significant risk of material adjustment in the next financial period, are as follows: (i) Judgements: For the purpose of these financial statements, judgement refers to the informed identification and analysis of reasonable alternatives, considering all relevant facts and circumstances, and the well-reasoned, objective and unbiased choice of the alternative that is most consistent with the agreed principles set out in IFRS.

19 19 2. Statement of compliance and basis of preparation (continued) (d) Use of judgements and estimates (continued): (i) Judgements (continued): The key relevant judgements are as follows: Applicable to 2018 only: (1) Classification of financial assets: The assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial asset are solely payments of principal and interest (SPPI) on the principal amount outstanding requires management to make certain judgements on its business operations. (2) Impairment of financial assets: Establishing the criteria for determining whether credit risk on the financial asset has increased significantly since initial recognition, determining the methodology for incorporating forward-looking information into measurement of expected credit losses (ECL) and the selection and approval of models used to measure ECL requires significant judgement. (ii) Key assumptions concerning the future and other sources of estimation uncertainty: Allowance for impairment losses - applicable to 2018 only: (1) In determining amounts recorded for impairment of financial assets in the financial statements, management makes assumptions in determining the inputs to be used in the ECL measurement model, including incorporation of forward-looking information. Management also estimates the likely amount of cash flows recoverable on the financial assets in determining loss given default. (2) Valuation of investment property Investment property is measured at fair value. Given the infrequency of trades in comparable properties in some cases, and therefore the absence of a number of observable recent market prices, fair value is less objective and requires significant estimation, which is impacted by the uncertainty of market factors, pricing assumptions and general business and economic conditions [see note 12(c)].

20 20 2. Statement of compliance and basis of preparation (continued) (d) Use of judgements and estimates (continued): (ii) Key assumptions concerning the future and other sources of estimation uncertainty (continued): (3) Taxation Recognition of current and deferred tax involves judgement and estimates, given that the Group is subject to special tax rules in respect of its investment property operations, particularly in the United States of America. This includes the application of the Internal Revenue Service (IRS) 1031 Exchange Capital Gains Real Estate Tax Deferment rules, under which the Group is allowed to sell investment property and reinvest the proceeds in ownership of like-kind property, and thereby defer the capital gains taxes. 3. Changes in accounting policies The Group has initially adopted IFRS 9 Financial Instruments and IFRS 15, Revenue from Contracts with Customers from January 1, The effect of initially applying these standards is mainly attributed to the following: an increase in impairment losses recognised on financial assets; additional disclosures related to IFRS 9; additional disclosures related to IFRS 15. Due to the transition method chosen by the Group in applying IFRS 9, comparative information throughout these financial statements has not generally been restated to reflect its requirements. The adoption of IFRS 15 did not impact the timing or amount of income from rental and maintenance contracts with customers and the related assets and liabilities recognised by the Group. Accordingly, the impact on the comparative information is limited to new disclosure requirements. IFRS 9, Financial Instruments IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39, Financial Instruments: Recognition and Measurement. The requirements of IFRS 9 represent a significant change from IAS 39. The new standard brings fundamental changes to the accounting for financial assets and to certain aspects of the accounting for financial liabilities. As a result of the adoption of IFRS 9, the Group has adopted consequential amendments to IFRS 7, Financial Instruments: Disclosures that are applied to disclosures about 2018, but have not been applied to the comparative information.

21 21 3. Changes in accounting policies (continued) IFRS 9, Financial Instruments (continued) The key changes to the Group s accounting policies and the full impact resulting from its adoption of IFRS 9 are summarised below: Group Company Retained earnings Balance at December 31, 2017 under IAS ,830, ,925,505 Recognition of expected credit losses under IFRS 9 Cash at bank, accounts receivable and related party receivables ( 815,740) (16,373,261) Balance at January 1, 2018 under IFRS 9 $469,015, ,552,244 IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). IFRS 9 classification is generally based on the business model in which a financial asset is managed and its contractual cash flows. The standard eliminates the previous IAS 39 categories of held-to-maturity, loans and receivables and available-for-sale. For an explanation on how the Group classifies financial instruments under IFRS 9, see note 4(i). The following table and the accompanying notes explain the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Group s financial assets and financial liabilities as at January 1, The effect of adopting IFRS 9 on the carrying amounts of financial assets at January 1, 2018 relates solely to the new impairment requirements. Group Financial assets Cash resources Accounts receivable Original classification under IAS 39 Loans and receivables Loans and receivables New classification under IFRS 9 IAS 39 carrying amount at December 31, 2017 Remeasurement IFRS 9 carrying amount at January 1, 2018 Amortised cost 37,966,958-37,966,958 Amortised cost 19,017,349 (815,740) 18,201,609 $56,984,307 (815,740) 56,168,567

22 22 3. Changes in accounting policies (continued) Company Financial assets Cash resources Accounts receivable Related party receivables Original classification under IAS 39 Loans and receivables Loans and receivables Loans and receivables New classification under IFRS 9 IAS 39 carrying amount at December 31, 2017 Remeasurement IFRS 9 carrying amount at January 1, 2018 Amortised cost 19,470,464-19,470,464 Amortised cost Amortised 1,381,969 ( 20,937) 1,361,032 cost 404,038,245 (16,352,324) 387,685,921 $424,890,67 (16,373,261) 408,517,417 Impairment of financial assets IFRS 9 replaces the incurred loss model in IAS 39 with an expected credit loss (ECL) model. The new impairment model applies to financial assets measured at amortised cost. Under IFRS 9, credit losses are recognised earlier than under IAS 39. Transition For assets in the scope of the IFRS 9 impairment model, impairment loses are generally expected to increase and become more volatile. The Group has determined that application of the IFRS 9 impairment requirements at January 1, 2018 results in an additional allowance for impairment as follows: Group Company Loss allowance at December 31, Impairment recognised at January 1, 2018 on transition: Trade receivables 815,740 20,937 Related party receivables - 16,352,324 Loss allowance at January 1, 2018 $815,740 16,373,261 Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except that comparative periods generally have not been restated. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognised in retained earnings as at January 1, Accordingly, the information presented for 2017 does not reflect the requirements of IFRS 9 and therefore is not comparable to the information presented for 2018 under IFRS 9.

23 23 4. Significant accounting policies Except for the changes described in note 3, the Group has consistently applied the accounting policies set out below to all periods presented in these financial statements. (a) Consolidation The consolidated financial statements combine the financial position, results of operations and cash flows of the Company and its subsidiaries (note 1), after eliminating intra-group amounts. (i) Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (ii) Transactions eliminated on consolidation Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (b) Investment in subsidiaries Investments in subsidiaries (note 1) are accounted for at cost less, impairment losses, if any, in the separate financial statements. (c) Cash and cash equivalents Cash and cash equivalents are measured at amortised cost. For the purposes of the statement of cash flows, cash and cash equivalents comprise cash on hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. (d) Accounts payable and accrued charges Accounts payable and accrued charges are measured at amortised cost. (e) Receivables Receivables are measured at amortised cost less impairment losses, if any.

24 24 4. Significant accounting policies (continued) (f) Related parties A related party is a person or entity that is related to the Group. (i) A person or a close member of that person s family is related to the Group if that person: (1) has control or joint control over the Group; (2) has significant influence over the Group; or (3) is a member of the key management personnel of the Group or of a parent of the Group. (ii) An entity is related to the Group if any of the following conditions applies: (1) The entity and the Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). (2) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). (3) Both entities are joint ventures of the same third party. (4) One entity is a joint venture of a third entity and the other entity is an associate of the third entity. (5) The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group. (6) The entity is controlled, or jointly controlled by a person identified in (i). (7) A person identified in (i)(1) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity). (8) The entity, or any member of a group of which it is a part provides key management services to the Group. A related party transaction is a transfer of resources, services or obligations between related parties, regardless of whether a price is charged.

25 25 4. Significant accounting policies (continued) (g) Foreign currencies (i) (ii) Transactions in foreign currencies are translated to the functional currencies at the exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rates ruling at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Exchange differences arising on settlement of monetary items or on reporting the Group s monetary items at rates different from those at which they were initially recorded during the period or reported in previous financial statements, are recognised as income or expense in the period in which they arise. Non-monetary assets and liabilities that are denominated in foreign currencies and are measured at historical cost are translated at the foreign exchange rate ruling at the date of the transaction. Non-monetary assets and liabilities that are denominated in foreign currencies and are carried at fair value are translated to the functional currency at the foreign exchange rates ruling at the dates that the fair values were determined. Foreign currency differences arising on translation are recognised in profit or loss, except for differences arising on the translation of investment in equity securities designated as at FVOCI (2017: available-for-sale equity investments (except on impairment, in which case foreign currency differences that have been recognised in OCI are reclassified to profit or loss)). Exchange differences arising on a monetary item that, in substance, forms a part of the Company s net investment in a foreign entity is included in equity in these financial statements until the disposal of the net investment, at which time they are recognised as income or expense. (iii) The assets and liabilities of the foreign operations, which are foreign entities, as defined in IFRS, are translated into Jamaica dollars for the purpose of inclusion in these financial statements as follows: (1) Assets and liabilities are translated at the closing rate at the reporting date; (2) Share capital and retained earnings are converted at historical rates; (3) Income and expenses are translated at average exchange rates; and (4) All resulting exchange differences are recognised through other comprehensive income and reflected in the currency translation reserve, a component of stockholders equity.

26 26 4. Significant accounting policies (continued) (h) Impairment of financial assets: Policy applicable from January 1, 2018 The Group recognises a loss allowance for expected credit losses (ECL) on financial assets that are measured at amortised cost. At each reporting date, the loss allowance for the financial asset is measured at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the loss allowance is measured for the financial asset at an amount equal to twelve month expected credit losses. A significant increase in credit risk is assumed to have occurred if there has been deterioration in the counterparty s performance and ability to pay. The Group uses judgement when considering the following factors that affect the determination of impairment: Macroeconomic Factors, Forward Looking Information and Multiple Scenarios The Group applies an unbiased and probability weighted estimate of credit losses by evaluating a range of possible outcomes that incorporates forecasts of future economic conditions. Macroeconomic factors and forward looking information are incorporated into the measurement of ECL as well as the determination of whether there has been a significant increase in credit risk since origination. Measurement of ECL at each reporting period reflect reasonable and supportable information at the reporting date about past events, current conditions and forecasts of future economic conditions. The Group uses three scenarios that are probability weighted to determine ECL. For trade receivables, the Group applies the simplified approach to providing for expected credit losses, which allows the use of a lifetime expected loss provision. The lifetime ECL are determined by taking into consideration historical rates of default for each segment of aged receivables as well as the estimated impact of forward looking information. Policy applicable before January 1, 2018 The carrying amount of the Group s assets is reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists for an asset, the asset s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. (i) Calculation of recoverable amount The recoverable amount of the Group s receivables is calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. Receivables with a short duration are not discounted. The recoverable amount of other assets is the greater of their fair value less cost to sell and value in use. In assessing value in use, the estimated future cash flows are discounted at 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 an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs.

27 27 4. Significant accounting policies (continued) (h) Impairment of financial assets (continued): Policy applicable before January 1, 2018 (continued) (ii) Reversals of impairment An impairment loss in respect of a receivable is reversed if the subsequent increase in the recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the carrying amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognised. (i) Financial instruments: A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. In these financial statements, financial assets comprise trade and other receivables, cash and cash equivalents, restricted cash and owed to subsidiaries. Financial liabilities comprise trade and other payables, loan from bank, other payables and owed by subsidiaries. Financial assets Policies applicable from January 1, 2018 Recognition and initial measurement Trade receivables are initially recognised when they are originated. All other financial assets and financial liabilities are initially recognised when the Group becomes a party to the contractual provisions of the instrument. A financial asset (unless it is a trade receivable without a significant financing component) or financial liability is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. A trade receivable without a significant financing component is initially measured at the transaction price. Classification and subsequent measurement The financial assets that meet both of the following conditions and are not designated as at fair value through profit or loss: a) are held within a business model whose objective is to hold assets to collect contractual cash flows, and b) whose contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are classified as Held to collect and measured at amortised cost.

28 28 4. Significant accounting policies (continued) (i) Financial instruments (continued): Financial assets Policy applicable from January 1, 2018 Classification and subsequent measurement (continued) Amortised cost represents the net present value ( NPV ) of the consideration receivable or payable as of the transaction date. This classification of financial assets comprises the following captions: Cash and cash equivalents Receivables Related party receivables Due to their short-term nature, the Company initially recognises these assets at the original invoiced or transaction amount less expected credit losses Subsequent measurement The subsequent measurement of financial assets depends on their classification as described in the particular recognition methods disclosed in their individual policy statements associated with each item. Impairment of financial assets Impairment losses of financial assets, including receivables, are recognised using the expected credit loss model for the entire lifetime of such financial assets on initial recognition, and at each subsequent reporting period, even in the absence of a credit event or if a loss has not yet been incurred, considering their measurement past events and current conditions, as well as reasonable and supportable forecasts affecting collectability. Derecognition A financial asset is primarily derecognised when the rights to receive cash flows from the asset have expired, or the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset Financial liabilities Policy applicable from January 1, 2018 Initial recognition and measurement All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, plus directly attributable transaction costs. The Group s financial liabilities, which include accounts payables, loans payable and owed to subsidiaries which are recognised initially at fair value.