Consolidated Financial Statements As at and for the year ended 31 December 2012 (Prepared in accordance with International Financial Reporting Standards as adopted by the EU)
Consolidated Financial Statements As at 31 December 2012 List of contents Page Independent auditors report on consolidated financial statements 3-4 Consolidated financial statement Consolidated statement of financial position 5 Consolidated income statement 6 Consolidated statement of comprehensive income 7 Consolidated statement of changes in equity 8 Consolidated statement of cash flows 9-10 11-76
Independent au"umy< on consolidated financial statements To the shareholders of Kimberly Enterprises N.V. We have audited the accompanying consolidated financial statements of KimberJy Enterprises N.V. (hereinafter referred to as "the Group"), which comprise the consolidated statement of financial position as at 31 December 2012, the consolidated income statement, the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the BU, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated 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 about whether the consolidated financial statements are free from material
of matter Without qualifying our opinion, we draw attention to Note 4.b to the consolidated financial statements which describes the Group's financial position as at 31 December 2012, including that the Group had EUR 6 million bank loans which were in breach of repayment terms of that date and is not able to meet its obligations to its employees and service providers as these fall due. As also described in Note 4.b, as at 31 December 2012 a subsidiary was in breach of lease payments obligations tota/jng EUR 6.4 million relating to the lease of Marina Dorcol in Belgrade, Serbia. After the reporting date the Company breached its lease payment obligation with additional amount of EUR 1.4 million. The appropriateness of the going concern assumption on which the consolidated financial statements are prepared is dependent on the continued support of the financing banks, parent company and the group ability to generate sufficient cash from its operations to meet its obligations. These conditions, along with other matters regarding the group's interest bearing loans from bank and other payabjes described in Note 4.b and Note 16, indicate the existence of a material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern. 21 March 2013 Istvan Partner
ASSETS Cash and cash equivalents Restricted bank deposits and cash in escrow Trade receivables Prepayments and other assets Loans to related parties Current tax assets Inventories of housing units and land Assets in disposal held for sale Current assets Kimberly Enterprises N.V. Consolidated statement of financial position 31 December 3] December Note.;::.20,::..1:2::: 2011,"----- ---- - -. --.-,----~;,.;;..:..~-...;...---- 5 6.., i 8 9 III 35 296 261 io 636 6,337 111 22,066 4,229 33,946 959 68 209 589 6,184 106 31,011 4,153 43,279 Investment property Inventories of land Property and equipment Deferred tax assets Noo-tllrrent a."ets Total assets H 10 12 13 21.000 1,417 14 1,980 24,411 58,357 21,100 40 1,977 23,117 66,396 LIABILITIES Interest~bearing loans from banks 16 Current portion of finance lease liability 17 Loans and amounts due to related parties and joint venture partners J 8 Trade payables Other pay abies 19 Provisions 20 Current tax liabilities Liabilities in disposal held for sale 35 Current liabilities Finance lease liability 17 Deferred tax liabilities! 3 Non current liabilities Total liabilities 6,000 11,332 2i,381 1,019 3,361 1,213 313 1,793 52,412, 18,858 202 19,060 71,472 12,594 5,951 24,663 t,262 3,531 1,581 200 1,505 51,287 21,685 217 21,902 73,189 EQUITY Share capital Share premium Capital reserve Accumulated losses Accumulated translation adjustment Equity attributable to owners of the Compao)' Non-controlling interests Total equity 21 21 878 39.298 (J40) (54,077) 1.505 (12.736) (379) (13,115) 58,357 878 39.298 (340) (47,68B) U34 (6,618) (175) (6,793) 66,396 21 Mareh loll Oate of approval afthe financial statements The notes on pages 11-76 arc an integraj part of these consolidated financial statements. - 5.
Consolidated income statement Note For the year ended 31 December Revenues 22 2,594 4,131 Change in fair value of investment property 11 1,617 (1,379) Write down of inventory 23 (498) (1,958) Cost of sales 24 (2,866) (5,103) Gross profit (loss) 847 (4,309) Other incomes (losses) 25 2,064 (88) Selling, general and administrative expenses 26 (1,769) (2,226) Results from operating activities 1,142 (6,623) Net foreign exchange losses (939) (517) Finance income 295 284 Finance costs (7,175) (6,395) Net finance costs 27 (7,819) (6,628) Loss before tax (6,677) (13,251) Tax benefit 28 26 384 Loss for the year (6,651) (12,867) Loss attributable to: Owners of the Company (6,389) (12,754) Non-controlling interests (262) (113) Loss for the year (6,651) (12,867) Loss per share: Basic loss per share (Euro) 29 (0.076) (0.147) Diluted loss per share (Euro) 29 (0.076) (0.147) The notes on pages 11-76 are an integral part of these consolidated financial statements. - 6 -
Consolidated statement of comprehensive income For the year ended 31 December Loss for the year (6,651) (12,867) Other comprehensive income: Foreign currency translation differences for foreign operations 329 607 Total comprehensive loss for the year (6,322) (12,260) Total comprehensive loss attributable to: Owners of the Company (6,118) (12,149) Non-controlling interests (204) (111) Total comprehensive loss for the year (6,322) (12,260) The notes on pages 11-76 are an integral part of these consolidated financial statements. - 7 -
Consolidated statement of changes in equity Attributable to owners of the Company Share capital Share premium Capital reserve Translation reserve Accumulated losses Total Noncontrolling interests Total equity Balance at 1 January 2011 878 39,298 (340) 629 (34,934) 5,531 (64) 5,467 Total comprehensive loss for the year - - - 605 (12,754) (12,149) (111) (12,260) Balance at 31 December 2011 878 39,298 (340) 1,234 (47,688) (6,618) (175) (6,793) Balance at 1 January 2012 878 39,298 (340) 1,234 (47,688) (6,618) (175) (6,793) Total comprehensive loss for the year - - - 271 (6,389) (6,118) (204) (6,322) Balance at 31 December 2012 878 39,298 (340) 1,505 (54,077) (12,736) (379) (13,115) The notes on pages 11-76 are an integral part of these consolidated financial statements. - 8 -
Consolidated statement of cash flows For the year ended 31 December Note Cash flows from operating activities Loss for the year (6,651) (12,867) Adjustments for: - Depreciation 12 35 19 - Net finance costs 27 7,819 6,628 - Tax benefit 28 (26) (384) - Other (incomes) losses 25 (2,064) 88 - Change in fair value of investment property 11 (1,617) 1,379 - Write down of inventories 23 498 1,958 (2,006) (3,179) Change in: - Inventories of housing units and land 1,962 3,576 - Net assets and liabilities in disposal held for sale 35 212 (13) - Trade receivables 199 (76) - Provisions 20 (272) (518) - Other prepayments and other assets (52) 122 - Trade payables (308) (9) - Other payables 82 773 Cash generated from (used in) operating activities (183) 676 Interest received 227 99 Interest paid (232) (237) Income taxes (paid) received 21 (215) Net cash from (used in) operating activities (167) 323 The notes on pages 11-76 are an integral part of these consolidated financial statements. - 9 -
Consolidated statement of cash flows (continued) For the year ended 31 December Note Cash flows from investing activities Acquisition of property and equipment 12 (9) (6) Proceeds from sale of property and equipment 12-14 Disposal of subsidiary 34.d (2) - Short term loans granted to related parties (144) (384) Short term loans repaid by related parties 6 136 Change in restricted bank deposits and cash in escrow (190) 1,188 Net cash from (used in) investing activities (339) 948 Cash flows from financing activities Interest-bearing loans received from banks - 54 Interest-bearing loans repaid to banks (1,283) (2,501) Loans received from related parties and other 1,459 2,450 Loans repaid to related parties and other (345) (1,155) Net cash used in financing activities (169) (1,152) Net increase (decrease) in cash and cash equivalents (675) 119 Cash and cash equivalents at 1 January 959 880 Effect of exchange rate fluctuations on cash held 12 (40) Cash and cash equivalents at 31 December 5 296 959 The notes on pages 11-76 are an integral part of these consolidated financial statements. - 10 -
NOTE 1 - REPORTING ENTITY Kimberly Enterprises N.V. (the "Company") is a Company domiciled in The Netherlands. The Company owns subsidiary companies and has jointly controlled entities mainly in Eastern Europe which purchase, develop, hold and sell real estate assets. The Company has been listed on the Alternative Investment Market ("AIM") of the London Stock Exchange, United Kingdom since 15 December 2005. The consolidated financial statements of the Company as at and for the year ended 31 December 2012 comprise the Company and its subsidiaries and the Group's interests in associates and jointly controlled entities (collectively, the Group ). At the Annual General Meeting of the Company held on 7 March 2012 it was approved to change the name of the Company from Engel East Europe N.V. to Kimberly Enterprises N.V. Copies of these consolidated financial statements of the Group are available on the Company s website (www.kimberly-enterprises.com) and upon request from the Company s registered office at Keizersgracht 616, 1017 ER Amsterdam, The Netherlands. NOTE 2 - BASIS OF PREPARATION a. Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU ( EU IFRS ). The consolidated financial statements were authorized for issue by the Board of Directors on 21 March 2013. These consolidated financial statements have been prepared by the Company. These consolidated financial statements are not intended for statutory filing purposes. The Company is required to file consolidated financial statements prepared in accordance with The Netherlands Civil Code. At the date of preparing these financial statements the Company had not yet filed consolidated financial statements for the years ended 31 December 2011 and 31 December 2012 in accordance with The Netherlands Civil Code. - 11 -
NOTE 2 - BASIS OF PREPARATION (continued) b. Going concern The consolidated financial statements have been prepared on a going concern basis, which assumes that the Group will be able to rise funding to meet its obligations to the banks, its employees and service providers as disclosed in Note 4.b. The financial position of the Group continued to be weak during the reporting period, the Group is in breach of: Interest bearing loans from banks totaling EUR 6,000 thousands see Note 16. The requirement to pay lease payments totaling EUR 6.4 million (relating to the lease of the Marina Dorcol project in Belgrade, Serbia). After the reporting date the Company breached is requirements to pay an additional amount of EUR 1.4 million see Note 17. Management considers it is unlikely that some of the projects will generate sufficient cash inflows to repay their obligations when they fall due. Management believes that the above financial position of the Group indicates the existence of material uncertainties which cast significant doubt on the Company s ability to continue as a going concern. The notes to the consolidated financial statements (in particular see Notes 4.b, 16 and 17) disclose all the key risk factors, assumptions made and uncertainties of which the management of the Company aware that are relevant to the Company s ability to continue as a going concern, including significant conditions and events. Should the going concern assumption not be appropriate, adjustments would have to be made to reflect a situation where the assets may need to be realized other than in the normal course of business and at amounts which could differ significantly from the amounts stated in the consolidated financial statements. c. Basis of measurements The consolidated financial statements have been prepared on the historical cost basis except for the following material item in the statements of financial position: Investment property which is measured at fair value. d. Functional and presentation currency These consolidated financial statements are presented in Euro (EUR), which is the Company's functional currency. All financial information presented in Euro has been rounded to the nearest thousands, except where otherwise indicated. The functional currency of each subsidiary and jointly controlled entity is the local currency in the specific country in which it is located. - 12 -
NOTE 2 - BASIS OF PREPARATION (continued) e. Use of estimates and judgments The preparation of the consolidated financial statements in conformity with IFRSs as adopted by the EU requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about accounting estimates in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in Note 37. f. Operating cycle The Group is involved in projects some of which may take 5-6 years to complete. The cost of inventory and loans which finance residential development projects are presented as current assets and liabilities (see Note 3.f). NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently during the periods presented in these consolidated financial statements and have been applied consistently by all Group entities. a. Basis of consolidation 1. Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. The Group measures goodwill at the acquisition date as: the fair value of the consideration transferred; plus the recognized amount of any non-controlling interests in the acquire; plus if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquire; less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss. - 13 -
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued) a. Basis of consolidation (continued) 2. Subsidiaries Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of the subsidiaries have been changed when necessary to align them with the policies adopted by the Group. 3. Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20% and 50% of the voting power of another entity. Other investments in associates are accounted for using the equity method (equity accounted investees) and are recognized initially at cost. The Group s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group s share of the profit and loss and other comprehensive income, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. When the Group s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil, and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. 4. Jointly controlled entities Entities which are jointly controlled with another party or parties through the establishment of a contractual agreement ( joint ventures ) are accounted for using the proportional consolidation method of accounting. In any period where there is a change of economic interest or a change in estimate of economic interest, then the corresponding adjustment is recognized in the income statement. The financial statements of joint ventures are included in the consolidated financial statements from the date that joint control commences until the date that joint control ceases. Where necessary, adjustments are made to the financial statements of subsidiaries, associates and joint ventures to bring the accounting policies used into line with those used by the Group in the consolidated financial statements. 5. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. - 14 -
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued) a. Basis of consolidation (continued) 6. Loss of control On the loss of control, the Group derecognizes the assets and liabilities of the subsidiary, any noncontrolling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognized in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or as an available-for-sale financial asset depending on the level of influence retained. b. Foreign currency 1. Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the end of the year. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of available-for-sale equity investments, a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognized in other comprehensive income. 2. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to euro at exchange rates at the reporting date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to euro at exchange rates at the dates of the transactions. Foreign currency differences are recognized in other comprehensive income, and presented in the foreign currency translation reserve (translation reserve) in equity. However, if the operation is a non-whollyowned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non-controlling interests. When a foreign operation is disposed of such that control, significant influence or joint control is lost the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only a part of its investment in an associate that includes a foreign operation while retaining significant influence, the relevant proportion of the cumulative amount is reclassified to profit or loss. - 15 -
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued) b. Foreign currency (continued) 2. Foreign operations (continued) When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognized in other comprehensive income, and presented in the translation reserve in equity. The functional currencies of the Group entities are: Hungarian Forint ("HUF"), Czech Crown ("CZK"), Polish Zloty ("PLN"), Canadian Dollar ("CAD"), Romanian Lei ("RON"), New Israeli Shekel (NIS) and Serbian Dinar ("CSD"). c. Financial instruments 1. Non-derivative financial assets The Group initially recognizes loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Group classifies non-derivative financial assets into the following categories: cash and cash equivalents, restricted bank deposits, cash in escrow and loans and receivables. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. Restricted bank deposits and cash in escrow Restricted bank deposits comprise of deposits in banks that are pledged to secure banking facilities for the Group and to which the Group does not have access. Cash in escrow represents cash paid into an escrow account for security of future interest bank payments. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise cash and cash equivalents and trade and other receivables. - 16 -
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued) c. Financial instruments (continued) 2. Non-derivative financial liabilities The Group initially recognizes debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Group classifies non-derivative financial liabilities into the following categories: loans and borrowing, bank overdrafts, and trade and other payables. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method. Trade payables Trade payables are not interest bearing and are recognized initially at fair value, subsequent to which they are stated at amortized cost. Interest-bearing loans from banks Interest-bearing loans from banks are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the income statement over the period of the borrowings on an effective interest basis. 3. Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity, net of any tax effects. - 17 -
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued) d. Property and equipment 1. Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of selfconstructed assets includes the following: the cost of materials and direct labor; any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located; capitalized borrowing costs. Cost also may include transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Any gain or loss on disposal of an item of property and equipment (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognized in profit or loss. 2. Depreciation Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each component of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: Furniture, office equipment and other assets 3-15 years Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. - 18 -
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued) e. Investment property Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is measured at cost on initial recognition and subsequently at fair value with any change therein recognized in profit or loss. Cost includes expenditure that is directly attributable to the acquisition of the investment property. The cost of self-constructed investment property includes the cost of materials and direct labour, any other costs directly attributable to bringing the investment property to a working condition for their intended use and capitalized borrowing costs. Any gain or loss on disposal of an investment property (calculated as the difference between the net proceeds from disposal and the carrying amount if the item) is recognized in profit and loss. When an investment property that was previously classified as property, plants and equipment is sold, any related amount included in the revaluation reserve is transferred to retain earnings. An external, independent valuation companies, having appropriate recognized professional qualifications and recent experience in the location and category of property being valued, value the Group s investment properties. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm s length transaction after proper marketing wherein the parties had each acted knowledgeably. In the absence of current prices in an active market, the valuations are prepared by considering the aggregate of the estimated cash flows expected to be received from renting out the property. A market yield is applied to the estimated rental value to arrive the gross property valuation. When actual rents differ materiality from the estimated rental value, adjustments are being made to reflect actual rents. Any gain or loss arising from a change in fair value is recognized in the profit or loss in the period in which it arises. Rental income from investment property is accounted for as described in Note 3.l. f. Inventories of housing units Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the first-in first-out principle, and includes direct materials, direct labor costs, subcontracting costs and those direct overheads which have been incurred in bringing the inventories to their present condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset (see Note 3.m). The Group is involved in projects some of which may take several years to complete. The cost of inventory and loans which finance residential development projects are presented as current assets and liabilities, unless they are not expected to be realized within the operating cycle of 5-6 years and then they are classified as non-current. - 19 -
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued) g. Impairment The carrying amounts of the Group s assets, other than inventories (see Note 3.f), investment property (see Note 3.e) and deferred tax assets (see Note 3.n) are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated. For goodwill, that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognized in the income statement. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Calculation of recoverable amount The recoverable amount of the Group's receivables carried at amortized cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. The recoverable amount of other assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specified 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. Reversal of impairment An impairment loss in respect of a receivable carried at amortized cost is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. Such reversal is recognized in the income statement. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed when there is an indication that the impairment loss may no longer exist and 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 asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. - 20 -
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued) h. Assets held for sale or distribution Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale or distribution rather than through continuing use, are classified as held for sale or distribution. Immediately before classification as held for sale or distribution, the assets, or components of a disposal group, are remeasured in accordance with the Group s accounting policies. Thereafter generally the assets, or disposal group, are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets and investment property, which continue to be measured in accordance with the Group s accounting policies. Impairment losses on initial classification as held for sale or distribution and subsequent gains and losses on remeasurement are recognized in profit or loss. Gains are not recognized in excess of any cumulative impairment loss. Once classified as held for sale or distribution, intangible assets and property and equipment are no longer amortized or depreciated, and any equity-accounted investee is no longer equity accounted. i. Employee benefits Short-term employee benefit Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. j. Provisions and warranties A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost. Provision for warranty costs are recognized at the date of sale of housing units, at the Company's best estimate of the expenditure required to settle the Group s liability. Such estimates take into consideration warranties given to the Group by subcontractors. - 21 -
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued) k. Leased assets 1. Operating leases The Group's leases of assets in which substantially all the risks and rewards of ownership are retained by the other party, the lessor, are classified as operating leases. Payments, including prepayments, made under operating leases (net of any incentives received from the lessor) are added to inventory where these costs will be recovered in future sales. 2. Finance leases The Group's leases of assets in which the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in current and non-current borrowings. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Investment properties held under finance leases are carried at their fair value. l. Revenue Revenue from the sale of housing units is recognized when the risks and rewards of ownership have been transferred to the buyer provided that the Group has no further substantial acts to complete under the contract. Rental income from investment property is recognized in the income statement on a straight- line basis over the term of the lease. Lease incentives granted are recognized as an integral part of the total rental income. Other revenues, including project management fees, are recognized in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided, and are measured at the fair value of the consideration received or receivable for goods and services provided in the normal course of business, net of VAT and other sales related taxes. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, associated costs or continuing management involvement with the assets. - 22 -
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued) m. Finance income and finance costs Finance income comprises interest income on funds invested. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions and impairment losses recognized on financial assets. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Capitalization of borrowing costs may continue until the assets are substantially ready for their intended use. If the resulting carrying amount exceeds its recoverable amount, an impairment loss is recognized. The capitalization rate is arrived at by reference to the actual rate payable on borrowings for development purposes or, with regard to that part of the development cost financed out of general funds, to the average rate. Borrowing costs that are not directly attributable to the acquisition or construction of a qualifying asset are recognized in profit or loss using the effective interest method. n. Tax Tax expense comprises current and deferred tax. Current tax and deferred tax is recognized in profit or loss except to the extent that these relate to a business combination, or items recognized directly in equity or in other comprehensive income. 1. Current tax Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends. 2. Deferred tax Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for: temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and Taxable temporary differences arising on the initial recognition of goodwill. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. For investment property that is measured at fair value, the presumption that the carrying amount of the investment property will be recovered through sale has not been rebutted. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. - 23 -
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued) n. Tax (continued) 2. Deferred tax (continued) Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. 3. Tax exposures In determining the amount of current and deferred tax the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Company believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment in estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Company to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. o. Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees. p. Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group s other components. All operating segments operating results are reviewed regularly by the Group s CEO to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available. Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets (primarily the Company s headquarters), head office expenses, and tax assets and liabilities. Segment capital expenditure is the total cost incurred during the year to acquire property, plant and equipment, and intangible assets other than goodwill. - 24 -
NOTE 4 - FINANCIAL RISK MANAGEMENT Overview The Group has exposure to the following risks from its use of financial instruments: Credit risk Liquidity risk Market risk This note presents information about the Group s exposure to each of the above risks, the Group s objectives, policies and processes for measuring and managing risk, and the Group s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. The Group s risk management policies are established to identify and analyses the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Group Audit Committee oversees how management monitors compliance with the Group s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. a. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group s receivables from customers. There are no significant concentrations of credit risk. The Group exposure to credit risk in most of the countries of activity is minimized by the requirement for customers to pay most of the amount due on purchased housing units prior to handover. The Group limits its exposure to credit risk arising from bank deposits by transacting only with reputable bank counterparties that have a credit rating higher than that of the Group. Additionally, the Group reduces its exposure to credit risk by depositing its financial funds in different and independent bank institutions. The carrying amount of financial assets represents the maximum credit exposure of the Group at the reporting date. - 25 -