Financial statements and independent auditor s report Ikarus Industrial Petroleum Company SAK (Closed) 31 December 2006
Contents Page Independent auditor's report 1 and 2 Statement of income 3 Balance sheet 4 Statement of changes in equity 5 Statement of cash flows 6 Notes to the financial statements 7 to 11
Independent auditor's report To the shareholders of Ikarus Industrial Petroleum Company SAK (Closed) Report on the Financial Statements We have audited the accompanying financial statements of Ikarus Industrial Petroleum Company (A i Closed Shareholding Company), which comprise the balance sheet as at 31 December 2006, and the related statements of income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Directors Responsibility for the Financial Statements Directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International 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 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. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Ikarus Industrial Petroleum Company SAK (Closed) as at 31 December 2006, and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
2 Report on Other Legal and Regulatory Requirements Furthermore, in our opinion proper books of account have been kept by the company and the financial statements, together with the contents of the report of the board of directors relating to these financial statements, are in accordance therewith. We further report that we obtained all the information and explanations that we required for the purpose of our audit and that the financial statements incorporate all information that is required by the Commercial Companies Law of 1960, as amended, and by the company s articles of association, that an inventory was duly carried out and that, to the best of our knowledge and belief, no violations of the Commercial Companies Law, as amended, nor of the company s articles of association have occurred during the year ended 31 December 2006 that might have had a material effect on the business of the company or on its financial position. Anwar Y. Al-Qatami, F.C.C.A. (Licence No. 50-A) of Grant Thornton Anwar Al-Qatami & Co. 13 March 2007
3 Statement of income Note Year ended 31 Dec. 2006 Year ended 31 Dec. 2005 Income from investments at fair value through statement of income 1,462,230 38,130,442 Profit on sale of available for sale investment 3 8,696,919 - Dividend income 918,636 1,662,850 Interest income 140,535 2,239 Operating expenses (109,862) (71,870) Profit before KFAS and directors remuneration 11,108,458 39,723,661 Contribution to Foundation for the Advancement of Sciences (KFAS) (99,976) (397,237) Directors remuneration (35,000) - Net profit for the year 10,973,482 39,326,424 The notes set out on pages 7 to 11 form an integral part of these financial statements.
4 Balance sheet Assets Note 31 Dec. 2006 31 Dec. 2005 Available for sale investments 3 88,708,988 30,100 Investments at fair value through statement of income 4 24,973,316 67,532,050 Due from related company - 177,400 Accounts receivable and other assets - 7,899 Short-term deposit 21,708,467 - Bank balance 606,739 40,854 Total assets 135,997,510 67,788,303 Equity and liabilities Equity Share capital 5 75,000,000 1,000,000 Treasury shares (20,475) - Legal reserve 7 2,110,846 1,000,000 Cumulative changes in fair value 10,609,832 - Retained earnings 37,395,253 52,532,617 Total equity 125,095,456 54,532,617 Liabilities Due to parent company 10,315,341 12,187,403 Due to related company - 657,763 Other liabilities 586,713 410,520 Total liabilities 10,902,054 13,255,686 Total equity and liabilities 135,997,510 67,788,303 The notes set out on pages 7 to 11 form an integral part of these financial statements.
5 Statement of changes in equity Share capital Treasury shares Legal reserve Cumulative changes in fair value Retained earnings Total Balance as at 31 December 2004 1,000,000-1,000,000-13,206,193 15,206,193 Net profit for the year - - - - 39,326,424 39,326,424 Balance as at 31 December 2005 1,000,000-1,000,000-52,532,617 54,532,617 Change in fair value of available for sale investments - - - 10,609,832-10,609,832 Dividend (Note 6) - - - - (25,000,000) (25,000,000) Issue of shares 74,000,000 - - - - 74,000,000 Purchase of treasury shares - (20,475) - - - (20,475) Net profit for the year - - - - 10,973,482 10,973,482 Transfer to legal reserve - - 1,110,846 - (1,110,846) - Balance as at 31 December 2006 75,000,000 (20,475) 2,110,846 10,609,832 37,395,253 125,095,456 The notes set out on pages 7 to 11 form an integral part of these financial statements.
6 Statement of cash flows Note Year ended 31 Dec. 2006 Year ended 31 Dec. 2005 OPERATING ACTIVITIES Profit before KFAS and directors remuneration 11,108,458 39,723,661 Adjustments: Profit on sale of available for sale investment (8,696,919) - Dividend income (918,636) (1,662,850) Interest income (140,535) (2,239) Operating profit before changes in operating assets and liabilities 1,352,368 38,058,572 Changes in operating assets and liabilities: Investments at fair value through statement of income (1,824,903) (41,440,733) Due from related company 177,400 (177,400) Accounts receivable and other assets 7,899 2,510 Due to parent company 495,870 1,354,364 Due to related company (657,763) 657,763 Other liabilities 41,216 (107,757) Net cash used in operating activities (407,913) (1,652,681) INVESTING ACTIVITIES Dividend income received 918,636 1,662,850 Proceed on sale of available for sale investments 22,035,379 - Purchase of available for sale investments (391,810) - Interest income received 140,535 2,239 Net cash from investing activities 22,702,740 1,665,089 FINANCING ACTIVITIES Purchase of treasury shares (20,475) - Net cash used in financing activities (20,475) - Net increase in cash and cash equivalents 22,274,352 12,408 Cash and cash equivalents at beginning of the year 40,854 28,446 Cash and cash equivalents at end of the year 8 22,315,206 40,854 The notes set out on pages 7 to 11 form an integral part of these financial statements.
7 Notes to the financial statements 31 December 2006 1 Incorporation and activities Ikarus Industrial Petroleum Company SAK (Closed) is a subsidiary of National Industries Group Holding SAK parent company and was incorporated in on 1 February 1997. Its principal objective is to engage in chemical and petrochemical related activities. The company s administrative function is carried out by its parent company. The address of the company is Second Commercial Area, Part 2, Block 4, Abdullah Al-Saad and Partners Complex, Office No. 71B. The company's board of directors approved these financial statements for issue on 13 March 2007. The general assembly of the company s shareholders has the power to amend these financial statements after issuance. 2 Significant accounting policies Preparation of financial statements The financial statements are prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board. The financial statements are prepared under the historical cost convention except for investment at fair value through statement of income and available for sale investments that have been measured at fair value. The accounting principles are consistent with those used in the previous year, except for the new accounting policy adopted for treasury shares. The financial statements are presented in i Dinars (). Treasury shares Treasury shares are stated at cost as a deduction within shareholders equity and they are not entitled to cash dividends. Gains or losses resulting from the trading in treasury shares are taken directly to shareholders equity under Gain on sale of treasury shares reserve. Should the reserve fall short of any losses from the sale of treasury shares, the difference is charged to retained profits then reserves, subsequent to this, should profits arise from sale of treasury shares an amount is transferred to reserves then retained profits equal to the loss previously charged to these accounts.
8 2 Significant accounting policies (Continued) IASB Standard issued but not yet effective The following IASB Standard has been issued but not yet effective, and has not yet been adopted by the company. IFRS 7 Financial Instruments: Disclosures The application of IFRS 7, which will be effective for the year ending 31 December 2007 will result in amended and additional disclosures relating to financial instruments and associated risks. Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the company and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised. Dividend income Dividend income is recognised when the company s right to receive payment is established. Interest income Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the rate applicable. Investments The company classifies investments upon initial recognition into the following two categories: (i) Investments at fair value through statement of income (ii) Available for sale investments Investments at fair value through statement of income Investments at fair value through statement of income are initially recognised at cost being the fair value of the consideration given, excluding transaction costs. These investments are either "held for trading" or "designated" as such on initial recognition. Held for trading investments are acquired principally for the purpose of selling or repurchasing them in the near term or are a part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short term profit taking. Designated investments are those investments which are initially designated as investments at fair value through statement of income. After initial recognition, investments at fair value through statement of income are re-measured at fair value. Realised and unrealised profits resulting from sale or changes in fair value of investments at fair value through statement of income are recognised in the statement of income. Available for sale investments Available for sale investments are initially recognised at cost, being the fair value of the consideration given, plus transaction costs that are directly attributable to the acquisition. After initial recognition, available for sale investments are re-measured at fair value except for investments whose fair value cannot be reliably measured, which are measured at cost less impairment. Unrealised gain or loss on re-measurement of available for sale investments to fair value is recognised directly in equity in "cumulative changes in fair value" account until the investment is derecognised or determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is recognised in the statement of income. Realised profits/(losses) from sale of available for sale investments are recognised in the statement of income.
9 2 Significant accounting policies (Continued) Fair values For investments traded in organised financial markets, fair value is determined by reference to stock exchange quoted market bid prices at the close of business on the balance sheet date. For investments where there is no quoted market price, a reasonable estimate of fair value is determined by using valuation techniques. The company uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Valuation techniques used include the use of comparable recent arm s length transactions, discounted cash flow analysis and other valuation techniques commonly used by market participants. Impairment of financial assets An assessment is made at each balance sheet date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, any impairment loss is recognised in the statement of income. Impairment is determined as follows: (a) For assets carried at fair value, impairment is the difference between cost and fair value; and (b) For assets carried at cost, impairment is the difference between cost and the present value of future cash flows discounted at the current market rate of return for a similar financial asset. Reversal of impairment losses recognised in prior years is recorded when there is an indication that the impairment losses recognised for the financial asset no longer exist or have decreased and the decrease can be related objectively to an event occurring after the impairment was recognised. Except for reversal of impairment losses related to equity instruments classified as available for sale, all other impairment reversals are recognised in the statement of income to the extent the carrying value of the asset does not exceed its amortised cost at the reversal date. Impairment reversals in respect of equity instruments classified as available for sale are recognised in the cumulative changes in fair value reserve. Impairment of non-financial assets The company assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the company makes an estimate of the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cashgenerating unit s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets and then its recoverable amount is assessed as part of the cash-generating unit to which it belongs. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount by recognising impairment loss in the income statement. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash-generating unit). In determining fair value less costs to sell an appropriate valuation model is used. These calculations are corroborated by available fair value indicators. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the company makes an estimate of recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the assets recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount. Trade and settlement date accounting All regular way purchases and sales of financial assets are recognised on the trade date, i.e. the date that the company commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of
10 financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place concerned. 2 Significant accounting policies (Continued) Recognition and de-recognition of financial assets and liabilities A financial asset or a financial liability is recognised when the company becomes a party to the contractual provisions of the instrument. A financial asset is de-recognised when the company loses control of the contractual rights that comprise the financial asset. A financial liability is de-recognised when the obligation specified in the contract is discharged, cancelled or expired. Cash and cash equivalents Cash and cash equivalents included in the statement of cash flows consist of cash on hand and demand deposits. 3 Available for sale investments 2006 2005 Quoted shares 88,678,888 - Unquoted shares 30,100 30,100 88,708,988 30,100 During the year the company purchased foreign unquoted investments from its parent company for an amount of 91,015,705. The purchase price, based on an independent valuation was settled by crediting the parent company s current account which was used to increase the company s share capital (see Note 5). The investee companies are primarily involved in petrochemical activities. Subsequently, the company partially disposed an available for sale investment for a consideration of 21,677,270 resulting in a profit of 8,696,919. 4 Investments at fair value through statement of income 2006 2005 Held for trading : Quoted shares 17,818,603 59,492,291 Designated on initial recognition : Local funds 7,154,713 8,039,759 24,973,316 67,532,050 5 Share capital Following the approval of the shareholders at the extraordinary general assembly held on 1 October 2005, during the year the company increased its capital from 10,000,000 shares amounting to 1,000,000 to 750,000,000 shares amounting to 75,000,000 by way of issuing to its parent company 740,000,000 shares at par value of 100 fils per share amounting to 74,000,000. The increase in capital was settled by utilizing the credit balance of the parent company s current account (see Note 3). 6 Dividend Subject to the requisite consent of the relevant authorities and approval from the general assembly, the board of directors propose not to declare any dividends for the year ended 31 December 2006.
11 The shareholders general assembly held on 1 March 2006 approved the distribution of a cash dividend of 2.500 per share amounting to 25,000,000 for the year ended 31 December 2005, which was credited to the parent company s current account. 7 Legal reserve In accordance with the Commercial Companies Law and the company s articles of association, 10% of the profit for the year before contribution to KFAS and directors remuneration is to be transferred to legal reserve. The company may resolve to discontinue such annual transfer when the reserve totals 50% of the paid up share capital. Distribution of the legal reserve is limited to the amount required to enable the payment of a dividend of 5% of paid-up share capital to be made in years when retained earnings are not sufficient for the distribution of a dividend of that amount. 8 Cash and cash equivalents 2006 2005 Short term deposit 21,708,467 - Bank balance 606,739 40,854 22,315,206 40,854 9 Related party transactions Transactions with related parties are approved by the management and mainly represent: a) Interest free advances provided by/to related parties. b) Transfer of investments at fair value through statement of income with a fair value of 44,383,637 to its parent company. The transfer was recorded by debiting the parent company s current account. 10 Financial instruments Credit risk Financial assets, which potentially subject the company to concentrations of credit risk, consist principally of bank balance, short term deposit, due from related company and other assets. The company s bank balance and short term deposit is placed with a high credit quality financial institution and due from related company and other assets are presented net of appropriate provisions, where necessary. Interest rate risk The company s short-term deposits earn interest at an average rate of 6.75% per annum. The bank balances earn interest at an average rate of 2.5% (2005:2.5%) per annum. Market risk Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual security, or its issuer, or factors affecting all securities traded in the market. The company is exposed to market risk with respect to its investment securities. The company limits market risk by maintaining a diversified portfolio and by continuous monitoring of developments in local equity markets. In addition, the company actively monitors the key factors that affect stock market movements, including analysis of the operational and financial performance of investees. Liquidity risk Liquidity risk is the risk that the company will be unable to meet its liabilities when they fall due. To limit this risk, management has arranged diversified funding sources, manages assets with liquidity in mind, and monitors liquidity on a daily basis.
12 11 Fair values In the opinion of the management the carrying amounts of financial assets and liabilities as at 31 December 2006 and 2005 approximated their fair values.