` RAK INVESTMENT AUTHORITY GOVERNMENT OF RAS AL KHAIMAH CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR S REPORT FOR THE YEAR ENDED DECEMBER 31,
RAK INVESTMENT AUTHORITY GOVERNMENT OF RAS AL KHAIMAH CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR S REPORT Table of Contents Page Exhibit Independent Auditor s Report 1 -- Consolidated Statement of Financial Position 2 A Consolidated Income Statement 3 B Consolidated Statement of Comprehensive Income 4 C Consolidated Statement of Changes in Equity 5 D Consolidated Cash Flow Statement 6 E Notes to the Consolidated Financial Statements 7-52 --
RAK INVESTMENT AUTHORITY GOVERNMENT OF RAS AL KHAIMAH CONSOLIDATED INCOME STATEMENT EXHIBIT B Notes Revenue 4.31 & 31 611,719 370,302 Cost of revenue 32 (304,021) (162,359) Gross profit 307,698 207,943 Other income 33 32,827 40,765 Marketing expenses 34 (20,036) (18,716) Administrative expenses 35 (79,658) (60,286) Investment income 36 26,635 33,373 Finance costs 37 (61,442) (28,949) Shares of results of associated companies 14 (b) 58,603 82,013 Loss on disposal of a subsidiary 38 (4,415) (8,800) Impairment of assets 39 (27,424) (142,670) Profit from sale of an associate -- 33,189 Profit before income tax 232,788 137,862 Income tax (expenses)/benefits 4.32 (3,540) 14,772 PROFIT FOR THE YEAR 229,248 152,634 ====== ======= ATTRIBUTABLE TO: Owner of the parent Exhibit D 228,852 182,644 Non controlling interest Exhibit D 396 (30,010) 229,248 152,634 ======= ======= The attached notes 1 to 46 form part of these consolidated financial statements. -3-
RAK INVESTMENT AUTHORITY GOVERNMENT OF RAS AL KHAIMAH CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME EXHIBIT C Profit for the year Exhibit B 229,248 152,634 Other comprehensive income: Difference resulting from re-measurement of investment in shares Note 15 (a) 11,410 (44,700) (Decrease)/increase in revaluation of property, plant and equipment Note 23 (b) (13,137) 64,874 (Decrease)/increase in foreign currency reserve Note 23 (b) (9,096) 28,444 Other comprehensive income for the year (10,823) 48,618 TOTAL COMPREHENSIVE INCOME FOR THE YEAR - EXHIBIT D 218,425 201,252 ATTRIBUTABLE TO: Owner of the parent 218,029 186,937 Non controlling interest 396 14,315 Total 218,425 201,252 ====== ======= The attached notes 1 to 46 form part of these consolidated financial statements. -4-
RAK INVESTMENT AUTHORITY GOVERNMENT OF RAS AL KHAIMAH CONSOLIDATED STATEMENT OF CHANGES IN EQUITY EXHIBIT D Reserves Cumulative changes in fair value of available-forsale investments Government current account Retained earnings Total Non-controlling interest Total equity Balance at December 31, 2007 635,794 18,300 --. 50,428 704,522 (909) 703,613 Profit for the year Exhibit B -- -- -- 182,644 182,644 (30,010) 152,634 Foreign currency translation reserve Note 23 (b) 15,907 -- -- -- 15,907 12,537 28,444 Other comprehensive income 33,086 (44,700) --. --. (11,614) 31,788 20,174 Total comprehensive income for the year- Exhibit C 48,993 (44,700) --. 182,644 186,937 14,315 201,252 Net movement in non-controlling interest -- -- -- (50,538) (50,538) 196,575 146,037 Capital reserve against land Note 6 (b) 262,157 -- -- -- 262,157 -- 262,157 Capital reserve on acquisition of shares Note 23 (b) 199 -- -- -- 199 -- 199 Net movement in RAK Govt. current account -- -- (65,004) -- (65,004) -- (65,004) Transferred to RAK Govt. current account -- -- 65,004 (65,004) -- -- -- Balance at December 31, Exhibit A 947,143 (26,400) --. 117,530 1,038,273 209,981 1,248,254 Profit for the year Exhibit B -- -- -- 228,852 228,852 396 229,248 Increase in foreign currency translation reserve Note 23 (b) (9,096) -- -- -- (9,096) -- (9,096) Other comprehensive income (13,137). 11,410 --. --. (1,727) -- (1,727) Total comprehensive income for the year- Exhibit C (22,233) 11,410 --. 228,852 218,029 396 218,425 Acquisition of shares from non-controlling interest 44,325 -- -- (34,794) 9,531 (209,796) (200,265) Addition to minority shareholders interest -- -- -- -- -- 500 500 Capital reserve against land Note 6 (b) 297,700 -- -- -- 297,700 -- 297,700 Transferred to retained earnings (199) -- -- 199 -- -- -- Net movement in RAK Govt. current account -- -- (73,073) -- (73,073) -- (73,073) Transferred to RAK Govt. current account -- -- 73,073 (73,073) -- -- -- Balance at December 31, Exhibit A 1,266,736 (14,990) -- 238,714 1,490,460 1,081 1,491,541 ======== ======== ========= ========= ========= ======== ======== The attached notes 1 to 46 form part of these consolidated financial statements.. -5-
RAK INVESTMENT AUTHORITY GOVERNMENT OF RAS AL KHAIMAH CONSOLIDATED CASH FLOW STATEMENT EXHIBIT E Cash Flows from Operating Activities Profit before income tax Exhibit B 232,788 137,862 Adjustments for: Depreciation and amortization 34,502 13,833 Impairment loss 27,424 142,670 End of service benefits 407 (194) Finance costs 61,442 28,949 Investment income (26,635) (33,373) Interest income (17,065) (4,570) Gain on disposal of investment property (4) -- Loss from a subsidiary 4,415 8,800 Profit from associates (58,603) (82,013) Profit on sale of investment in an associate -- (33,189) Dividend income (190) (5,896) Operating profit before working capital changes 258,481 172,879 Decrease/(Increase) in inventories 2,894 (9,700) (Increase) in trade and other receivables (49,389) (50,194) (Decrease)/Increase in advances from customers (118,339) 1,805,264 Increase in trade and other payables 91,286 188,413 Net cash generated from operations 184,933 2,106,662 Finance costs paid (55,042) (20,755) Net cash provided by operating activities 129,891 2,085,907 Cash Flows from Investing Activities Purchase of land (2,020) (113,919) Purchase of property, plant and equipment (366,542) (753,581) Sale of property, plant and equipment 2,356 62,002 Capital work-in-progress (282,244) (287,606) Goodwill on acquisition of shares in subsidiary (1,778) (85,440) Land improvement (915) (4,773) Disposal of investment property 146 (27,519) Advance to contractors (54,070) (183,414) Refund from contractors 73,470 -- Purchase of intangible assets (72) (61) Advances for investment projects (5,940) (488,520) Trading properties under development (71,889) (1,091,121) Investments in associates (88,011) (47,048) Sale proceeds from an associate -- 69,692 Sale proceeds of investment in a subsidiary 6,827 510 Purchase of available-for-sale investments (781) (162,514) Income from investments in associates 82,732 55,125 Proceeds of available-for-sale investments 500 -- Finance lease receivable -- (76,831) Investment income 23,056 33,373 Fixed deposits with bank (11,850) -- Dividend received 190 5,916 Interest income 15,984 4,570 Net cash (used) in investing activities (680,851) (3,091,159) Cash Flows from Financing Activities Proceeds from unsecured loans 211,649 494,587 Payment of unsecured loans (60,836) (59,706) Proceeds from medium-term bank loans 701,452 112,720 Payment of medium-term bank loans (86,486) (31,900) Loans and advances 105,789 (619,911) Payment of finance lease liabilities (49) 160 Proceeds from short-term borrowings from banks -- 33,969 RAK Government current account (73,073) (65,004) Non-controlling interests (208,900) 196,575 Net cash provided by financing activities 589,546 61,490 Net increase/(decrease) in cash and cash equivalents 38,586 (943,762) Net foreign currency translation difference 8,936 (9,490) Cash and cash equivalents at beginning of the year 159,810 1,113,062 CASH AND CASH EQUIVALENTS AT END OF THE YEAR Notes 4.17 & 22 207,332 159,810 ======= ======== The attached notes 1 to 46 form part of these consolidated financial statements. -6-
1. GENERAL INFORMATION: RAK Investment Authority, a government owned entity ( the Parent Entity ) was established by the Government of Ras Al Khaimah, U.A.E. under Emiri Decree No. 2 dated February 1, 2005 issued by H.H. Sheikh Saqr Bin Mohammad Bin Salim Al Qassimi, Ruler of the Emirate of Ras Al Khaimah. The Parent Entity and its subsidiaries constitute the Group ( the Group ). The domicile of the Parent Entity is in Ras Al Khaimah City, Emirate of Ras Al Khaimah, United Arab Emirates. The principal activities of the Parent Entity are: 1. Attracting investments in industrial sectors in the Emirate of Ras Al Khaimah. 2. Developing and promoting industrial, tourism & infrastructure activities in the Emirate of Ras Al Khaimah. 3. Issuing licenses and collecting lease rents from companies registered in Free Zone and Industrial Zone in the Emirate of Ras Al Khaimah. 4. Investments in various projects. 2. BASIS OF PREPARATION: 2.1 Statement of compliance: The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). 2.2 Basis of measurement: The consolidated financial statements have been prepared on a historical cost basis except for the available-for-sale investments which are measured at fair value. The method used to measure fair value of available-for-sale investment is discussed in Note 4.10. 2.3 Functional and presentation currency: The consolidated financial statements are presented in United Arab Emirates Dirhams ( AED ), which is the Group s functional currency. All financial information presented in AED have been rounded to the nearest thousand unless otherwise stated. 2.4 Basis of consolidation: Subsidiaries are those enterprises controlled by the Parent Entity. Control exists when the Parent Entity owns directly or indirectly more than 50% of the capital and has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. - 7 -
2. BASIS OF PREPARATION: (continued ) 2.4 Basis of consolidation: (continued ) The consolidated financial statements incorporate the financial statements of the Parent Entity and its subsidiaries ( the Group ). The details of the consolidated subsidiaries are as follows: Name of subsidiary Country of incorporation Principal activities Percentage of holding Al Jazeera Farm Products LLC UAE Agricultural production activity and marketing the same within UAE. 56 % Al Ghail Power LLC UAE Natural gas based power generation and supply 99 % JSC Poti Sea Port Georgia Servicing ships, cargo handling, dispatching operations and warehousing. 100 % Ras Al Khaimah Investment Authority Georgia LLC RAKIA Georgia Free Industrial Zone LLC Yacht Club Port of Poti LLC (a subsidiary of JSC Poti Sea Port) Georgia Georgia Georgia Hotel and hospitality as main activity and real estate development as other activity in Georgia. Development of Free Industrial Zone, leasing and licensing in FIZ 100 % 100 % Restaurant and related activities. 100 % All intra-group balances, transactions, income and expenses, and profits and losses resulting from intra-group transactions that are recognized in assets are eliminated in full. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. 3. ADOPTION OF NEW AND REVISED STANDARDS (Deemed Appropriate): In the current year, the Group has adopted the new and revised International Financial Reporting Standards (IFRSs) including the International Accounting Standards (IASs) and their interpretations that are relevant to its operations and effective for annual reporting periods beginning on or after January 1,, and the consequential amendments thereon. The Group has adopted the following new and amended IFRS and IFRIC interpretations as of January 1, : - 8 -
3. ADOPTION OF NEW AND REVISED STANDARDS (Deemed Appropriate): (continued ) IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended) effective July 1,. IFRS 7 Financial Instruments : Disclosures effective January 1, IFRS 8 Operating Segments effective January 1, IAS 1 Presentation of Financial Statements effective January 1, IAS 23 Borrowing Costs (Revised) effective January 1, IAS 40 Investment Property (Amended) Improvement to IFRS (May ) effective January 1, The adoption of the above standards and interpretations did not have any effect on the financial performance or position of the Group. However, the adoption of certain standards and interpretations resulted in certain disclosures in the consolidated financial statements as follows: IFRS 3 Business Combination (Revised) IFRS 3 requires an entity to account each business combination by applying the acquisition method. Applying the acquisition method requires identifying the acquirer, determining the acquisition date, recognizing and measuring the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree and recognizing and measuring goodwill or gain from a bargain purchase IFRS 7 Financial Instruments: Disclosures The amended standard requires additional disclosure about fair value measurement and liquidity risk. IFRS 8 Operating Segments During the year the Group has adopted IFRS 8 Operating Segments, which requires a management approach under which segment information is presented on the same basis as that used for internal reporting purposes. The Group concluded that the operating segments determined in accordance with IFRS 8 are the same as the business segments previously identified under IAS 14. IAS 1 Presentation of Financial Statements The revised standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented in a reconciliation of each component of equity. In addition, the standard introduces the statement of comprehensive income; it presents all items of recognized income and expense, either in one single statement, or in two linked statements. The Group has elected to present two statements. - 9 -
3. ADOPTION OF NEW AND REVISED STANDARDS (Deemed Appropriate): (continued ) IAS 23 Borrowing Costs (Revised) A revised IAS 23 Borrowing Cost was issued in March 2007, and becomes effective for financial years beginning on or after January 1,. The standard has been revised to require capitalisation of borrowing cost when such costs relate to qualifying asset. A qualifying asset is an asset that necessarily takes an substantial period of time to get ready for its intended use or sale. The Group accounting policy was already in accordance with this revised standard. IAS 40 Investment Property (Amended) IAS 40 has been amended to bring within its scope investment under construction. Consequently such property is measured at fair value when completed investment properties are measured at fair value. However, the adoption of this amendment did not have any impact on the financial position of the Group as it uses cost model for measuring its investment properties. Improvement to IFRS (May ) In May and April, the IASB issued various amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of May amendments resulted in changes to accounting policies but did not have any impact on the financial position or performance of the Group. The impact of April improvements on the consolidated financial position and performance of the Group is currently being assessed by the management. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements: 4.1 Land: Land has been allotted to the Parent Entity by the Government of Ras Al Khaimah free of cost to set up free zones and industrial zones in the Emirate of Ras Al Khaimah. Land which is mortgaged is stated as per valuation report of valuer and has been transferred to capital reserve account and the balance has been stated at nominal value. Land also includes land acquired by subsidiaries in the country of their operation. 4.2 Property, plant and equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Cost comprises of the purchase price and any other attributable cost of bringing the assets to its working condition for its intended use as per IAS 16. - 10 -
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued ) 4.3 Depreciation: The Group applies the straight-line method in depreciating its property, plant and equipment over their estimated useful lives of service. Annual rates of depreciation used are as follows: Asset Category Percentage Building 1 10 Plant and machinery 2 33.33 Tools and equipment 25 Motor vehicles & transportation equipment 3 25 EDP system and office equipment 5 50 Furniture and fixtures 5 50 4.4 Capital work-in-progress: Capital work-in-progress is recorded at cost incurred by the Group for the construction of asset. Allocated cost directly attributable to the construction of assets are capitalized. The capital work-in-progress is transferred to the appropriate asset category and depreciated in accordance with the Group s policies when construction of the asset is completed and is available for use. 4.5 Investment properties: Investment properties are properties held for rental income and capital appreciation and which is not occupied by the Group or its subsidiaries. Investment properties in Ras Al Khaimah, UAE are stated at cost, less accumulated depreciation and provision for impairment, where required. The investment properties in Georgia are not depreciated until the date of their future use is determined by the Group s management. If any indication exists that investment properties may be impaired, the Group estimates the recoverable amount as the higher of value in use and fair value less cost to sell. The carrying amount of an investment property is written down to its recoverable amount through consolidated income statement. - 11 -
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued ) 4.5 Investment properties: (continued ) An impairment loss recognised in prior years is reversed if there has been subsequent changes in the estimates used to determine the assets recoverable amount. Subsequent expenditure is capitalised only when it is probable that future economic benefits associated with it will flow to the Group and cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. If an investment property becomes owner-occupied, it is reclassified to property, plant and equipment, and its carrying amount at the date of reclassification becomes its deemed cost to be subsequently depreciated. The Group charged depreciation on straight-line basis over the useful lives of the investment properties. 4.6 Goodwill: Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of the cash-generating units, to which the goodwill is allocated. Where the recoverable amount of the cash-generating units is less than their carrying amount an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods. The Group performs its annual impairment test of goodwill at year end. - 12 -
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued ) 4.7 Intangible assets: The Group policy is to recognize intangible assets initially at cost. Intangible assets are tested annually for impairment and any estimated reduction in value is charged to the consolidated income statement for the current year. The Group s intangible assets include computer software licenses. 4.8 Trading properties under development: Properties in the process of construction or development for the purpose of sale on completion are classified as trading properties under development. Trading properties under development are measured at the lower of cost and net realizable value. Cost of trading properties under development is determined on the basis of specific identification of their individual costs. The classification of trading properties under development as current and non-current depends upon the expected date of their completion. 4.9 Investments in associates: Investments in associates are accounted for using the equity method depending on the most recent available financial statements of the associated company. Any gain or loss resulting from investment in the associated company is recognized in consolidated income statement for the current year. 4.10 Available-for-sale investments: Available-for-sale investments are initially recognized at cost being the fair value of the consideration given. After initial measurement, available-for-sale financial assets are measured at fair value with unrealized gains or losses recognized directly in the statement of comprehensive income until the investment is derecognized or determined to be impaired at which time the cumulative gain or loss recorded in the statement of changes in equity is recognized in the consolidated income statement. Reversal of impairment loss is not recognized in the consolidated income statement. 4.11 Loans and advances: Loans and advances are stated at amortised cost net of provisions for impairment. All loans and advances are recognised when cash is disbursed to borrowers. Expenses incurred in making loans and advances are charged to the consolidated income statement in the year of disbursing these loans and advances. - 13 -
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued ) 4.12 Finance lease: Leases are classified as finance leases whenever the terms of lease transfer substantially all the risks and rewards incidental to ownership of an asset to the lessee. All other leases are classifed as operating leases. Amounts due from lessees under finance lease are recorded as receivables at the amount of Groups s net investment in the leases. Finance lease income is allocated to accounting period so as to reflect a constant periodic rate of return on the Group s net investment outstanding in respect of the leases. 4.13 Deferred income tax assets recognition: The recognized deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded on the statement of financial position. Deferred income tax assets are recorded to the extent that realization of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on medium term business plan and cash flow projections prepared by management and extrapolated results thereafter. The business plan is based on management expectations that are believed to be reasonable under the circumstances. 4.14 Inventories: Inventories are stated at lower of actual cost and net realizable value. Cost is determined on average basis. Finished goods are valued at the lower of average cost and net realizable value. Cost comprises direct cost of production. 4.15 Trade accounts receivable: Trade accounts receivable are stated at original invoice amount less provision for any doubtful or uncollectible amount. An estimate of doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written-off when there is no possibility of recovery. 4.16 Postdated cheques received: Postdated cheques received are recognized and accounted for in the books of account upon their actual collection. 4.17 Cash and cash equivalents: Cash represents cash on hand and checking accounts with banks. Cash equivalents represent all highly liquid investments that are readily convertible into known amounts of cash which are subject to an insignificant risk of changes in value and include call deposits and fixed deposits with maturities of three months or less from the date of placement. Bank overdraft balances (if any) that fluctuate from debit to credit during the year are deducted from cash and cash equivalents. 4.18 Impairment of financial assets: Financial assets are assessed for indicators of impairment at each financial statements date. Financial assets are impaired where there is an objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial asset have been impacted. - 14 -
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued ) 4.18 Impairment of financial assets: (continued ) For certain categories of financial assets, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 120 days, as well as observable changes in national or local economic conditions that correlate with default on receivables. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written-off against the allowance account. Subsequent recoveries of amounts previously written-off are credited to other income. Changes in the carrying amount of the allowance account are recognized in the consolidated income statement. If, in a subsequent period, the amount of the impairment loss decreases and decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through the consolidated income statement to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. Unquoted available-for-sale investments are carried at cost due to the unpredictable nature of future cash flows and the lack of other suitable methods for arriving at a reliable fair value. 4.19 Trade and settlement date accounting: The Group adopts the trade date accounting for the regular way purchase and sale of various categories of financial assets. Trade date accounting requires recognition of the financial assets on the date of its acquisition or sale by the Group. 4.20 Non-controlling interests: Non-controlling interests represent the portion of profit or loss and net assets not held by the Group and are presented separately in the consolidated income statement and within equity in the consolidated statement of financial position, separately from the Parent Entity s equity. 4.21 End of service benefit obligation: The employees end of service benefit obligation (indemnity) is accounted for non UAE national employees on the basis of UAE Federal Labour Law. - 15 -
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued ) 4.22 Government grants: Government grants are recognized at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. Government grants whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets are recognized as deferred revenue in the consolidated statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets. 4.23 Medium-term bank loans: Medium-term bank loans are stated in the consolidated statement of financial position at the amounts received after deducting the installments paid. The interests on these loans are at the effective market interest rate which was recorded in the books of account. 4.24 Leased assets: Where the Group is a lessee in a lease which transferred substantially all the risks and rewards incidental to ownership to the Group, the assets leased are capitalised in property, plant and equipment at the commencement of the lease at the lower of the fair value of the leased assets and present value of the minimun lease payments. Each lease payment is allocated between the liabilty and finance charges, so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of future finance charges, are included in the borrowings. The interest cost is charged to the statement of comprehensive income over the lease period using the effective interest method. The assets acquired under the finance leases are depreciated over their useful lives or the shorter lease term if the Group is not reasonably certain that it will obtain ownership by the end of the lease term. 4.25 Loans and borrowings: After initial recognition, interest bearing loans and borrowings are subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the consolidated income statement when the liabilities are derecognized as well as through the amortization process. 4.26 Short-term employees benefits : The short-term employees benefits are accounted for on the basis of U.A.E. Federal Labour Law. The leave obligation thereof is calculated on basic salary plus house and car allowance of each employee and 30 leave days for each year of service completed less leave availed. Air ticket obligation is accounted for individually for eligible employees as per the terms and conditions of employment contracts. Computation is based on the quoted market prices currently available to the Group for air tickets to various destinations of employees native countries. 4.27 Trade accounts payable: Trade accounts payable are measured at original received invoice amount. - 16 -
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued ) 4.28 Provisions: Provisions are recognized when the Group has a legal or constructive obligation as a result of past event; it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. 4.29 Borrowing costs: Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing cost are recognized in consolidated income statement in the period in which they are incurred. 4.30 Foreign currency translations: The consolidated financial statements are presented in UAE Dirhams (AED) which is functional currency of the Parent Entity. Each company in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are recorded in the functional currency at the rate ruling at the date of the transaction. Monetary assets and liabilities determined in foreign currencies are retranslated at the rate of exchange ruling at the reporting date. All differences are taken to consolidated income statement. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at closing rate. As at the reporting date, the assets and liabilities of the subsidiaries with the functional currencies other than AED are translated into AED at the rate of exchange ruling at the reporting date and their income statements are translated at the weighted average exchange rates for the year. These differences arising on the translation are taken directly to the consolidated statement of comprehensive income. On disposal of an entity, the deferred cumulative amount recognized in equity relating to that entity is recognized in the consolidated income statement. - 17 -
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued ) 4.31 Revenue recognition: Revenue is recognized in the consolidated income statement when the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the Group; and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Revenue is generally recognized in the consolidated income statement as follows: Income from sale of trading properties are recognized on the basis of transfer of title deed of the properties. Visa and licensing income is recognized when these services are provided and invoices are raised to the clients. Lease rental income is recognized when lease contract is signed and invoices are raised according to the terms of the relevant lease. Interest income is accrued on a timely basis, by reference to the principal outstanding and effective interest rate applicable. Revenue of other services is recognized when the services are provided and are invoiced to the clients. Revenue of sales is generally recognized upon issuance of sales invoices to customers. 4.32 Income tax: Taxation is provided in accordance with the relevant fiscal regulations with the countries in which the Group operates. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustments to the tax payable in respect of prior years. Income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated income statement. Deferred income tax is provided, using the liability method, on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on laws that have been enacted at the reporting date. - 18 -
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued ) 4.32 Income tax:(continued ) Deferred income tax assets are recognized for all deductible temporary differences and carry-forward of unused tax assets and tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and carry-forward of unused tax assets and unused tax losses can be utilized. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. 4.33 Financial instruments: The Group s financial instruments are principally comprised of trade and other receivables, finance lease receivables, loans and advances, deferred tax assets, cash and banks, end of service benefits obligation, deferred tax liabilities, Sukuk payable, medium-term bank loans, finance lease liabilities, unsecured loans, advances from others, advance from customers, trade and other payables, and short-term borrowings from banks. The Group uses different assumptions to estimate the fair value of the financial instruments. The significant assumptions underlying the estimation of fair value of financial instruments, include, reference to quoted market prices, estimating the net realizable value, applying the discounted cash flows approach using current market interest rate, and other assumptions depending on the management s past experience. If an objective evidence exists that a financial instrument may be impaired, then the impairment losses are recognized in the consolidated income statement for the current year. 5. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY: In the application of the Group s accounting policies, which are described in Note 4, the management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Annual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. - 19 -
5. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY: (continued ) Critical judgments in applying accounting policies: In the process of applying the Group s accounting policies, the management is of the opinion that there is no instance of application of judgments which is expected to have effect on the amounts recognized in the consolidated financial statements: Investments and other financial assets Financial assets within the scope of IAS 39 Financial Instruments: Recognition and Measurement (Revised) are classified as either financial assets at fair value through profit or loss, loans and receivables, or available-for-sale investments, as appropriate. The Group determines the classification of its financial assets at initial recognition. Valuation of unquoted equity investments The available-for-sale investments in unquoted securities are carried at cost due to the unpredictable nature of future cash flows and lack of other suitable methods for arriving at a reliable fair value. Impairment of financial assets The Group determines whether available-for-sale equity financial assets are impaired when there has been a significant or prolonged decline in their fair value below cost. This determination of what is significant or prolonged requires judgment. In making this judgment and to record whether an impairment occurred, the Group evaluates among other factors, the normal volatility, the financial health of the investee, industry and sector performance, changes in technology and operational and financial cash flows. Key sources of estimation uncertainty: The following are the key assumptions concerning the future, and other key sources of estimating uncertainty at the consolidated statement of financial position s date: Business combinations Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets and liabilities of the acquired business. For most assets and liabilities, the purchase price allocation is accomplished by recording the asset or liability at its estimated fair value. Determining the fair value of assets acquired and liabilities assumed requires judgment by management and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, the useful lives of licenses and other assets and market multiples. The Group s management uses all available information to make these fair value determinations. Impairment of loans, advances and receivables An estimate of the collectible amount of loans, advances and receivable is made when collection of the full amount is no longer probable. For individually significant amounts, this estimation is performed on an individual basis. Amounts which are not individually significant, but which are past due, are assessed collectively and a provision applied according to the length of time past due, based on historical recovery rates. Any difference between the amounts actually collected in future periods and the amounts expected to be received will be recognized in the consolidated income statement. - 20 -
5. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY: (continued ) Fair value of financial instruments Where the fair value of financial assets and financial liabilities recorded in the statements of financial position cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include consideration of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. Impairment of non financial assets impairment testing The Group s impairment testing for non financial assets is based on calculating the recoverable amount of each cash generating unit or group of cash generating units being tested. Recoverable amount is the higher of value in use and fair value less costs to sell. Value in use for relevant cash generating units is derived from projected cash flows as approved by management and do not include restructuring activities that the group is not yet committed to or significant future investments that will enhance the asset base of the cash generating unit being tested. Fair value less cost to sell for relevant cash generating units is generally derived from discounted cash flow models using market based inputs and assumptions. Recoverable amount is most sensitive to the price assumptions, foreign exchange rate assumptions and discount rates used in the cash flow models. Investments and other financial assets Available-for-sale investments are treated as impaired when there has been a significant or prolonged decline in the fair value below cost or where other objective evidence of impairment exists. The determination of what is significant or prolonged requires considerable judgment and includes factors such as normal volatility in share price for quoted equities and the future cash flows and discount factors for unquoted equities. Contingencies By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of probability of occurrence of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. 6. LAND: a) This item comprises of the following: Land Note 6 (b) 1,312,235 1,013,061 Land leveling 25,865 24,950 Total Exhibit A 1,338,100 1,038,011 ======== ======= - 21 -
6. LAND: (continued ) b) The details of land are as follows: Balance as of January 1 1,013,061 635,794 Additions 2,020 115,110 Revaluations Note 6 (d) & Exhibit D 297,700 262,157 Foreign currency translation differences (546) -- Total Note 6 (a) above 1,312,235 1,013,061 ======= ======= c) The details of land area and valuation during year are as follows: Area Amount (in Sqr. Mts.) Land granted by RAK Government and value stated as per valuation report of the independent valuer 21,073,788 1,244,707 Purchased land 18,887 29,815 Land situated in foreign country 3,046,037 37,713 Area of land carrying at nominal value 13,226,525 -- Total 37,365,237 1,312,235 ======== ======== d) The off-setting amount of land revaluation is credited to capital reserve. e) The land as shown in Note 6 (b) above includes cost of land amounting to AED 1,082,204 thousands, with service area 8,546,619 square meters, comprises of various parcel of land which are presently mortgaged with different banks against financing of various projects of the Parent Entity. f) Land amounting to AED 1,312,235 thousands as shown in Note 6 (b) above includes cost of land acquired by a foreign subsidiary amounting to AED 37,713 thousands and which is mortgaged with a bank against finance facility obtained by the subsidiary. - 22 -
7. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost less accumulated depreciation as follows: Buildings Plant and machinery Tools & equipment Motor vehicles & transportation equipment EDP system & office equipment Furniture & fixtures Total Cost: At January 1, 498,753 20,155 1,053 48,138 9,605 12,868 590,572 Additions 17,635 363,446 2,548 3,727 2,617 4,419 394,392 Disposals (1,421) (377) -- (312) (877) (96) (3,083) Transfers from CWIP 16,312 133,934 -- (4,657) 2,068 -- 147,657 Revaluation decrease (23,693) (7,440) -- (1,887) -- -- (33,020) Foreign currency translation differences (7,159) (163) --. (671) (111) (285) (8,389) At December 31, 500,427 509,555 3,601 44,338 13,302 16,906 1,088,129 Accumulated Depreciation: At January 1, 1,428 3,161 -- 862 5,524 2,602 13,577 Charged for the year 8,107 12,162 231 3,965 1,353 2,196 28,014 Disposals (11) (24) -- (59) (633) -- (727) Elimination on revaluation (6,037) (2,014) -- (3,653) -- -- (11,704) Impairment -- -- -- -- -- 845 845 Foreign currency translation differences (20) --. --. --. (18) (17) (55) At December 31, 3,467 13,285 231 1,115 6,226 5,626 29,950 Carrying Amount: At December 31, Exhibit A 497,325 16,994 1,053 47,276 4,081 10,266 576,995 ====== ====== ====== ====== ====== ====== ======= At December 31, Exhibit A 496,960 496,270 3,370 43,223 7,076 11,280 1,058,179 ====== ====== ====== ====== ====== ====== ======= 23
8. CAPITAL WORK-IN-PROGRESS: a) The details of capital work-in-progress are as follows: RAKIA Accommodation 115,750 -- Al Hamra Industrial Zone infrastructure 67,956 59,083 Al Hamra Free Zone infrastructure 41,625 24,548 Labour Accommodation 13,685 20,787 Al Ghayl Zone infrastructure 46,681 28,666 RAK Financial City 16,346 12,447 Customs Building 2,407 2,364 Al Hamra Amenity Centre 50,499 66,443 Al Hamra Power Project -- 133,934 Construction in progress in Georgia Subsidiaries 8,624 4,639 Al Hamra Commercial Centre -- 6,884 Other projects 9,835 1,546 Total Exhibit A 373,408 361,341 ======= ====== b) The movements over capital work-in-progress are as follows: Balance as at January 1 361,341 128,086 Additions during the year 287,516 342,922 Transferred to property, plant and equipment (147,657) (106,198) Transferred to trading properties (127,725) -- Disposal -- (3,469) Foreign currency translation difference (67) -- Balance as at December 31 373,408 361,341 ========= ========= 9. INVESTMENT PROPERTIES: Investment properties consist of land plots and building acquired by the Group in Ras Al Khaimah, UAE and Georgia. The Group has not started any development or construction work over this property and neither determined its future use. As such the acquired property is regarded as held for capital appreciation. The investment properties in Ras Al Khaimah are depreciated annually. The investment properties in Georgia are not depreciated until the date of their future use is determined by the Group management. The carrying value of investment properties is reviewed for impairment at each financial statements date. As of December 31,, the fair value of investment properties was estimated and stated as per valuation report of independent appraiser in Georgia. 24
9. INVESTMENT PROPERTIES: (continued ) The movement over this account is as follows: Cost: At January 1, 33,390 Additions 127,725 Disposal (142) Foreign currency translation difference (480) At December 31, 160,493 ====== Accumulated impairment At January 1, 5,871 Charged for the year 6,232 Foreign currency translation difference (85) At December 31, 12,018 ====== Carrying amount: At December 31, Exhibit A 27,519 ====== At December 31, Exhibit A 148,475 ====== 10. GOODWILL: Goodwill as shown in Exhibit A represents goodwill recognized on acquisition of a subsidiary, JSC Poti Sea Port - Georgia. The detail of goodwill calculation is as follows: Percentage of shares held by Parent Entity 100 % 51 % Amount paid for acquisition of shares 532,657 293,880 Less: Share of net worth in the subsidiary (408,704) (208,440) Net Exhibit A 123,953 85,440 ======= ======= 11. OTHER INTANGIBLE ASSETS: a) Other intangible assets comprise of software license obtained and web page developed for operational needs. 25
11. OTHER INTANGIBLE ASSETS: (continued ) b) Other intangible assets are stated at cost less accumulated amortization as follows: Total Cost: At January 1, 1,636 Additions 72 Foreign currency translation differences (23) At December 31, 1,685 ==== Accumulated amortization: At January 1, 455 Amortized during the year 256 Impairment during the year 77 Foreign currency translation differences (9) At December 31, 779 ==== Carrying amount: At December 31, Exhibit A 1,181 ==== At December 31, Exhibit A 906 ==== 12. TRADING PROPERTIES UNDER DEVELOPMENT: a) Trading properties under development represent the costs of the following projects: Al Marjan Island Note 12 (b) 1,043,776 946,912 Dana Island 354,647 357,723 Gateway City 138,672 126,242 RAK Financial City 54,133 50,668 Al Hamra Views 13,521 12,992 Other projects 6,430 4,785 Total Exhibit A 1,611,179 1,499,322 ======= ======= b) The cost of Al Marjan Island amounting to AED 1,043,776 thousands as shown above includes an amount of AED 101,605 thousands being the capitalized cost of profit on Sukuk. c) The movement details of trading properties under development are as follows: Balance at January 1 1,499,322 408,201 Additions of new projects 216,411 765,118 Sale of a parcel of land (131,678) (53,547) Deferred commission on projects 27,124 379,550 Net Note 12 (a) above 1,611,179 1,499,322 ======= ======== 26
13. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES: a) Transactions over this account are as follows: Country of Incorporation Legal Form Percentage of Holding London International Television Ltd. - Note 13 (b) U.K. LTD 53 11,612 11,612 RAK Power LLC - Note 13 (b) RAK LLC 70 700 700 JSC Poti Sea Port Georgia JSC 100 -- 330,615 Total 12,312 342,927 Beaufort RAK LLC (restated) Note 13 (c) 29,999 29,999 JSC Poti Sea Port transferred to consolidated subsidiaries (restated) (refer to Note 10) -- (293,880) Transferred to advance for investment in subsidiary (JSC Poti Sea Port) -- (36,735) Subsidiary sold during the year (29,999) -- Provision for impairment of investment in subsidiaries (12,312) (7,347) Net - Exhibit A -- 34,964 ====== ====== b) Impairment for these unconsolidated subsidiaries have been fully provided for during the year. c) This subsidiary has been disposed off and loss on disposal is recognized during the year. 27