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AFI Development PLC (AFRB)

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Tuesday 16 April, 2019

AFI Development PLC

PRELIMINARY STATEMENT OF RESULTS FOR 2018

RNS Number : 3917W
AFI Development PLC
16 April 2019
 

THIS ANNOUNCEMENT IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION

IN OR INTO THE RUSSIAN FEDERATION, THE UNITED STATES, CANADA, AUSTRALIA OR JAPAN

 

16 April 2019

 

AFI DEVELOPMENT PLC

("AFI DEVELOPMENT" OR "THE COMPANY" OR "THE GROUP")

PRELIMINARY STATEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2018

 

solid growth in revenue and profit supported by residential sales

 

 

AFI Development, a leading real estate company focused on developing property in Russia, has today announced its preliminary audited financial results for the year ended 31 December 2018.

 

Financial highlights:

 

·     Revenue for the year, including proceeds from the sale of trading properties, increased by 65% year-on-year to US$296.0 million (2017: US$179.1 million):

The sale of residential properties contributed US$169.6 million to total revenue, a 174% increase year-on-year (2017: US$61.8 million), mostly due to revenue recognition from delivery of apartments in AFI Residence Paveletskaya in Q2 2018 and the implementation of IFRS 15[1]

Rental and hotel operating income increased 7% year-on-year to US$125.5 million (2017: US$117.0 million)

AFIMALL City revenue contribution increased to US$86.8 million (2017: US$82.7 million), a 5% increase year-on-year

·     Gross profit up 47% year-on-year to US$89.4 million (2017: US$61.0 million) 

·     Net profit of US$31.5 million in 2018, compared to a loss of US$4.7 million in 2017

·     Total gross value of property portfolio of US$1.25 billion, down from US$1.42 billion in 2017

·     Cash, cash equivalents and marketable securities stood at US$100.2 million at 31 December 2018

Operational highlights

·     At Odinburg, the construction and sales of Building 3 (phase II) have commenced. Building 3 (Phase I) and Building 6 (Phase II) are under construction and currently being marketed to customers. As of 31 March 2019, 697 apartments (99% of total) were sold in Building 2, 680 (74% of total) in Building 3 (Phase I) and 206 (92% of total) in Building 6

·     At AFI Residence Paveletskaya, all apartments in Phase I have been delivered to customers. The construction of Phase II and Phase III apartments is currently ongoing. As of 31 March 2019, 558 contracts for the pre-sales of apartments and "special units" had been signed (88% of Phase I and Phase II combined)

·     At Bolshaya Pochtovaya, construction and marketing of the project progressed according to plan and as of 31 March 2019, 251 apartments (62% of Phase I and Phase II combined) had been pre-sold to customers

·     The construction and pre-sale of properties at Botanic Garden remain on track. As of 31 March 2019, 348 apartments (43% of Phase I) had been pre-sold to customers.

·     In Q1 2019, the Company started construction works at the Tverskaya Plaza Ic, a grade A office development in central Moscow

·     At AFIMALL City, the NOI for 2018 increased slightly by 1% year-on-year to US$63.7 million (2017: US$63.0 million).

Commenting on today's announcement, Eli Avrahampour, Chairman of AFI Development, said:

"We are pleased to report another year of growth in revenue and gross profit, driven primarily by a continued strong performance in residential sales, the successful delivery of apartments in AFI Residence Paveletskaya in the first half of the year and the adoption of IFRS 15.

As we enter the new financial year, we are mindful of the ongoing uncertainty in Russia, in terms of the evolving legal, business and economic environment, which is expected to place downward pressure on the profitability of the Company's yielding properties and residential projects. In particular, high rouble volatility, recent tax increases and inflation will increase construction costs, while the implementation of the new escrow schemes and increased lending rates pose further challenges for the property development market. We also face rising competition stemming from the launch of the state-funded housing program.

That said, we remain cautiously optimistic and believe that AFI Development will meet the challenges in both the residential and commercial segments, supported by our market experience and competitive projects."

 

FY 2018 Results Conference Call

 

AFI Development will hold a conference call for analysts and investors to discuss its full year 2018 results, following their publication.

 

The details for the conference call are as follows:

 

Date:

Wednesday, 17 April 2019

 

 

 

Time:

15:00 UK (17:00 Moscow)

 

 

 

 

Dial-in Tel:

International:

UK toll free:

US toll-free:

Russia toll-free:

+44 (0) 20 3003 2666

 0808 109 0700

 1 866 966 5335

 8 10 8002 4902044

 

 

 

 

Password:

'AFI Development' or 'AFID'

 

 

Please dial in 5/10 minutes prior to the commencement time giving your name, company and stating that you are dialling into the AFI Development conference call quoting the reference AFI.

 

The FY 2018 investor presentation will be published on the Company's website: http://www.afi-development.com/en/investor-relations/reports-presentations at 11.00 UK (13.00 Moscow) on 17 April 2019.

 

For further information, please contact:

 

AFI Development

Ilya Kutnov, Corporate Affairs/Investments Director (Responsible for arranging
the release of this announcement)

+7 495 796 9988

 

 

Citigate Dewe Rogerson, London                                                                         

+44 20 7638 9571

Sandra Novakov

 

Lucy Eyles

 


 

This announcement contains inside information.

 

 

About AFI Development

 

Established in 2001, AFI Development is one of the leading real estate development companies operating in Russia.

 

AFI Development is listed on the Main Market of the London Stock Exchange and aims to deliver shareholder value through a commitment to innovation and continuous project development, coupled with the highest standards of design, construction and quality of customer service.

 

AFI Development focuses on developing and redeveloping high quality commercial and residential real estate assets across Russia, with Moscow being its main market. The Company's existing portfolio comprises commercial projects focused on offices, shopping centres, hotels and mixed-use properties, and residential projects. AFI Development's strategy is to sell the residential properties it develops and to either lease the commercial properties or sell them for a favourable return.

 

AFI Development is a leading force in urban regeneration, breathing new life into city squares and neighbourhoods and transforming congested and underdeveloped areas into thriving new communities. The Company's long-term, large-scale regeneration and city infrastructure projects establish the necessary groundwork for the successful launch of commercial and residential properties, providing a strong base for future.

 

 

Forward-looking Statements

This document and the documents following may contain certain "forward-looking statements" with respect to the Company's financial condition, results of operations and business, and certain of the Company's plans and objectives with respect to these items.

Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as "anticipates", "aims", "due", "could", "may", "should", "expects", "believes", "intends", "plans", "targets", "goal" or "estimates." By their very nature forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future.

There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, changes in the economies and markets in which the Company operates; changes in the regulatory and competition frameworks in which the Company operates; changes in the markets from which the Company raises finance; the impact of legal or other proceedings against or which affect the Company; and changes in interest and exchange rates.

Any written or verbal forward-looking statements, made in this document or made subsequently, which are attributable to the Company or persons acting on their behalf are expressly qualified in their entirety by the factors referred to above. The Company does not intend to update any forward-looking statements.

 

 

 

Chairman's Statement

 

For the Russian economy in general, 2018 was marked by the negative influence of US sanctions introduced in April, which were targeted against specific commodity producers and state-owned banks. The sanctions caused a weakening of the rouble, particularly towards the year-end, and triggered a rise in inflation. In response, the Central Bank of Russia ("CBR") raised its key lending rate by 25bps in September and December 2018 (currently at 7.75%). Inflation remains low, by Russian standards (4.3%, CBR), while the GDP grew modestly by 1.63% (OECD).

AFI Development performed steadily during the year due to continued progress at our four ongoing residential projects in Moscow and the Moscow region under construction and marketing, and our yielding properties under operation. The sale of residential properties and parking units continued to play a significant role in our revenue generation, alongside revenue earned from rent and hotel operations.

Revenue for the Company in 2018 grew 65% year-on-year to US$296.0 million, supported by strong residential sales which contributed US$169.6 million to total revenue. This is largely due to the implementation of IFRS 15[2]

Yielding properties performed well throughout 2018, with strong contribution from our flagship project, the AFIMALL City, which generated US$86.8 million in revenue, up 5% from the prior year. Overall, rental and hotel operating income for the year was US$125.5 million, a 7% increase year-on-year.

The Company recorded a gross profit of US$89.4 million in 2018, while net profit was US$31.5 million.

 

Valuation

As at 31 December 2018, based on the Jones Lang LaSalle LLC ("JLL") independent appraisers' reports and on accounting book value of properties, the value of AFI Development's portfolio of investment properties stood at US$742.6 million, while the value of the portfolio of investment property under development stood at US$141.9 million.

The total value of the Company's assets, mainly based on independent valuation as of 31 December 2018 and book values of residential development projects, was US$1.25 billion, compared to US$1.42 billion as at 31 December 2017. The drop in values was triggered by the exchange rate fluctuation effect (the rouble depreciated by 20.61% YoY) and reduction in the book values of residential projects due to delivery of apartments in AFI Residence Paveletskaya in Q2 2018 and the implementation of IFRS 15.

For additional information, please refer to the "Portfolio Valuation" section in the Management Discussion and Analysis (the "MD&A"). 

 

Liquidity

We ended 2018 with approximately US$100.2 million of cash, cash equivalents and marketable securities on our balance sheet (-5% YoY), and a debt[3] to equity level of 68%. This position reflects the Company's ability to continue balancing liquidity requirements from a number of sources.

For commercial projects, our financing strategy aims to maximise the level of debt financing for projects under construction, while maintaining healthy loan-to-value levels. After delivery and commissioning, we aim to refinance the properties at more favourable terms, including longer amortisation periods, lower interest rates and higher principal balloon payments. Property rights and shares of property holding companies are mainly used as collateral for the debt. We strongly prefer, whenever possible, to use non-recourse project level financing.

For residential projects, our financing strategy is to finance the ongoing construction from pre-sales, while for the new phases of our projects, which will be developed under the newly introduced mandatory escrow-schemes, the construction will be financed by bank project finance at market terms.

For additional information, please refer to the "Liquidity" section of the MD&A.

 

Key Events Subsequent to 31 December 2018

The Company did not have any significant events subsequent to 31 December 2018.

 

Portfolio Update

AFIMALL City

During 2018, AFIMALL City continued to demonstrate growth in footfall, revenue and NOI.

Average daily footfall in December 2018 was 21% higher compared to December 2017, reflecting the development of the Moscow City area (such as improving transportation infrastructure, and opening of new office space).

Revenue grew 5% year-on-year to US$ 86.8 million and NOI increased 1% year-on-year to US$63.7. Occupancy stood at 93% at the end of the year.

In January 2019, the Russian government announced that three federal ministries, namely the Ministry of Economic Development, the Ministry of Communications and the Ministry of Industry and Trade will relocate to Moscow City in 2019, occupying about 70,000-80,000 sq.m of office space. 

 

AQUAMARINE III (OZERKOVSKAYA III)

In February 2018, AFI Development successfully completed the disposal transaction of two buildings in the complex for RUR7.89 billion (circa US$135 million). The Company currently owns one remaining building in the complex (GBA 18,759 sq.m including underground parking), which is leased to Deutsche Bank, Brown-Forman and other tenants.

 

HOTELS

AFI Development's hospitality portfolio, which consists of one Moscow city-hotel (Aquamarine) and two resorts in the Caucasus mineral waters region (Plaza Spa Kislovodsk and Plaza Spa Zheleznovodsk), performed well in 2018. Notably, the Aquamarine hotel benefited from the football World Cup held in Russia in the summer of 2018.

 

ODINBURG

At Odinburg, construction work and marketing continued throughout the year. The construction and sales of Building 3 (phase II) have commenced, while Building 3 (Phase I) and Building 6 (Phase II) are under construction and currently being marketed to customers.

As of 31 March 2019, 697 apartments (99% of total) were sold in Building 2, 680 (74% of total) in Building 3 (Phase I) and 206 (92% of total) in Building 6. 

 

AFI RESIDENCE PAVELETSKAYA

In December 2015, AFI Development successfully launched the main construction phase of the project. The pre-sale of apartments and "special units"[4] began simultaneously with the onset of construction.

In 2018, construction and marketing of AFI Residence Paveletskaya proceeded according to schedule. Delivery of Phase I apartments to customers was completed while construction of Phase II and Phase III apartments remains ongoing. As of 31 March 2019, 558 contracts for pre-sales of both apartments and "special units" have been signed (88% of Phase I and Phase II combined).

 

BOLSHAYA POCHTOVAYA

The main construction phase and pre-sale of apartments was launched in Q1 2017 at Bolshaya Pochtovaya. During 2018, construction and marketing of the apartments progressed to schedule and as of 31 March 2019, 251 apartments (62% of Phase I and Phase II combined) had been pre-sold to customers.

 

BOTANIC GARDEN

The main construction phase and pre-sale of apartments at Botanic Garden, which began in Q1 2017, continues to progress as expected. As of 31 March 2019, 348 apartments (43% of Phase I) have been pre-sold to customers.

TVERSKAYA PLAZA Ic

The project, located in 2nd Brestskaya street in the office district near the Belorussky Railway station, is planned as a grade A office building. Construction of the building commenced in Q1 2019.

 

TVERSKAYA PLAZA II

In Q2 2017, the Company obtained development rights for a project at Tverskaya Plaza II. This has been approved for development by the Moscow construction authorities as a "recreational centre", with a gross buildable area of 22,000 sq.m.

 

Outlook

A weaker rouble and additional taxation are expected to place downward pressure on the profitability of both the Company's yielding properties, AFIMALL City in particular, and the residential projects. The impact of these two factors is already reflected in the valuation of our portfolio with a valuation loss on properties of US$11.5 million for 2018.

Broadly speaking, the tax increases introduced in 2019 will drive up the investment cost for all projects under development. The introduction of new escrow schemes for residential development poses uncertainty as to the magnitude of its effects on costs and cash flows. For details on taxation increases and the new mandatory escrow schemes please refer to the Market Update section below.

We see that sanctions have caused the CBR to increase its key lending rate in 2018 and we believe further increases in 2019 are likely. The CBR key lending rate, in turn, will drive the cost of mortgage finance higher. Approximately 55-65% of our residential sales are mortgage financed and therefore, we expect the demand for our residential units to decline. Furthermore, if the CBR further increases its key lending rates, our cost of rouble financing will also increase.

New competition in residential segment from the state renovation programme will most probably affect future sales. We remain cautiously optimistic and believe that AFI Development will meet the challenges in both residential and commercial segments, supported by our market experience and competitive projects.

 

 

 

BOARD OF DIRECTORS

The Directors of AFI Development, as at the date of publication of this report, are as set out below:

Mr Elias Ebrahimpour (Eli Avrahampour), Non-Executive Chairman of the Board

Mr Panayiotis Demetriou, Senior Non-Executive Independent Director

Mr Avraham Noach Novogrocki, Non-Executive Independent Director

Elias Ebrahimpour (Eli Avrahampour), Chairman

 

 

15 April 2019

 

 

 

 

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Overview

As at 31 December 2018, the Company's portfolio consisted of 7 investment properties, 4 investment properties under development, 4 trading properties under development and 4 hotel projects (3 of them are active and 1 is frozen). The portfolio comprises commercial projects focused on offices, shopping centres, hotels and mixed-use properties, as well as residential projects, in Moscow and other regions of Russia. The total value of the Company's assets, based predominantly on independent valuation as of 31 December 2018, was US$1.25 billion[5], compared to US$1.42 billion as at 31 December 2017. Revenues for 2018 increased by 65.3% year-on-year to US$296.0 million, mainly as a result of initial application of IFRS 15 Revenue from Contracts with Customers from 1 January 2018. The average exchange rate of the Russian rouble to US dollar increased by 7.5% during 2018. Mainly due to these two factors, AFI Development recorded a 46.6% year-on-year increase in gross profit to US$89.4 million. Cash, cash equivalents and marketable securities decreased by 5.5% to US$100.2 million as at 31 December 2018.

In 2018, AFI Development incurred a net profit of US$31.5 million, compared to net loss of US$4.7 million in 2017.

 

Key Factors Affecting our Financial Results

Our results have been affected, and are expected to be affected in the future, by a variety of factors, including, but not limited to, the following:

 

Macroeconomic Factors

Our properties and projects are mainly located in the Russian Federation. As a result, Russian macroeconomic trends and country-specific risks significantly influence our performance.

The following table sets out certain macroeconomic information for the Russian Federation as of and for the dates indicated:

 

Year ended 31 December 2018, %

Year ended 31 December 2017,%

Real Gross Domestic Product growth

1.7

1.8

Consumer prices growth (inflation)

2.8

4.2

Source: The International Monetary Fund

 

Company Specific Factors 

The following factors affected our performance in 2018:

·     From 1 January 2018 the Company has adopted and applied IFRS 15 Revenue from Contracts with Customers. The effect of this is mainly attributed to the earlier recognition of revenue from sales of residential properties under the "DDU" (pre-sales) contracts which contributed US$154.9 million to revenue for 2018 (for details on IFRS 15 please refer to note 5 to the consolidated financial statements);

·    At the AFI Residence Paveletskaya project, Phase I was delivered to customers in H1 2018, which enabled the Company to recognise revenue from sales of trading properties in the amount of US$23.9 million for 2018.

·    In December 2017 the Company refinanced the AFIMALL City loan and repaid the Ozerkovskaya III loan in January 2018. For further details please see note 27 to the consolidated financial statements.

 

Key Portfolio Updates

 

YIELDING ASSETS

AFIMALL City

AFIMALL City is a major retail centre located in the high-rise business district of Moscow, "Moscow-City". With a total GBA of nearly 274,877 sq.m (including parking), and GLA of nearly 107,036 sq.m,, the project has a shopping gallery of around 460 shops, an 11-screen movie theatre and a number of additional outstanding leisure facilities. AFIMALL City is one of Europe's largest and most ambitious retail developments in recent years. The Mall introduces a new standard of quality to the Russian retail sector and offers visitors a combined shopping, dining and entertainment experience unmatched in any other retail development in Moscow.

The average daily footfall in December 2018 was up 21% from December 2017, reflecting further development of the Moscow City area such as improving transportation infrastructure, and the opening of new office space.

Revenue grew 5% year-on-year to US$ 86.8 million in 2018, while NOI increased 1% year-on-year to US$63.7. Occupancy stood at 93% at the end of 2018.

According to independent appraisers JLL, the market value of AFIMALL City as of 31 December 2018 was US$637.3 million.

AQUAMARINE III (OZERKOVSKAYA III)

Ozerkovskaya (Aquamarine) III is an office complex forming part of the "Aquamarine" mixed-use development, located on the Ozerkovskaya embankment in the very heart of the historical Zamoskvorechie district of Moscow. The project consists of four Class A buildings and common underground parking. The project creates very attractive working conditions through state-of-the-art architecture, innovative design and efficient use of space. Due to these characteristics, "Aquamarine III" sets new standards for quality and creates an aspirational environment among Moscow's commercial developments.

At the end of 2017, the Company agreed to dispose of buildings 2 and 4 to one of the leading Russian banks for RUR7.89 billion (circa US$135 million). The transaction was successfully completed in February 2018.

The Company currently owns one remaining building in the complex with a GBA of 18,759 sq.m including underground parking, which is leased to Deutsche Bank, Brown-Forman and other tenants.

Following the restructuring of the loans of Aquamarine III and of AFIMALL City with VTB Bank PJSC, the loan for Aquamarine III was fully repaid in January 2018.

According to independent appraisers JLL, the market value of the remaining building of the Complex as of 31 December 2018 was US$57.4 million.

 

HOTELS

The Company's portfolio includes three hospitality projects, one located in Moscow and the remaining two in the Caucasus Mineral Waters region.

AQUAMARINE HOTEL

The Aquamarine Hotel is a modern, 4-star hotel located in the heart of Moscow. It is part of the company's mixed-use Aquamarine development, which also houses a Class A office centre, Aquamarine III, and the completed elite residential complex Aquamarine II.

The Hotel provides high-level services and offers 159 spacious rooms, a fitness-centre, spa-centre, bar, restaurant, and conference rooms. It is located in the Zamoskvorechie district which is a 20 minute walk from both the Kremlin and the Tretyakov Gallery, and a 5 minute walk from the Novokuznetskaya and Tretyakovskaya metro stations. The Hotel has added to the infrastructure of the historical district and is convenient for both business travellers and tourists.

In July 2018, the Company concluded a franchising agreement with Intercontinental Hotel Group to allow the Aquamarine Hotel to be rebranded as Crowne Plaza. The Company believes that, in light of increasing competition in central Moscow, branding is crucial to successful long-term competitiveness of the Hotel and its financial performance. The Hotel will be renamed "Crowne Plaza Tretyakovskaya".

Due to the 2018 Football World Cup in Russia, the Hotel performed very well in 2018, with average occupancy of 79%.

The balance sheet value of the project as of 31 December 2018 was US$13.0 million.   

PLAZA SPA HOTEL (ZHELEZNOVODSK)

Plaza Spa Zheleznovodsk is a sanatorium project launched in the summer of 2012 and is located in Zheleznovodsk, in the Caucasus mineral waters region. The hotel comprises 134 guest rooms over 11,701 sq.mof gross buildable area. The spa provides diagnostic assessment and treatment of urological diseases.

During 2018, the hotel performed in line with expectations with average occupancy levels at 69%.

The balance sheet value of the project as of 31 December 2018 was US$9.6 million.   

PLAZA SPA HOTEL (KISLOVODSK)

The Plaza Spa is located in the city centre of Kislovodsk, in the Caucasus mineral waters region. The facility began operations in 2008 after a full reconstruction and now has a total of 275 rooms across 25,000 sq.m.

Today, the Plaza Spa Kislovodsk is a popular spa hotel which has established new standards of quality and hospitality for the entire region. It offers an extensive range of medical services focused on the treatment of cardiac diseases. Diagnostic and treatment equipment is continually updated, and staff regularly attend training sessions for new methods of treatment to aid patient rehabilitation.

In 2018, the hotel performed well with average annual occupancy at 68% for the year.

The balance sheet value of the project as of 31 December 2018 stood at US$40.8 million.   

 

DEVELOPMENT PROJECTS

ODINBURG

In October 2013, AFI Development began construction at "Odinburg", one of the Company's largest residential projects, with a total area of more than 33 hectares, located 11 km west of Moscow in the town Odintsovo. 

The development is planned to include a multi-functional infrastructure comprising two schools, two kindergartens, a medical centre and other facilities.

The project involves the construction of a multi-storey residential micro district consisting of two phases:

· 

Phase I - construction of a 22-section residential building named Korona (Crown) and of the infrastructure for the kindergartens and schools. This will have a total sellable area of 153,839sq.m (2,850 apartments);

· 

Phase II - construction of 8 residential buildings and of infrastructure for the kindergartens, schools and outdoor multi-level parking. This will have a total sellable area of 307,200 sq.m (6,573 apartments).

Each phase includes commercial premises on the ground floor that are planned to be sold to end users.

The construction of Phases I and II are currently underway. The construction and sales of Building 3 (phase II) have recently commenced. Building 3 (Phase I) and Building 6 (Phase II) are under construction and currently being marketed to customers.

The balance sheet value of the project as of 31 December 2018 amounted to US$90.3 million.

PAVELETSKAYA II (AFI RESIDENCE PAVELETSKAYA)

AFI Residence Paveletskaya is a modern residential complex in proximity to Moscow city centre on Paveletskaya Embankment. The project is located in Danilovsky Subdistrict (the South Administrative district of Moscow), between the Garden Ring and the Third Transportation Ring and is easily accessible by private or public transport. The property is currently under construction.

The project consists of three phases:

·    

Phase I - includes several residential buildings with a total GBA of 52,928 sq.m and total GSA of 31,841 sq.m. This phase will comprise 175 apartments, 220 special units and 5,900 sq.m of flexible commercial space. 

·    

Phase II - will have a GBA of 49,860 sq.m and total GSA of 27,620 sq.m. This phase is planned to include apartments, special units and flexible commercial space. A kindergarten with an area of 2,220 sq.m is also planned in the project.

·    

Phase III - will have a GBA of 31,061 sq.m and total GSA of 20,000 sq.m. This phase is planned to include 9,842 sq.m of apartments and flexible commercial space.

 

In December 2015, AFI Development successfully launched the main construction phase of the project. The pre-sale of apartments and "special units"[6] began, alongside the launch of construction. 

In 2018, construction work and marketing at AFI Residence Paveletskaya proceeded according to schedule. Phase I apartments were fully delivered to customers and the construction of Phase II and Phase III is currently ongoing.

The balance sheet value of the project as of 31 December 2018 was US$53.2 million.  

BOLSHAYA POCHTOVAYA

Bolshaya Pochtovaya is a mixed-use project (predominantly residential) located in an attractive neighbourhood in the central administrative district of Moscow. The area benefits from developed infrastructure including transport, shops and cultural/leisure amenities, as well as a nearby river which significantly enhances the views from the project. It boasts a GBA of 136,581  sq.m on a land area of 5.65 hectares. The construction will be realised in four phases:

·    

Phase I - includes several residential buildings with a total GBA of 40,788 sq.m and total GSA of 25,969 sq.m. This phase is planned to include apartments, 8,400 sq.m of flexible commercial space and a kindergarten. 

·    

Phase II - will have a GBA of 37,373sq.m and total GSA of 21,483 sq.m., including apartments and 3,382 sq.m of flexible commercial space.

·    

Phase III - is will have a GBA of 35,629 sq.m and total GSA of 22,719 sq.m. This phase is planned to include apartments and 2,953 sq.m of flexible commercial space.

·    

Phase IV - will have a GBA of 22,792 sq.m and total GSA of 14,744 sq.m, including apartments and 1,002 sq.m of retail space.

The main construction phase and pre-sale of apartments was launched in Q1 2017 at Bolshaya Pochtovaya. During 2018, the construction and marketing of the projected progressed according to plan.

The balance sheet value of the project as of 31 December 2018 amounted to US$75.6 million. 

BOTANIC GARDEN

Botanic Garden is a residential project, located in the North-Eastern Administrative District of Moscow, approximately 8 km from the Third Transportation Ring, near the major transportation route of the district Prospect Mira, and within walking distance of Botanicheskuiy Sad and Sviblovo metro stations. The future residential complex has a land plot of 3.2 Ha and a GBA of 206,790 sq.m: 111,191 sq.m of residential area, 6,909 sq.m of commercial premises and 678 underground and above ground parking lots.

The project is being constructed in two phases:

·    

Phase I - includes several residential buildings with a GBA of 138,655 sq.m and total GSA of 71,773 sq.m. This phase is to include apartments and 6,909 sq.m of flexible commercial space. 

·    

Phase II - will have a GBA of 68,135 sq.m and total GSA of 46,327 sq.m. This phase will comprise apartments and 697 sq.m of flexible commercial space.

 

The main construction phase and pre-sale of apartments at Botanic Garden began in Q1 2017 with the development and marketing of the project progressing as expected.

The balance sheet value of the project as of 31 December 2018 was US$ 77.8 million. 

TVERSKAYA PLAZA IC

Tverskaya Plaza Ic is a Class A office development complex located in the cultural and business quarter of the Tverskoy sub-district. The complex is located within a 4-minute walk of Belorusskaya metro station, which serves as the main transport hub linking the city centre with one of Moscow's main airports - Sheremetievo International Airport. The project has a GBA of 50,200 sq.m, including underground parking of approximately 238 parking spaces, and an estimated GLA of 40,000 sq.m 

Following the registration of a 10-year land lease agreement, the Company successfully finalised the development concept, received the necessary construction permit and completed all pre-construction works.

Following some improvement in the Moscow office market, and given the excellent location of the project, AFI Development has launched construction of the project in Q1 2019.

Based on an independent valuation of the Company's portfolio by JLL as of 31 December 2018, the fair value of Tverskaya Plaza Ic is US$61.1 million.

TVERSKAYA PLAZA II

In Q2 2017, the Company obtained development rights for the project, which has been approved for development by the Moscow construction authorities as a "recreational centre" with a GBA of 22,000 sq.m. 

Plaza II is a retail-entertainment project envisaging construction of a 7-storey building with one underground level, with a total GBA of 22,000 sq.m, and providing a GLA of 14,000 sq.m.

Based on an independent valuation of the Company portfolio by JLL, as of 31 December 2018, the fair value of the Company share in Plaza II was US$18.0 million.

TVERSKAYA PLAZA IV

Plaza IV is a Class A office development with supporting ground level retail zones, located at 11, Gruzinsky Val. The project has a GBA of 92,285 sq.m (including underground parking) and an estimated GLA of 75,292 sq.m

Based on an independent valuation of the Company portfolio by JLL, as of 31 December 2018, the fair value of the Company share in Plaza IV was US$54.0 million.

KOSSINSKAYA 

Kossinskaya is mixed-use building spanning 108,528 sq.m with nine aboveground floors and a single underground level. The property was constructed in 2005.

Based on an independent valuation of the Company portfolio by JLL as of 31 December 2018, the fair value of Kossinskaya is US$25.7 million.  

 

LAND BANK

In addition to multiple yielding properties and projects under development, AFI Development also has a land bank which consists of projects that are not currently under development.

By retaining full flexibility regarding the future development of these projects, the Company remains well placed to benefit from further recovery in the regional real estate markets. Given its strong track record in bringing projects to completion, this represents a significant competitive advantage for AFI Development.

AFI Development's strategy with respect to its land bank is to activate projects only upon securing necessary financing and having full confidence in the demand levels of prospective tenants or buyers.

 

Key Events Subsequent to 31 December 2018

The Company did not have any significant events subsequent to 31 December 2018.

 

Disposals and Acquisitions 

The Company did not have any disposals or acquisitions in 2018.

 

Presentation of Financial Information

Our consolidated financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union ("EU"), and the requirements of the Companies Law of Cyprus, Cap. 113. IFRS differs in various material respects from US GAAP and UK GAAP.

 

Financial policies and practices

Revenue Recognition

The key elements of our revenue recognition policies are as follows:

·    

Rental income. Rental income from investment property is recognised as revenue on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease.

·    

Income from hotel operations. Income from hotel operations comprises of accommodation, treatments and other services offered at the hotels operated by the Group, as well as sales of food and beverages, and are recognised on acceptance of the service by the client.

·    

Sales of trading properties under sales agreements. We recognise revenue from the sales of trading properties in our statement of comprehensive income when the risks and rewards of ownership of the property are transferred to the buyer.

·    

Sales of trading properties under DDU contracts. The Company has initially applied IFRS 15 Revenue from Contracts with Customers from 1 January 2018 which effects earlier recognition of revenue from sales of residential properties under DDU contracts and recognition of significant financial component on payments received in advance from customers for residential properties under DDU contracts. DDU contracts are advance sale contracts for trading properties which are signed while the development of the respective residential property is still ongoing. The revenue from sale of trading properties under such DDU contracts is recognised over time as the construction progresses. The Company has determined that this results in revenue and associated costs to fulfil the contracts being recognised over time, i.e. before the ownership of flats is actually transferred to the customer. The transaction price for such contract is determined by adjusting the promised amount of consideration which is received in advance, for the effect of significant finance component. The contract liability is presented in the statement of financial position as Advances from customers.

·    

Construction Management fee. Revenue from construction management is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.

 

Operating expenses

Operating expenses consist mainly of employee wages, social benefits and property operating expenses, including property tax, which are directly attributable to revenues.  We recognise as expenses in our statement of comprehensive income the costs of employees who have provided construction consulting and construction management services with respect to our investment and trading properties. We also recognise property operating costs (including outsourced building maintenance), utilities, security and other tenant services related to our properties that generate rental income, as expenses on our statement of comprehensive income.

Administrative expenses

Our administrative expenses comprise primarily of general and administrative expenses such as audit and consulting, marketing costs, charity, travelling and entertainment, office equipment, as well as depreciation expenses related to our office use motor vehicles, bad debt provisions and other provisions.

Profit on disposal of investment in subsidiaries

We recognise profit or loss from the sale of interests in our subsidiaries when the risks and rewards of ownership are transferred to the buyer in the transaction.

Gross Profit

Gross profit is the result of the Group's operations and comprises revenue and other income net of all cost for trading properties sold and operating, administrative and other expenses, recognised in profit or loss during the year.

Revaluation of investment property

An external, independent valuation company (with appropriate recognised professional qualifications and recent experience in the location and categories of properties being valued) values the Company's investment property portfolio every six months. 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 in a transaction between a willing buyer and a willing seller after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion. The difference between revalued fair value of investment property and its book value is recognised as gain or loss in the statement of comprehensive income.

Operating profit before net finance costs

Operating profit before net finance costs is calculated by adding revenue, other income, profit on disposal of investment in subsidiaries and valuation gains on investment property, and subtracting operating expenses, administrative expenses and other expenses.

Finance income

Our finance income comprises net foreign exchange gain, if any, and interest income. We recognise foreign exchange gains and losses, principally in connection with US Dollar or other foreign currency denominated payables and receivables of our Russian subsidiaries, whose functional currency is the Russian Rouble. Our interest income is derived from interest on our bank deposits and gains from other investments.

Finance expenses

Our finance expense comprises loss on other investments, if any, net foreign exchange loss, if any, and interest expense on outstanding loans less interest capitalised. We recognise foreign exchange gains and losses principally in connection with US Dollar and EURO denominated payables and receivables of our Russian subsidiaries, whose functional currency is the Russian Rouble. We capitalise our interest expense with respect to our development projects that are under construction, for which amounts are not reflected as expenses in our statement of comprehensive income.

When funds are borrowed specifically for a particular project, we capitalize all actual borrowing costs related to the project less income earned on the temporary investment of such borrowings and when funding for a project is obtained from our general funds, we capitalise only funding costs related to the particular project based on the weighted average of the borrowing costs applicable to our general funds. Capitalisation of borrowing costs commences when the activities to prepare the asset are in process and expenditures and borrowing costs are incurred. Capitalisation of borrowing costs may continue until the assets are ready for their intended use.

Foreign currency gain or loss on financial assets and financial liabilities is reported on a net basis as either finance income or finance expense depending on whether foreign currency movements are in a net gain or net loss position.

Income tax expense

Income taxes are calculated based on tax legislation applicable to the country of residence of each of our subsidiaries and, as a company based and organised in Cyprus, we are subject to income tax in Cyprus. We and our Cypriot subsidiaries are currently subject to a statutory corporate income tax rate of 12.5% in Cyprus. Our Russian subsidiaries were subject to corporate income tax at a rate of 20%.

Capitalisation of Costs for Properties under Development 

We capitalise all costs directly related to the purchase and construction of properties developed as both investment properties and trading properties, including costs to acquire land rights and premises, design costs, permit costs, costs of general contractors, costs relating to the lease of the underlying land and the majority of employee costs related to such projects.

In addition, we capitalise financing costs related to development projects only during the period of construction. We do not, however, commence the capitalising of financing costs related to expenditures on a project until construction has begun. Since the Company's adoption of IAS 40 from 1 January 2009, upon completion of construction works, property classified as investment property under development (which are those properties that are being constructed or developed for future use to earn rental income or for capital appreciation) is appraised to market value and reclassified as an investment property and any gain or loss on appraisal is recognised in our statement of comprehensive income. Trading properties, which include those projects where we intend to sell the entire project as a whole or in part (this principally includes our residential development projects), are represented on our balance sheet at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less the estimated costs of completion and sale.

Exchange Rates

Our consolidated financial statements are presented in US Dollars, which is our functional currency. The functional currency of our Russian subsidiaries and eight Cyprus companies is the Russian Rouble. The balance sheets of our Russian subsidiaries are translated into US Dollars in accordance with IAS 21, whereby assets and liabilities are translated into US Dollars at the rate of exchange prevailing at the balance sheet date and income and expense items are translated into US Dollars at the average exchange rate for the period.

If the volatility of the exchange rates is high for a given year or period, the Company uses the average rate for shorter periods i.e. quarters or months for income and expense items. All resulting foreign currency exchange rate differences are recognised directly in our shareholders' equity under the line item "translation reserve."

When a foreign operation is disposed of in its entirety or partially such that control 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. The monetary assets and liabilities of our Russian subsidiaries that are denominated in currencies other than Russian Roubles are initially recorded by our subsidiaries at the exchange rate between the Russian Rouble and such foreign currency prevailing at such date. Such monetary assets and liabilities are then retranslated into Russian Roubles at the exchange rate prevailing at each subsequent balance sheet date. We recognise the resulting exchange rate differences between the dates at which such assets or liabilities were originally recorded and at subsequent balance sheet dates as foreign exchange losses and gains in our statement of comprehensive income. In particular, during the period under review, we have recognised foreign exchange rate gains and losses in connection with US Dollar and EURO denominated payables and receivables of our Russian and foreign subsidiaries. 

Recovery of VAT

We pay VAT to the Russian authorities with respect to construction costs and expenses incurred in connection with our projects, which, according to Russian tax law, can be recovered upon completion of construction. Under Russian VAT legislation, VAT can also be claimed during the period of construction provided that all required documentation is presented to the VAT authorities.

Deferred Taxation

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

Under Russian tax law, capitalisation of certain costs in relation to the design, construction and financing of projects that are capitalised for the purposes of consolidated financial statements under IFRS is not allowed. As a result, our tax bases in the related assets may be lower than our accounting bases for IFRS purposes, which would result in deferred tax liabilities. However, the recognition of such costs as expenses may result in accumulated tax losses for Russian tax purposes that we may be able to carry forward against estimated future profits, resulting in deferred tax assets. Deferred tax assets are recognised for unused tax losses, unused 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 used.

Measurement of fair values

Our future results of operations may be affected by our measurement of the fair value of our investment properties and changes in the fair value of such properties. Upon completion of construction, the projects that we have classified as investment property under development are reassessed at fair value and reclassified as investment property, and any gain or loss as a result of reassessment is recognised in our statement of comprehensive income.

Any change in fair value of the investment property under development is thereafter recognised as a gain or loss in the statement of comprehensive income. Accordingly, fair value measurements of investment properties under development may significantly affect results of operations even if the Company does not dispose of such assets.

We have an established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values and reports directly to the CFO. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified.

 

Results of Operations

Description of Statement of comprehensive income Line Items

Summary of statement of comprehensive income for 2018 and 2017

US$ million

For the year ended 31 December 2018

For the year ended 31 December 2017

               Change 2018/2017

         US$ million

              %% 

Revenue

 

 

 

 

Construction consulting/management services

0.0

             0.2

         (0.2)

-98.5%

Rental income

125.5

             117.0

        8.5

7.2%

Non-core activity revenue

0.9

0.0

0.9

100%

Sale of residential

14.7

            61.8

           (47.2)

-76.3%

Sale of residential - transferred over time

154.9

0.0

154.9

100%

 

296.0

          179.1

      117.0

65.3%

Other income

3.3

           3.8

(0.5)

-14.3%

Expenses

 

 

 

 

Operating expenses

(63.4)

(57.1)

    (6.3)

11.1%

Administrative expenses

(5.5)

       (6.0)

       0.5

-8.0%

(including Bad debt provisions and write-offs)

(0.1)

   (0.1)

  (0.0)

-18.2%

Cost of sales of residential

(11.7)

  (58.4)

   46.7

-80.0%

Cost of sales of residential - transferred over time

(124.8)

0.0

(124.8)

100%

Other expenses

(4.5)

   (2.4)

   (2.2)

90.4%

 

(206.6)

     (120.0)

  (86.6)

72.2%

Share of the after tax (loss)/profit of joint ventures

0.0

      2.0

   (2.0)

-100.0%

 

 

 

 

 

Gross profit

 89.4

       61.0

  28.4

46.6%

Profit on disposal of investments in subsidiaries

(0.0)

   (3.9)

  3.9

-100.0%

Profit on purchase of 50% of JV

0.0

     7.5

    (7.5)

-100.0%

Valuation gain/(loss) on properties

     (11.5)

    2.0

     (13.5)

-668.4%

Impairment loss on inventory of real estate

      -  

         -  

    -  

0.0%

 

 

 

 

 

Results from operating activities

 77.9

66.6

11.3

17.0%

 

 

 

 

 

Finance income

1.6

    0.8

0.8

118.6%

Finance expense

(35.2)

     (50.4)

   15.2

-30.2%

FX Gain/( Loss)

(2.3)

         12.4

    (14.6)

-118.4%

Net finance income/(costs)

(35.8)

       (37.3)

      1.4

-3.9%

 

 

 

 

 

Profit before income tax

42.1

   29.3

        12.8

43.5%

 

 

 

 

 

Income tax expense

(10.5)

    (34.0)

23.4

-69.0%

 

 

 

 

 

Profit (Loss) from continuing operations

31.5

               (4.7)

          36.2

-776%

 

Revenue - General Overview

To date, we have derived revenues from three sources: rental income, sale of residential properties and construction consulting and management fees.

Rental income

We derive rental income from our investment properties and hotels that we acquired or developed in the past.

US$ million

For the year ended 31 December 2018

For the year ended 31 December 2017

Change 2018/2017

US$ million

%% 

Investment property

AFIMALL City

85.9

           81.8

   4.1

5.0%

Premises at Tverskaya Zastava Square

1.9

2.0

     (0.0)

-2.2%

Berezhkovskya office building

1.8

1.9

(0.1)

-5.1%

Ozerkovskaya (Aquamarine) III

4.1

1.0

3.0

298.5%

H2O office building

0.8

0.9

     (0.1)

-12.5%

Premises at Tverskaya Plaza IV

0.0

0.1

     (0.0)

-74.6%

Other land bank assets

0.1

0.0

    0.0

58.8%

Paveletskaya I

0.1

0.0

0.0

54.6%

Hotels

Plaza Spa Hotel (Kislovodsk)

18.5

17.1

   1.4

8.2%

Plaza Spa Hotel (Zheleznovodsk)

6.2

6.5

      (0.3)

-4.4%

Aquamarine hotel

6.1

5.6

      0.4

7.9%

 

 

 

 

 

Total

125.5

117.0

8.4

7.2%

 

Sale of residential

US$ million

For the year ended 31 December 2018

For the year ended 31 December 2017

Change 2018/2017

US$ million

%% 

Revenue

Odinburg

5.7

61.4

(55.6)

-90.6%

Ozerkovskaya II

0.1

0.5

        (0.4)

-82.4%

Paveletskaya II

8.8

-

8.8

100%

 

 

 

 

 

Total

14.7

61.8

(47.2)

-76.3%

           

Sale of residential - transferred over time

US$ million

For the year ended 31 December 2018

For the year ended 31 December 2017

Change 2018/2017

US$ million

%% 

Revenue

Paveletskaya II

39.1

-

39.1

100%

Botanic Garden

40.2

-

40.2

100%

Pochtovaya

38.4

-

38.4

100%

Odinburg

37.2

-

37.2

100%

 

 

 

 

 

Total

154.9

-

154.9

100%

           

 

Sale of residential. Our income from sale of residential increased by US$107.7 million in total, from US$61.8 million in 2017 to US$169.6 million in 2018, due to the IFRS 15 adoption. For more details see Note 5 to the consolidated financial statements.

Operating expenses. Our operating expenses increased by 11.1% year-on-year to US$63.4 million in 2018 (2017: US$57.1 million). More than half of operating expenses' rise is explained by amended property tax calculation methodology. Other factor causing increase in operating costs relates to our marketing efforts as for the projects AFI Residence Paveletskaya, Bolshaya Pochtovaya and Botanic Garden.

Administrative expenses. Our administrative expenses decreased by 8.0% year-on-year to US$5.5 million in 2018 (2017: US$6.0 million). The decrease is attributable to the cost saving initiatives across the Company.

Net valuation gain/ (losses) on properties.  Net result of investment property valuation changed from a gain of US$2.0 million in 2017 to a loss of US$11.5 million in 2018. For additional information, please refer to "Portfolio Valuation" section below.

Finance income. Our finance income increased by 118.6% year-on-year to US$1.6 million in 2018 (2017: US$0.8 million). The increase was a result of more efficient cash management. 

Finance expense. Our finance expense decreased by 30.2% year-on-year to US$35.2 million in 2018 (2017: US$50.4 million), as a result of  repayment of Ozerkovskaya (Aquamarine) III loan and decrease of interest rate due to the conversion of US$ denominated loans into EUR.

FX Gain/ (Loss). We recorded a foreign exchange loss of US$2.3 million in 2018, against a gain of US$12.4 million in 2017. This was a result of Russian Rouble depreciation versus the US Dollar during 2018.

Income tax expense. Our current tax expense decreased by US$ 8.5 million to US$ 4.3 million due to the additional Russian capital gain tax from sale of non-residential premises to an end-user at Ozerkovskaya III Business Centre incurred in Q4 2017. Deferred tax expense decreased by US$ 14.9 million to US$ 6.2 million.

Profit/Loss for the year. Due to the factors described above, we recorded a US$ 31.5 million net gain for 2018 compared to net loss of US$4.7 million for 2017.

 

Liquidity and Capital Resources

Cash flows

Summary of cash flows for 2018 and 2017

US$ thousand

For the year ended 31 December 2018

For the year ended 31 December 2017

Net cash from operating activities

                          64,438

                         104,735

Net cash from/(used in) investing activities

(17,805)

105,864

Net cash from/(used in) financing activities

                    (50,767)

                    (125,271)

Effect of exchange rate fluctuations

                     (2,331)

                     (479)

Net increase/(decrease) in cash and cash equivalents 

                         (6,465)

                         84,849

Cash and cash equivalents at 1 January

                         95,468

                         10,619

Cash and cash equivalents at 31 December*

                         89,003

                         95,468

* Note: the cash and cash equivalents do not include US$11.2 million (2017: US$10.5 million) fair value of marketable securities.

 

Net cash from operating activities

Net cash from operating activities decreased to US$64.4million in 2018, from US$104.7 million in 2017. The decrease is attributable to the adoption and application of IFRS 15 Revenue from Contracts with Customers from 1 January 2018.

Net cash from investing activities

Net cash outflow used in investing activities amounted to US$ 17.8 million in 2018 against cash from investing activity amounted to US$ 105.9 in 2017 attributable to cash inflow from sale of two buildings at Aquamarine III Business Centre in 2017.

 

Net cash used in financing activities

Net cash used in financing activities increased to a negative US$50.8 million in 2018 from a negative US$125.3 million in 2017 due to refinancing of Bellgate loan and repayment of Ozerkovskaya III loan in January 2018. For further details please see Note 27 to the consolidated financial statements. 

Capital Resources

Capital Requirements

We require capital to finance capital expenditures, consisting of cash outlays for capital investments in active real estate development projects; repayment of debt; changes in working capital; and general corporate activities. 

Real estate development is a capital-intensive business, and we expect to have significant ongoing liquidity and capital requirements in order to finance our active development projects.

For the foreseeable future, we expect that we will continue to rely on our financing activities to support our investing and operating activities. We also expect that our capital expenditures in connection with the development of real estate properties will comprise the majority of our cash outflows for the foreseeable future.

AFI Development ended 2018 with of approximately US$100.2 million in cash, cash equivalents and marketable securities on our balance sheet and a debt[7] to equity level of 68%.

The Company's financing strategy aims to maximise the amount of debt financing for projects under construction while maintaining healthy loan-to-value levels. After delivery and commissioning, the aim is to refinance properties at more favourable terms, including longer amortisation periods, lower interest rates and higher principal balloon payments. Property rights and shares of property holding companies are mainly used as collateral for the debt. We strongly prefer, whenever possible, to use non-recourse project level financing.

As of December 31, 2018 our debt portfolio was as follows:

Project / Subsidiary

Lending bank

Max dept limit

Balance as of Dec-31, 2018

Available (US$ mn)

Nominal Interest rate

Currency

Maturity

 (US$ mn)

 (US$ mn)

AFIMALL City / Bellgate Constractions Ltd

VTB Bank JSC

36.5 billion rub

135.8

-

CBR + 0.75%

RUR

27/12/2022

324.0

4.2%

EUR

27/12/2022

Plaza Spa Hotel (Kislovodsk) / Sanatorium Plaza LLC

VTB Bank JSC

21.3

14.4

-

4.2%

EUR

21/02/2022

11.8

11.3

4.2%

EUR

20/09/2022

Plaza Spa Hotel (Zheleznovodsk) / Sanatorium Plaza SPA LLC

VTB Bank JSC

18.6

18.0

-

4.2%

EUR

20/09/2022

 

The total balance of secured debt financing reached US$503.52 million as at 31 of December 2018, including US$503.4 million of Principal Debt and US$0.17 million of accrued interest with average interest rate 5.4% per annum as at 31.12.2018 (6.9% per annum as at 31.12.2017) (for more details see note 27 to our consolidated financial statements).

As at 31 December 2018, our loans and borrowings were payable as follows:

US$ thousand

As at 31 December 2018

As at 31 December 2017

 
 

Less than one year

                     16,433

                         86,775

 

Between one and five years

                   487,348

                   492,484

 

Total

                   503,781

579,259

 

 

Portfolio Valuation

In 2018 Jones Lang LaSalle LLC ("JLL") continued to serve as the Company independent appraisers. As at 31 December 2018, based on the JLL independent appraisers' report, the value of AFI Development's portfolio of investment properties stood at US$742.6 million, while the value of the portfolio of investment property under development stood at US$141.9 million.

Consequently, the total value of the Company's assets, based predominantly on independent valuation as of 31 December 2018, decreased 12% year-on-year to US$1.25 billion, compared to US$1.42 billion as at 31 December 2017. The drop in values was mostly technical, triggered by the exchange rate fluctuation effect (the rouble depreciated by 20.61% YoY) and reduction in the book values of residential projects due to delivery of apartments in AFI Residence Paveletskaya in Q2 2018 and the implementation of IFRS 15.

 

 

Property

Valuation 31/12/2018, US Dollars

Valuation 31/12/2017, US Dollars

Change in valuation, %

Balance sheet value 31/12/2018, US Dollars

Balance sheet value 31/12/2017, US Dollars

Investment property

1

AFIMALL City

637,300,000

696,000,000

-8%

637,300,000

696,000,000

2

Ozerkovskaya III

57,430,000

63,200,000

-9%

57,430,000

63,200,000

3

Tverskaya Plaza II

18,000,000

21,700,000

-17%

18,000,000

21,700,000

4

Berezhkovskaya

9,970,000

11,900,000

-16%

9,970,000

11,900,000

5

Paveletskaya I

9,520,000

11,712,379

-19%

9,520,000

11,810,000

6

H2O

6,980,000

9,808,249

-29%

6,980,000

9,890,000

7

Tverskaya Plaza Ib

3,390,000

3,560,000

-5%

3,390,000

3,560,000

 

Total

742,590,000

817,880,628

-9%

742,590,000

818,060,000

Investment property under development

8

Tverskaya Plaza IV

54,000,000

67,000,000

-19%

54,000,000

67,000,000

9

Tverskaya Plaza Ic

61,100,000

66,300,000

-8%

61,100,000

66,300,000

10

Kossinskaya

25,700,000

28,700,000

-10%

25,700,000

28,700,000

11

Starokaluzhskoye shosse

1,080,000

1,240,000

-13%

1,080,000

1,240,000

 

 

 

 

 

 

 

 

Total

141,880,000

163,240,000

-13%

141,880,000

163,240,000

Trading property & Trading property under development

13

AFI Residence Paveletskaya

n/a

n/a

-

53,204,937

114,983,691

14

Odinburg

n/a

n/a

-

90,326,793

108,815,920

15

Bolshaya Pochtovaya

n/a

n/a

-

75,556,973

84,336,992

16

Botanic Garden

n/a

n/a

-

77,835,579

50,364,056

17

Ozerkovskaya II

n/a

n/a

-

958,253

2,027,075

 

Total

-

-

-

297,882,536

360,527,734

Hotels

18

Plaza Spa Hotel Kislovodsk

n/a

n/a

-

40,841,822

44,942,392

19

Aquamarine Hotel

n/a

n/a

-

12,986,550

15,750,733

20

Plaza Spa Hotel Zheleznovodsk

n/a

n/a

-

9,575,647

11,774,505

21

Park Plaza hotel Kislovodsk

n/a

n/a

-

3,549,859

4,240,732

 

Total

-

-

-

66,953,879

76,708,362

 

Grand Total

884,470,000

981,120,628

-10%

1,249,306,414

1,418,536,096

 

 

Principal Business Risks and Uncertainties Affecting the Company

 

Risk management framework

The Board of Directors is ultimately responsible for the establishment and oversight of the Company's risk management framework as well as for developing and monitoring the Company's risk management policies.

The Company's risk management policies are established to identify and analyse the risks faced by the Company, 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 Company's activities. The Company, 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 Company's Audit Committee oversees management monitoring of compliance with the Company's risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Board of Directors requests management to take corrective actions as necessary and submit follow up reports to the Audit Committee and the Board, addressing deficiencies found.

Credit risk

Credit risk is the risk of financial loss to AFI Development if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company's receivables from customers and investment securities.

Trade and other receivables

Financial assets that are potentially subject to credit risk consist principally of trade and other receivables. The carrying amount of trade and other receivables represents the maximum amount exposed to credit risk. Credit risk arises from cash and cash equivalents as well as credit exposures with respect to rental customers, including outstanding receivables. The Company has policies in place to ensure that, where possible, rental contracts are made with customers with an appropriate credit history. Cash transactions are limited to high-credit-quality financial institutions. The utilisation of credit limits is regularly monitored.

AFI Development has no other significant concentrations of credit risk, although collection of receivables could be influenced by economic factors.

Investments

In February 2018 the Board of Directors approved a new cash management and investment policy allowing the Company to invest 20% of its available cash into medium and high risk instruments, including externally managed investment products. 80% of available cash is invested into bank deposits and money market to guarantee liquidity.

The management monitors liquidity of the Company daily. The Board reviews and discusses the investment portfolio on quarterly basis.

Guarantees

The Company's policy is to provide financial guarantees to wholly-owned subsidiaries in exceptional cases. In negotiations with lending banks, the Company aims to avoid recourse to AFI Development on loans taken by subsidiaries.

All of AFI Development guarantees under a loan facility agreement of Bellgate Constructions Limited (AFIMALL City), Krown Investments LLC (Ozerkovskaya III) and OJSC MKPK (AFI Residence Paveletskaya) were terminated in 2018 due to repayment of debt. As at 31 December 2018, there were no outstanding guarantees.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. AFI Development's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's reputation. Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Company aims to maintain flexibility in its funding requirements by keeping cash and committed credit lines available.

Management monitors AFI Development's liquidity position on a daily basis and takes necessary actions, if required. The Company structures its assets and liabilities in such a way that liquidity risk is minimised.

Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the available returns for shareholders. We are exposed to market risks from changes in foreign currency exchange rates, interest rates and equity prices. We do not use financial instruments, such as foreign exchange forward contracts, foreign currency options and forward rate agreements, to manage these market risks.

Interest rate risk

We are subject to market risk deriving from changes in interest rates, which may affect the cost of our current floating rate indebtedness and future financing. As of 31 December 2018, 73 % of our financial liabilities were fixed rate. For more detail see note 32 to our consolidated financial statements.

Currency risk

The Company is exposed to currency risk on future commercial transactions, recognised monetary assets and liabilities and net investments in foreign operations that are denominated in a currency other than the respective functional currencies of AFI Development's entities, primarily the US Dollar, Russian Rouble and the Euro.

Operational risk

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company's processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group's operations.

The Company's priority is to meet construction and delivery schedule of residential premises to customers. [To preserve once received construction rights the Company is obliged to accomplish construction within a pre-set time schedule.] The Company owns a number of valid building permits and is exposed to the risk of construction rights loss in case of breach of construction time schedule.   

The Company's objective is to manage operational risk so as to balance the need to avoid financial losses and damage to the Group's reputation with overall cost effectiveness.

The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Company standards for the management of operational risk.

Renovation Programme

The launch of the municipal "Renovation Programme" in Moscow will create a large new state-owned player mainly in the economy and comfort-class segments. Due to significant uncertainty, currently existing on the market, as for further evolvement of this programme, the Company's management along with other market players believe that the programme can have a significant influence on the Moscow housing market. For details on the "Renovation Programme" please refer to the Market Update section above. 

Critical Accounting Policies

Critical accounting policies are those policies that require the application of our management's most challenging, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies involve judgments and uncertainties that are sufficiently sensitive to result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies are those described below.

A detailed description of certain of the main accounting policies we use in preparing our consolidated financial statements is set forth in notes 3 and 5 to our consolidated financial statements.

Estimates regarding fair value

We make estimates and assumptions regarding the fair value of our investment properties that have a significant risk of causing a material adjustment to the amounts of assets and liabilities on our balance sheet. In particular, our investment properties under development are remeasured at fair value upon completion of construction and the gain or loss on remeasurement is recognised in our income statement, as appropriate. In forming an opinion on fair value, we consider information from a variety of sources including, among others, the current prices in an active market, third party valuations and internal management estimates.

The principal assumptions underlying our estimates of fair value are those related to the receipt of contractual rentals, expected future market rentals, void/vacancy periods, maintenance requirements and discount rates that we deem appropriate. We regularly compare these valuations to our actual market yield data, actual transactions and those reported by the market. We determine expected future market rents on the basis of current market rents for similar properties in the same location and condition. For further details, please refer to Note 3 to our consolidated financial statements.

Impairment of financial assets

We recognise impairment losses with respect to financial assets, including loans receivable and trade and other receivables, in our income statement if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. We test significant financial assets for impairment on an individual basis and assess our remaining financial assets collectively in groups that share similar credit characteristics. Impairment losses with respect to financial assets are calculated as the difference between the asset's carrying amount and the present value of the estimated future cash flows of the asset discounted at the original effective interest rate of that asset.

Estimating the discounted present value of the estimated future cash flows of a financial asset is inherently uncertain and requires us both to make an estimate of the expected future cash flows from the asset and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Changes in one or more of these estimates can lead us to either recognising or avoiding impairment charges

Impairment of non-financial assets

We recognise impairment loss with respect to non-financial assets, including investment property under development and trading properties under construction, if the carrying amount of the asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, we discount estimated future cash flows of the asset to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The carrying amounts of impaired non-financial assets are reduced to their estimated recoverable amount either directly or through the use of an allowance account and we include the amount of such loss in our income statement for the period.

We assess at each reporting date whether there is any indication that a non-financial asset may be impaired. If any such indication exists, we then estimate the recoverable amount of the asset. Estimating the value in use requires us to make an estimate of the expected future cash flows from the asset and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The development of the value in use amount requires us to estimate the life of the asset, its expected cash flows over that life and the appropriate discount rate, which is primarily based on our weighted average cost of capital, itself subject to additional estimates and assumptions. Changes in one or all of these assumptions can lead to us either recognizing or avoiding impairment charges.

Deferred income taxes

We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves a jurisdiction-by-jurisdiction estimation of actual current tax exposure and the assessment of the temporary differences resulting from differing treatment of items, such as capitalization of expenses, among others, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must assess, in the course of our tax planning process, our ability and the ability of our subsidiaries to obtain the benefit of deferred tax assets based on expected future taxable profit and available tax planning strategies. If, in our management's judgment, the deferred tax assets recorded will not be recovered, a valuation allowance is recorded to reduce the deferred tax asset.

Significant management judgment is required in determining our provision for income taxes, deferred tax assets, deferred tax liabilities and valuation allowances to reflect the potential inability to fully recover deferred tax assets. In our consolidated financial statements, the analysis is based on the estimates of taxable income in the jurisdictions in which we operate and the period over which the deferred tax assets and liabilities will be recoverable.

If actual results differ from these estimates, or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could adversely affect our financial position and results of operations.

Share-based payment transactions

The fair value of employee share options is measured using a binomial lattice model. The fair value of share appreciation rights is measured using the Black-Scholes formula. Measurement inputs include share price on the measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historic experience and general option holder behaviour), expected dividends and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.

Related Party transactions

During 2018, the Company had one related party transaction, as defined in the UK Listing Rules:

On 29th August 2018 the Board of Directors of the Company approved granting of a loan in the maximum amount of EUR 5 million to Grosolim Ltd, a company controlled by Mr Leviev. The loan is to be provided at Euribor + 5.2% annual interest rate, the interest will be paid quarterly while the principal amount will be paid at 5-year maturity. The loan is secured by a personal guarantee of Mr Lev Leviev.  In September 2018 one drawdown of this loan in the amount of EUR1 million was made on 12 April 2019 the Company received the repayment of total outstanding amount of the loan including accrued interest.

 

 

 

AFI DEVELOPMENT PLC

 

FINANCIAL STATEMENTS

 

For the year ended 31 December 2018

 

 

C O N T E N T S

 

 

                                                                                                                               

 

Board of Directors and Professional Advisers                                                            

 

Management's Report                                                                                              

 

Directors' Responsibility Statement                                                                           

 

Independent Auditors' Report                                                                                   

 

Consolidated Financial Statements                                                                             

 

Separate Financial Statements of the Parent Company                                               

 

 

 

 

 

 

BOARD OF DIRECTORS AND PROFESSIONAL ADVISERS

 

 

 

Board of Directors                 Elias Ebrahimpour - Chairman (appointed on 1 January 2019)

 

                                               Lev Leviev - Chairman (resigned on 31th August 2018)

                                                                                                                               

                                               Mark Groysman (appointed on 1st September 2018 and resigned on 1 December 2018)

 

                                               Avraham Noach Novogrocki (appointed on 1 December 2018)

 

                                               Panayiotis Demetriou

 

                                               David Tahan (resigned on 1 January 2019)

 

                                              

Secretary                                Fuamari Secretarial Limited

 

 

Independent Auditors             KPMG Limited

 

 

Bankers                                      Joint Stock Company VTB Bank

 

Joint Stock Commercial Savings Bank of the Russian Federation (Sberbank)

 

Otkritie FC Bank

 

VP Bank (Switzerland) Ltd

 

 

Registered Office                   Spyrou Araouzou 165,

                                               Lordos Waterfront Building,

                                               3035 Limassol,

                                               Cyprus

 

 

 

 

 

 

 

MANAGEMENT REPORT

 

 

The Board of Directors of AFI Development Plc (the "Company") presents to the members its management report together with the audited consolidated financial statements of the Company for the year ended 31 December 2018.

 

PRINCIPAL ACTIVITY AND NATURE OF OPERATIONS OF THE COMPANY

 

The principal activities of the Group, which remained unchanged from last year, are real estate investment and development. The principal activity of the Company is the holding of investments in subsidiaries.

 

EXAMINATION OF THE DEVELOPMENT, POSITION AND PERFORMANCE OF THE ACTIVITIES OF THE GROUP

 

AFI Development is one of the leading real estate development companies operating in Russia. Established in 2001, AFI Development is a publicly traded subsidiary of Flotonic Limited.

 

AFI Development is listed on the Main Market of the London Stock Exchange and aims to deliver shareholder value through a commitment to innovation and continuous project development, coupled with the highest standards of design, construction, quality and customer service.

 

AFI Development focuses on developing and redeveloping high quality commercial and residential real estate assets across Russia, with Moscow being its main market. The Company's existing portfolio comprises commercial projects focused on offices, shopping centres, hotels and mixed-use properties, and residential projects in prime locations in Moscow. AFI Development's strategy is to sell the residential properties it develops and to either lease the commercial properties or sell them for a favourable return.

 

As at 31 December 2018, the Company's portfolio consisted of 7 investment properties, 4 investment properties under development, 4 trading properties under construction, 2 trading properties and 4 hotel projects.

 

FINANCIAL RESULTS

 

The Group's results are set out in the consolidated income statement on page 13. The profit of the Group for the year before taxation amounted to US$42,084 thousand (2017: US$29,327 thousand). The profit after taxation attributable to the Group's owners amounted to US$31,510 thousand (2017: loss US$4,918 thousand).

 

DIVIDENDS

 

The Board of Directors does not recommend the payment of a dividend and the profit for the year is transferred to retained earnings or accumulated losses.

 

MAIN RISKS, UNCERTAINTIES AND USE OF FINANCIAL INSTRUMENTS

 

The Group is exposed to market price risk, interest rate risk, credit risk, liquidity risk. The most significant risks faced by the Group and the steps taken to manage these risks and the Group's financial risk management objectives and policies are described in note 32 of the consolidated financial statements.

 

FUTURE DEVELOPMENTS

 

The Group is one of the leading real estate development companies operating in Russia. It focuses on developing and redeveloping high quality commercial and residential real estate assets in Moscow and the Moscow Region.  The strategy during the reporting period and for the future periods is to sell the residential properties that the Group develops and to either lease the commercial properties that the Group develops or sell them if the Group is able to achieve a favourable return.

 

GOING CONCERN

 

As described in note 2i the consolidated financial statements have been prepared on a going concern basis, which assumes that the Group is in a position to generate enough cash to cover its working capital requirements and debt service obligations in order to continue its operations in the foreseeable future.

 

SHARE CAPITAL

 

There were no changes to the share capital of the Company during the current year.  As at the year end the share capital of the Company comprised of:

 

·  

523,847,027 "A" shares of US$0.001 and,

·  

523,847,027 "B" shares of US$0.001

 

All "A" shares are on deposit with BNY (Nominees) Limited and each "A" share is represented by one GDR listed on the London Stock Exchange ("LSE"). All "B" shares were admitted to a premium listing of the Official list of the UK Listing Authority and to trading on the main market of LSE.

 

IMPLEMENTATION AND COMPLIANCE TO THE CODE OF CORPORATE GOVERNANCE

 

Although the Company is incorporated in Cyprus, its shares are not listed on the Cyprus Stock Exchange, and therefore it is not required to comply with the corporate governance regime of Cyprus. Pursuant to the UK Listing Rules however, the Company is required to comply with the UK Corporate Governance Code or to explain its reasons for non-compliance. The Company's policy is to achieve best practice in its standards of business integrity in relation to all activities. This includes a commitment to follow the highest standards of corporate governance throughout the AFI Development group. For the financial year 2018, the Company applied the UK Corporate Governance Code published in April 2016 (the "Code"), on which the Company reported in its 2018 Annual report. The Company is applying the UK Corporate Governance Code published in July 2018 to the financial year 2019 and will report on this in next year's Annual Report.

 

The directors are pleased to confirm that the Company has complied with the provisions of the Code for the period under review, with the exception that the Executive Chairman of the Board, Mr Leviev, was not independent on appointment (as recommended by section A.3.1 of the Code) by virtue of the fact that he was, until 31st August 2018, an Executive Chairman while being, indirectly, a major shareholder of the Company. Mr Leviev holds a controlling stake in Flotonic Limited, the major shareholder of the Company. The directors had considered Mr Leviev to be a key member of the Company's leadership during his period in office and greatly valued his oversight and management role. It should be noted that Mr Leviev resigned from his position on the Board on 31 August 2018.

 

PARTICIPATION OF DIRECTORS IN THE COMPANY'S SHARE CAPITAL

 

None of the Directors holds shares of the Company directly. Mr Lev Leviev, a former Executive Chairman of the Board, holds 64.88% indirectly through Flotonic Limited as described in detail in note 33 "Group Composition".

 

BRANCHES

 

The Group operates six branches and/or representative offices of Cypriot, BVI and Luxembourg entities in the Russian Federation. These are Bellgate Construction Ltd branch, which operates AFIMALL City project, Amerone Ltd branch, Bugis Finance branch, Aquamare Uno Ltd branch and Triumvirate I S.a r.I branch hold investment properties under development projects and Bastet Estates Ltd branch acting as sale agents for residential properties.

 

BOARD OF DIRECTORS

 

The members of the Board of Directors as at 31 December 2018 and at the date of this report are shown on page 1.  The Directors' date of appointment or resignation, if applicable, is indicated on page 1.  The term of those that have not resigned will expire on the date of the next annual general meeting of the shareholders but all of them are eligible for re-election. There were no significant changes in the assignment of responsibilities of the Board of Directors during the current year. Remuneration of Board of Directors is disclosed in note 38.

 

OPERATING ENVIRONMENT OF THE COMPANY

 

Any significant events that relate to the operating environment of the Company are described in note 32 to the consolidated financial statements.

 

EVENTS AFTER THE REPORTING PERIOD

 

Events which took place after the reporting date and which have a bearing on the understanding of the financial statements are described in note 39 of the consolidated financial statements.

 

RELATED PARTY TRANSACTIONS

 

Disclosed in note 38 of the consolidated financial statements.

 

INDEPENDENT AUDITORS

 

The independent auditors, KPMG Limited, have expressed their willingness to continue offering their services. A resolution reappointing the auditors and giving authority to the Board of Directors to fix their remuneration will be proposed at the Annual General Meeting.

 

 

                                                                                          By order of the Board

 

 

                                                                                      Fuamari Secretarial Limited

                                                                                                   Secretary

Nicosia, 15 April 2019

 

 

 

 

STATEMENT BY THE MEMBERS OF THE BOARD OF DIRECTORS AND THE COMPANY OFFICIALS RESPONSIBLE FOR THE DRAFTING OF THE CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH THE PROVISIONS OF CYPRUS LAW 190(I)/2007 ON TRANSPARENCY REQUIREMENTS

 

We, the members of the Board of Directors and the Company officials responsible for the drafting of the consolidated financial statements of AFI Development Plc (the 'Company') for the year ended 31 December 2018, the names of which are listed below, confirm that, to the best of our knowledge:

a)

The consolidated financial statements:

 

(i)    have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union and the requirements of the Cyprus Companies Law,

 

(ii)   give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidated financial statements taken as a whole,

b)

the adoption of a going concern basis for the preparation of the financial statements continues to be appropriate based on the foregoing and having reviewed the forecast financial position of the Group; and

c)

the Management Report provides a fair review of the developments and performance of the business and the position of the Company and the undertakings included in the consolidated financial statements taken as a whole, together with a description of the principal risks and uncertainties that they face.

The Directors of the Company as at the date of this announcement are as set out below:

The Board of Directors:

Non-executive independent directors

 

 

Elias Ebrahimpour - Chairman …........................................................

 

 

Panayiotis Demetriou               .............................................................

 

 

Avraham Noach Novogrocki    .............................................................

 

 

Company officers:

Chief executive officer

Mark Groysman                       .............................................................

 

Chief financial officer

 

Alexey Miroshnikov                 .............................................................

 

15 April 2019   

 

INDEPENDENT AUDITORS' REPORT

 

TO THE MEMBERS OF

 

AFI DEVELOPMENT PLC

 

Report on the audit of the consolidated financial statements and the separate financial statements

 

Opinion

 

We have audited the accompanying financial statements of AFI Development Plc ("the Company") and its subsidiaries (the "Group"), and the separate financial statements of AFI Development Plc (the "Company"), which are presented on pages 12 to 113 and comprise the consolidated statement of financial position and the statement of financial position of the Company as at 31 December 2018, and the consolidated statements of income statement, comprehensive income, changes in equity and cash flows and the statements of income statement, comprehensive income, changes in equity and cash flows of the Company for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

 

In our opinion, the accompanying consolidated financial statements and the separate financial statements give a true and fair view of the financial position of the Group and the Company as at 31 December 2018, and of their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS-EU") and the requirements of the Cyprus Companies Law, Cap. 113, as amended from time to time (the "Companies Law, Cap. 113").

 

Basis for Opinion

 

We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the "Auditors' Responsibilities for the audit of the consolidated financial statements and separate financial statements" section of our report. We remained independent of the Group and Company throughout the period of our appointment in accordance with the Code of Ethics for Professional Accountants of the International Ethics Standards Board for Accountants ("IESBA Code"), and the ethical requirements in Cyprus that are relevant to our audit of the consolidated financial statements and the separate financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Key Audit Matters

 

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements and the separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements and the separate financial statements, as a whole, and in forming our opinion thereon and we do not provide a separate opinion on these matters.

 

Valuation of properties

See Notes 16 and 17 to the consolidated financial statements

The key audit matter

How the matter was addressed in our audit

The Group's properties include investment property portfolio of US$742,590 thousand and investment property under development portfolio of US$141,880 thousand together representing 62% of the Group's total assets as at 31 December 2018. The valuation of the Group's properties is inherently subjective due to, among other factors, the individual nature of each property, its location and the expected future rental revenue for that particular property. For properties under development, factors also include projected costs to complete and timing until completion.

The existence of significant estimation uncertainty, which could result in a material misstatement, warrants specific audit focus in this area.

Our audit procedures included evaluating the competence, capability, and objectivity of the Group's external property valuers, while considering fee arrangements for other engagements between the valuers and the Group which might exist. We carried out procedures, on a sample basis, to satisfy ourselves of the accuracy of the property information supplied to valuers by management. For properties under development we assessed the consistency of the outstanding construction costs supplied to the valuers to the Group's project budget. We assessed, on a sample basis, using also our own experts the appropriateness of the valuation methodologies and assumptions used based on our experience and knowledge of the market and by comparing them to market data.  We held discussions on key findings with the external property valuers and challenged various key inputs such as discount, vacancy and exit capitalisation rates used on a sample of properties within the property portfolio.

 

Other Information

 

The Board of Directors is responsible for the other information. The other information comprises the management report,  the preliminary statement of results, the chairman's statement, the management discussion and analysis of financial condition and results of operations and the annual report which includes the corporate governance statement and the corporate social responsibility statement but does not include the consolidated and separate financial statements and our auditor's report thereon.

 

Our opinion on the consolidated and separate financial statements does not cover the other information and we do not express any form of assurance conclusion thereon, except as required by the Companies Law, Cap.113.

 

In connection with our audit of the consolidated and separate financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.  If, based on the work we have performed on other information that we obtained prior to the date of this auditor's report, we conclude that there is a material misstatement of this other information, we are required to report that fact.

 

With regards to preliminary statement of results, the chairman's statement, the management discussion and analysis of financial condition and results of operations, the annual report and the corporate social responsibility statement we have nothing to report.

 

With regards to the management report and the corporate governance statement, our report is presented in the "Report on other legal and regulatory requirements" section.

 

Responsibilities of the Board of Directors and those charged with governance for the consolidated financial statements and the separate financial statements

 

The Board of Directors is responsible for the preparation of consolidated financial statements and separate financial statements that give a true and fair view in accordance with IFRS-EU and the requirements of the Cyprus Companies Law, Cap. 113, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements and separate financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the consolidated financial statements and the separate financial statements, the Board of Directors is responsible for assessing the Group's and Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless there is intention to either liquidate the Company and/ or the Group or to cease operations, or there is no realistic alternative but to do so.

 

The Board of Directors and those charged with governance are is responsible for overseeing the Group's financial reporting process.

 

Auditors' responsibilities for the audit of the consolidated financial statements and the separate financial statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements and the separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and separate financial statements.

 

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

 

·  

Identify and assess the risks of material misstatement of the consolidated financial statements and the separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

 

·  

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's and the Group's internal control.

 

 

·  

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors.

 

 

·  

Conclude on the appropriateness of the Board of Director's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's and the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Group and the Company to cease to continue as a going concern.

 

 

·  

Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves true and fair view.

 

 

·  

Obtain sufficient appropriate evidence regarding the financial information of the entities or the business activities of the Group and the Company to express an opinion on the consolidated and separate financial statements. We are responsible for the direction, supervision and performance of the Group and Company audit. We remain solely responsible for our audit opinion.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

 

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

 

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements and the separate financial statements of the current period and are therefore the key audit matters.

 

Report on other legal and regulatory requirements

 

Other regulatory requirements

 

Pursuant to the requirements of Article 10(2) of European Union (EU) Regulation 537/2014 we provide the following information in our Independent Auditors' Report, which is required in addition to the requirements of ISAs.

 

Date of our appointment and period of engagement

We were reappointed as auditors on 20 December 2018 by the General Meeting of the Company's members to audit the consolidated and separate financial statements of the Group and the Company for the year ended 31 December 2018. Our total uninterrupted period of engagement is 18 years, covering the periods ending 31 December 2001 to 31 December 2018.

Consistency of auditor's report to the additional report to the Audit Committee

We confirm that our audit opinion is consistent with the additional report presented to the Audit Committee dated 10 April 2019.

Provision of Non-audit Services ("NAS")

We have not provided any prohibited NAS referred to in Article 5 of EU Regulation 537/2014 as applied by Section 72 of the Auditors Law of 2017, L.53(I)2017, as amended from time to time ("Law L.53(I)/2017").

 

Pursuant to the London Stock Exchange Listing Rules we are required to review:

 

· 

The Directors' statement in relation to going concern and longer-term viability; and

· 

The part of the Corporate Governance Statement relating to the Company's compliance with the eleven provisions of the 2014 UK Corporate Governance Code specified for our review.

We have nothing to report in respect of the above.

 

Other legal requirements

Pursuant to the additional requirements of law L.53(I)2017, and based on the work undertaken in the course of our audit, we report the following:

·         

In our opinion, the management report, the preparation of which is the responsibility of the Board of Directors, has been prepared in accordance with the requirements of the Companies Law, Cap. 113, and the information given is consistent with the consolidated financial statements.

·         

In the light of the knowledge and understanding of the business and the Group's   environment obtained in the course of the audit, we have not identified material misstatements in the management report. 

·         

In our opinion, the information included in the corporate governance statement in accordance with the requirements of subparagraphs (iv) and (v) of paragraph 2(a) of Article 151 of the Companies Law, Cap. 113, and which is published on the Company's website, has been prepared in accordance with the requirements of the Companies Law, Cap, 113, and is consistent with the consolidated financial statements.

·         

In our opinion, the corporate governance statement includes all information referred to in subparagraphs (i), (ii), (iii), (vi) and (vii) of paragraph 2(a) of Article 151 of the Companies Law, Cap. 113.

 

Other Matter

 

This report, including the opinion, has been prepared for and only for the Company's members as a body in accordance with Article 10(1) of the EU Regulation 537/2014 and Section 69 of Law L.53(I)/2017 and for no other purpose.  We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whose knowledge this report may come to.

 

The engagement partner on the audit resulting in this independent auditors' report is Marios G. Gregoriades.

 

 

 

Marios G. Gregoriades, CPA

Certified Public Accountant and Registered Auditor

 

For and on behalf of

 

KPMG Limited

Certified Public Accountants and Registered Auditors

14 Esperidon Street

1087 Nicosia, Cyprus

 

15 April 2019

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

For the year ended 31 December 2018

 

 

C O N T E N T S

 

 

Consolidated Income Statement                                                                                

 

Consolidated Statement of Comprehensive Income                                                    

 

Consolidated Statement of Changes in Equity                                                             

 

Consolidated Statement of Financial Position                                                              

 

Consolidated Statement of Cash Flows                                                                      

 

Notes to the Consolidated Financial Statements                                                          

 

 

 

 

CONSOLIDATED INCOME STATEMENT

 

For the year ended 31 December 2018

 

 

 

 

2018

 2017

 

Note

US$ '000

US$ '000

 

 

 

 

Revenue

8

 296,043

 179,051

 

 

 

 

Other income

9

     3,272    

     3,819

 

 

 

 

Operating expenses

10

(63,364)

(57,054)

Carrying value of trading properties sold

21,22

(136,485)

(58,404)

Administrative expenses

11

(5,524)

(6,005)

Other expenses

12

   (4,542)

    (2,386)

Total expenses

 

 (209,915)

 (123,849)

 

 

 

 

Share of the after tax profit of joint ventures

 

             -

1,957

 

 

 

 

Gross Profit

 

   89,400

60,978

 

 

 

 

Gain on 100% acquisition of previously held interest in a joint venture

 

34

 

            -

 

7,532

 

 

 

 

(Loss)/profit on disposal of investment property

16

             -

(3,934)

 

 

 

 

(Decrease)/increase in fair value of properties

16,17

(11,494)

11,570

Impairment loss on properties

 

             -

  (9,548)

Net valuation gain/(loss) on properties

 

  (11,494)

       2,022

 

 

 

 

Results from operating activities

 

   77,906

  66,598

 

 

 

 

Finance income

 

1,635

13,119

Finance costs

 

(37,457)

(50,390)

Net finance costs

13

 (35,822)

 (37,271)
 

 

 

 

 

Profit before tax

 

42,084

29,327

Tax expense

14

(10,547)

(33,991)

 

 

 

 

Profit/(loss) for the year

 

 31,537

  (4,664)

 

 

 

 

Profit/(loss) attributable to:

 

 

 

Owners of the Company

 

31,510

(4,918)

Non-controlling interests

 

         27

     254

 

 

  31,537

  (4,664)

 

 

 

 

Earnings per share

 

 

 

Basic and diluted earnings per share (cent)

15

       3.01

      (0.47)

 

 

 

 

 

The notes are an integral part of these consolidated financial statements.

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

For the year ended 31 December 2018

 

 

 

2018

2017

 

US$ '000

US$ '000

 

 

 

Profit/(loss) for the year

  31,537   

   (4,664)

 

 

 

Other comprehensive (expense)/income

 

 

Items that are or may be reclassified subsequently to profit or loss

 

 

Realised translation difference on 100% acquisition of previously held interest in a joint venture transferred to income statement

 

-

 

(4,271)

Foreign currency translation differences for foreign operations

 (70,945)   

   14,295

Other comprehensive income for the year

 (70,945)

   10,024

 

 

 

Total comprehensive (expense)/income for the year

 (39,408)

     5,360

 

 

 

 

 

 

Total comprehensive (expense)/income attributable to:

 

 

Owners of the Company

(39,443)

5,126

Non-controlling interests

          35

       234

 

 

 

 

  (39,408)

    5,360

 

 

 

 

 

 

 

 

 

The notes are an integral part of these consolidated financial statements.

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

For the year ended 31 December 2018

 

 

 

 

 

Attributable to the owners of the Company

Non-controlling   interests

 

Total

equity

 

 

 

Share

 Share

Capital

Translation

Accumula-

 

 

 

 

 

 

capital

premium

reserve

reserve

ted losses

Total

 

 

 

 

 

US$ '000

US$ '000

US$ '000

US$ '000

US$ '000

US$ '000

US$ '000

US$ '000

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at 1 January 2017

 1,048

1,763,409

 (9,201)

(311,331)

(667,801)

  776,124

 (3,827)

  772,297

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income/(expense) for the period

 

 

 

 

 

 

 

 

 

 

Loss for the period

-

-

-

-

(4,918)

  (4,918)

254

(4,664)

 

 

Other comprehensive income

         -

               -

            -

    10,044

             -

    10,044

     (20)

    10,024

 

 

Total comprehensive income/(expense) for the period

 

 

         -

 

 

               -

     

 

            -

 

 

    10,044

 

 

   (4,918)

 

 

      5,126

 

 

      234

 

 

      5,360

 

 

 

 

 

 

 

 

 

 

 

 

 

Transactions with owners of

the Company Contributions

and distributions

 

 

 

 

 

 

 

 

 

Acquisition of non-controlling interests (note 35)

 

        -

 

              -

 

(10,132)

 

             -

 

              -

 

   (10,132)

 

 3,422

 

    6,710)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at 31 December 2017

 1,048

1,763,409

(19,333)

(301,287)

(672,719)

  771,118

 (171)

  770,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at 1 January 2018 as reported previously

 

1,048

 

1,763,409

 

(19,333)

 

(301,287)

 

(672,719)

 

  771,118

 

 (171)

 

770,947

 

 

Adjustment on initial application of IFRS 15 net of tax

 

          -

 

             -

 

            -

 

        581

 

     13,885

 

     14,466

 

        73

 

   14,539

 

 

Adjusted balance at 1 January 2018

 

 1,048

 

1,763,409

 

 (19,333)

 

(300,706)

 

 (658,834)

 

   785,584

 

      (98)

 

 785,486

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the period

 

 

 

 

 

 

 

 

 

 

Profit for the period

-

-

-

-

31,510

  31,510

27

31,537

 

 

Other comprehensive income

         -

               -

            -

  (70,953)

             -

  (70,953)

         8  

 (70,945)

 

 

Total comprehensive income for the period

 

         -

 

               -

 

            -

 

  (70,953)

 

    31,510

 

   (39,443)

 

        35

 

 (39,408)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at 31 December 2018

 1,048

1,763,409

(19,333)

(371,659)

(627,324)

  746,141

      (63)

  746,078

 

                                       

 

 

The notes are an integral part of these consolidated financial statements.

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018

 

 

 

2018

2017

 

Note

US$ '000

US$ '000

Assets

 

 

 

Investment property

16

742,590

818,060

Investment property under development

17

141,880

163,240

Property, plant and equipment

18

67,868

77,633

Long-term loans receivable

19

2,811

1,669

Intangible assets

 

230

204

VAT recoverable

20

            51

            48

Other investments

23

      5,244

               -

Non-current assets

 

  960,674

1,060,854

 

 

 

 

Trading properties

21

19,082

10,792

Trading properties under construction

22

278,800

349,735

Other investments

23

11,168

10,515

Inventories

 

1,120

1,318

Short-term loans receivable

19

578

1,090

Trade and other receivables

24

54,569

70,402

Current tax assets

 

4,431

4,114

Cash and cash equivalents

25

     89,003

     95,468

Current assets

 

   458,751

   543,434

 

 

 

 

Total assets

 

1,419,425

1,604,288

 

 

 

 

Equity

 

 

 

Share capital

26

1,048

1,048

Share premium

26

1,763,409

1,763,409

Translation reserve

26

(371,659)

(301,287)

Capital reserve

26

(19,333)

(19,333)

Accumulated losses

 

 (627,324)

  (672,719)

Equity attributable to owners of the Company

 

746,141

771,118

Non-controlling interests

35

          (63)

         (171)

Total equity

 

  746,078

   770,947

 

 

 

 

Liabilities

 

 

 

Long-term loans and borrowings

27

487,348

492,484

Deferred tax liabilities

28

54,772

42,652

Deferred income

31

   11,964

    12,641

Non-current liabilities

 

 554,084

  547,777

 

 

 

 

Short-term loans and borrowings

27

16,433

86,775

Trade and other payables

29

37,378

65,106

Advances from customers

30

65,407

     123,766

Current tax liabilities

 

            45

       9,917

Current liabilities

 

   119,263

   285,564

 

 

 

 

Total liabilities

 

   673,347

   833,341

 

 

 

 

Total equity and liabilities

 

1,419,425

1,604,288

 

The consolidated financial statements were approved by the Board of Directors on 15 April 2019.

 

........................                                                                              ...............................

Elias Ebrahimpour                                                                           Avraham Noach Novogrocki

Chairman                                                                                        Director

 

The notes are an integral part of these consolidated financial statements.

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

For the year ended 31 December 2018

 

 

 

2018

2017

 

Note

US$'000

US$'000

Cash flows from operating activities

 

 

 

Loss for the year

 

31,537

(4,664)

Adjustments for:

 

 

 

Depreciation

18

899

846

Net finance costs

13

34,568

36,549

(Increase)/decrease in fair value of properties

16,17

11,494

(11,570)

Impairment loss on properties

22

-

9,548

Share of profit in joint ventures

34

-

(1,957)

Gain on 100% acquisition of previously held interest in a joint venture

 

 

-

 

(7,532)

Loss on disposal of investment property

 

-

3,934

Tax expense/(benefit)

14

  10,547

   33,991

 

 

89,045

59,145

Change in trade and other receivables

 

15,403

(2,407)

Change in inventories

 

(31)

(217)

Change in trading properties and trading properties under construction

21,22

(32,150)

(36,734)

Change in advances and amounts payable to builders of trading properties under construction

 

 

(5,363)

 

(1,613)

Changes in advances from customers

 

30,309

68,843

Change in trade and other payables

 

(22,332)

23,164

Change in VAT recoverable on trading

 

2,630

(3,975)

Change in deferred income

 

    1,643

      1,610

Cash generated from operating activities

 

79,154

107,816

Taxes paid

 

 (14,716)

    (3,081)

 

 

 

 

Net cash from operating activities

 

  64,438

  104,735

 

 

 

 

Cash flows from investing activities

 

 

 

Acquisition of subsidiary net of cash acquired

34

-

(786)

Proceeds from sale of other investments

23

12,977

11,825

Proceeds from disposal of investment property

 

-

114,588

Proceeds from sale of property, plant and equipment

 

150

137

Interest received

 

1,169

631

Change in advances and amounts payable to builders

 

(1,591)

3,495

Payments for construction of investment property under development

  17

(5,691)

(4,865)

Payments for the acquisition/renovation of investment property

16

(793)

(998)

Change in VAT recoverable on construction

 

65

(1,565)

Acquisition of intangible assets

 

(880)

(200)

Acquisition of property, plant and equipment

18

(1,596)

(484)

Acquisition of other investments

23

(20,995)

(16,408)

Payments for loan receivable

 

(6,477)

(3,851)

Proceeds from repayment of loans receivable

 

     5,857

      4,345

 

 

 

 

Net cash from investing activities

 

  (17,805)

  105,864

 

 

 

 

 

2018

2017

 

Note

US$'000

US$'000

Cash flows from financing activities

 

 

 

Acquisition of non-controlling interests

 

-

(1,369)

Proceeds from loans and borrowings

 

586,072

43,648

Repayment of loans and borrowings

 

(605,779)

(117,442)

Interest paid

 

   (31,060)

  (50,108)

 

 

 

 

Net cash used in financing activities

 

   (50,767)

 (125,271)

 

 

 

 

Effect of exchange rate fluctuations

 

     (2,331)

        (479)     

 

 

 

 

Net (decrease)/increase in cash and cash equivalents

 

(6,465)

84,849

Cash and cash equivalents at 1 January

 

   95,468

   10,619

 

 

 

 

Cash and cash equivalents at 31 December

25

   89,003

   95,468

 

 

 

 

 

 

The notes are an integral part of these consolidated financial statements.

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

For the year ended 31 December 2018

 

 

1.   INCORPORATION AND PRINCIPAL ACTIVITY

 

AFI Development PLC (the "Company") was incorporated in Cyprus on 13 February 2001 as a limited liability company under the name Donkamill Holdings Limited. In April 2007 the Company was transformed into public company and changed its name to AFI Development PLC.  The address of the Company's registered office is 165 Spyrou Araouzou Street, Lordos Waterfront Building, 5th floor, Flat/office 505, 3035 Limassol, Cyprus.  As of 7 September 2016 the Company is a 64.88% subsidiary of Flotonic Limited, a private holding company registered in Cyprus, 100% owned by Mr Lev Leviev. The remaining shareholding of "A" shares is held by a custodian bank in exchange for the GDRs issued and listed in the London Stock Exchange ("LSE"). On 5 July 2010 the Company issued by way of a bonus issue 523,847,027 "B" shares, which were admitted to a premium listing on the Official List of the UK Listing Authority and to trading on the main market of LSE. On the same date, the ordinary shares of the Company were designated as "A" shares.

 

These consolidated financial statements comprise the Company and its subsidiaries (together referred to as the "Group") and the Group's interest in jointly controlled entities. The principal activity of the Group is real estate investment and development.

 

The principal activity of the Company is the holding of investments in subsidiaries as presented in note 33 "Group Composition".

 

2.   BASIS OF ACCOUNTING

 

i.          Going concern basis of accounting

 

Macroeconomic environment was challenging in 2018. The Rouble weakened significantly versus the dollar towards the end of 2018, the Central Bank of Russia has increased its key lending rate in December 2018 and the United States' Office of Foreign Assets Control imposed strict blocking sanctions on April 6, 2018. In addition to that, legislation and tax changes affecting real estate sector will be effective in 2019. At the same time the Russian economy is expected to grow at moderate rates.

 

Despite the challenging operating environment, the Group has recognised a profit after tax of US$31.5 million for the twelve month period ended 31 December 2018. Its cash and cash equivalents and marketable securities remained stable at circa US$100.2 million. Its current liabilities decreased to US$16.4 million due to the repayment of Ozerkovskaya III loan in January 2018.

 

Management estimates that the Group will continue to generate sufficient operating cash flows from yielding properties such as AFIMall, the hotels and BC Ozerkovskaya III so as to meet loan interest and principal payments of the refinanced loan and new loans. The management succeeded in reducing debt and refinancing loans in Euro, decreasing the interest rates by 2%, which in turn resulted in a total decrease of finance cost by 13 bps. This will enable the Company to repay the principal when it falls due and to secure stable operational existence for the foreseeable future.

 

Based on cash flow projection for following 12 month period, the management reached a reasonable conclusion that the Group is in a position to secure further financing for its projects under construction by sales proceeds and to generate enough cash to cover its working capital requirements in order to continue its operations in the foreseeable future.

 

Considering all the above conditions and assumptions, the management concluded that the Group had adequate resources to continue in operational existence for the foreseeable future and adopted the going concern basis in preparing the consolidated financial statements.

 

ii.          Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and the requirements of the Companies Law of Cyprus, Cap. 113.

 

The consolidated financial statements were authorised for issue by the Board of Directors on 15 April 2019.

 

iii.         Functional and presentation currency

These consolidated financial statements are presented in United States Dollars which is the Company's functional currency. All amounts have been rounded to the nearest thousand, unless otherwise indicated.

 

3.   Use of judgements and estimates

 

In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of the Group's 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 estimates are recognised prospectively.

 

Judgements

Information about judgements made in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes:

 

·        

Note 8 - revenue recognition: (i) whether revenue from pre-sale contracts with buyers of residential development units (flats, parking, commercial premises) is recognised over time or at a point in time, (ii) whether the price of these contracts contains element of significant finance component.

·        

Note 36 - lease classification

 

Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties at 31 December 2018 that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year is included in the following notes:

 

·       

Note 22 - lower of cost and net realisable value of trading properties under construction

·       

Note 8(C) - revenue recognition: timing of satisfaction of performance obligation and measurement of significant finance component

·       

Note 14 - provision for tax liabilities

·       

Note 28 - utilisation of tax losses

 

Measurement of fair values

A number of the Group's accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities.

 

The Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values and reports directly to the chief financial officer.

 

The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified.

 

Significant valuation issues are reported to the Group's audit committee.

 

When measuring the fair value of an asset or a liability, the Group uses observable market data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

 

·        

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

·        

Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

·        

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 

If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirely in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

 

The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

 

Further information about the assumptions made in measuring fair values is included in the following notes:

 

·     

Note 16 - investment property

·     

Note 17 - investment property under development

·     

Note 32 - financial instruments

 

4.   STANDARDS ISSUED BUT NOT YET EFFECTIVE

 

Adoption of new and revised International Financial Reporting Standards and Interpretations as adopted by the European Union (EU)

 

As from 1 January 2018, the Group adopted all changes to International Financial Reporting Standards (IFRSs) as adopted by the EU which are relevant to its operations. This adoption did not have a material effect on the consolidated financial statements except for the adoption of IFRS 15 "Revenue from contracts with customers" (see note 5).

 

The following Standards, Amendments to Standards and Interpretations have been issued by International Accounting Standards Board ("IASB") but are not yet effective for annual periods beginning on 1 January 2018. Those which may be relevant to the Group are set out below. The Group does not plan to adopt these Standards early.

 

Standards and Interpretations adopted by the EU

 

·          

IFRS 16 "Leases" (effective for annual periods beginning on or after 1 January 2019), see below for the impact.

 

 

·          

IFRS 9 (Amendments) "Prepayment Features with Negative Compensation" (effective for annual periods beginning on or after 1 January 2019)

 

In October 2017, the IASB issued "Prepayment Features with Negative Compensation (Amendments to IFRS 9)". The amendments address the issue that under pre-amended IFRS 9, financial assets with such features would probably not meet the SPPI criterion and as such would be measured at fair value through profit or loss. The IASB believes that this would not be appropriate because measuring them at amortised cost provides useful information about the amount, timing and uncertainty of their future cash flows. Financial assets with these prepayment features can therefore be measured at amortised cost or fair value through other comprehensive income provided that they meet the other relevant requirements of IFRS 9. The final amendments also contain a clarification in the accounting for a modification or exchange of a financial liability measured at amortised cost that does not result in the derecognition of the financial liability. Based on the clarification, an entity recognises any adjustment to the amortised cost of the financial liability arising from a modification or exchange in profit or loss at the date of the modification or exchange.

 

The Group is currently evaluating the expected impact of adopting the amendments on its financial statements. As such, the expected impact of the amendments is not yet known or reasonably estimable.

 

 

·          

IFRIC 23 "Uncertainty over Income Tax Treatments" (effective for annual periods beginning on or after 1 January 2019).

 

IFRIC 23 clarifies the accounting for income tax treatments that have yet to be accepted by tax authorities, whilst also aiming to enhance transparency. The key test is whether it is probable that the tax authority will accept the chosen tax treatment, on the assumption that tax authorities will have full knowledge of all relevant information in assessing a proposed tax treatment. The uncertainty is reflected using the measure that provides the better prediction of the resolution of the uncertainty being either the most likely amount or the expected value. The interpretation also requires companies to reassess the judgements and estimates applied if facts and circumstances change. IFRIC 23 does not introduce any new disclosures but reinforces the need to comply with existing disclosure requirements in relation to judgements made, assumptions and estimates used, and the potential impact of uncertainties that are not reflected. 

 

The Group is currently evaluating the expected impact of adopting the interpretation on its financial statements. As such, the expected impact of the interpretation is not yet known or reasonably estimable.

 

·          

Annual Improvements to IFRSs 2015-2017 Cycle (effective for annual periods beginning on or after 1 January 2019).

 

In December 2017, the IASB published Annual Improvements to IFRSs 2015-2017 Cycle, containing the following amendments to IFRSs:

 

IFRS 3 "Business Combinations" and IFRS 11 "Joint Arrangements". The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, then the transaction is a business combination achieved in stages and the acquiring party remeasures the previously held interest in that business at fair value. The amendments to IFRS 11 clarify that when an entity maintains (or obtains) joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business.

 

IAS 12 "Income Taxes": the amendments clarify that all income tax consequences of dividends (i.e. distribution of profits) are recognised consistently with the transactions that generated the distributable profits - i.e. in profit or loss, OCI or equity.

 

IAS 23 "Borrowing Costs": the amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation rate on general borrowings.

 

 

 

The Group is currently evaluating the expected impact of adopting the improvements on its financial statements. As such, the expected impact of the improvements is not yet known or reasonably estimable.

 

Standards and Interpretations not adopted by the EU

 

·   ''Amendments to References to the Conceptual Framework in IFRS Standards'' (effective for annual periods beginning on or after 1 January 2020).

In March 2018 the IASB issued a comprehensive set of concepts for financial reporting, the revised ''Conceptual Framework for Financial Reporting'' (Conceptual Framework), replacing the previous version issued in 2010. The main changes to the framework's principles have implications for how and when assets and liabilities are recognised and derecognised in the financial statements, while some of the concepts in the revised Framework are entirely new (such as the ''practical ability'' approach to liabilities''). To assist companies with the transition, the IASB issued a separate accompanying document ''Amendments to References to the Conceptual Framework in IFRS Standards''. This document updates some references to previous versions of the Conceptual Framework in IFRS Standards, their accompanying documents and IFRS Practice Statements.

 

·     IFRS 3 "Business Combinations" (amendments): Definition of a Business (effective for annual periods beginning on or after 1 January 2020).

The amendments narrow and clarify the definition of a business. They also permit a simplified assessment of whether an acquired set of activities and assets is a group of assets rather than a business. The amended definition emphasises that the output of a business is to provide goods and services to customers, whereas the previous definition focused on returns in the form of dividends, lower costs or other economic benefits to investors and others. In addition to amending the wording of the definition, the Board has provided supplementary guidance. Distinguishing between a business and a group of assets is important because an acquirer recognises goodwill only when acquiring a business.

 

·     IAS 1 and IAS 8 (amendments): Definition of Material (effective for annual periods beginning on or after 1 January 2020).

The amendments clarify and align the definition of 'material' and provide guidance to help improve consistency in the application of that concept whenever it is used in IFRS Standards. The amendments include definition guidance that until now has featured elsewhere in IFRS Standards. In addition, the explanations accompanying the definition have been improved. Finally, the amendments ensure that the definition of material is consistent across all IFRS Standards. Old definition: Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements (IAS 1 Presentation of Financial Statements). New definition: Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.

 

·     IFRS 10 (Amendments) and IAS 28 (Amendments) ''Sale or Contribution of Assets between an Investor and its Associate or Joint Venture'' (effective date postponed indefinitely).

The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business (as defined in IFRS 3). A partial gain or loss is recognised when a transaction involves assets that do not constitute a business. In December 2015, the IASB postponed the effective date of this amendment indefinitely pending the outcome of its research project on the equity method of accounting.

 

The Group is currently evaluating the expected impact of adopting the amendments on its financial statements. As such, the expected impact of the improvements is not yet known or reasonably estimable.

 

Of those standards that are not yet effective, IFRS 16 is expected to have a material impact on the Company's financial statements in the period of initial application.

 

Estimated impact of the adoption of IFRS 16 "Leases"

 

The Group is required to adopt IFRS 16 "Leases" from 1 January 2019. The Group has assessed the estimated impact that the initial application of IFRS 16 will have on its consolidated financial statements, as described below. The estimated impact of the adoption of this standard on the Group's equity as at 1 January 2019 is based on assessment undertaken to date and is summarised below. The actual impact of adopting the standard at 1 January 2019 may change because the new accounting policy is subject to change until the Group presents its first financial statements that include the date of initial application.

 

The standard introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases and leases of low value items. Lessor accounting remains similar to the current standard - i.e. lessors continue to classify leases as finance or operating leases.

 

IFRS 16 replaces existing leases guidance including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

 

A.    Leases in which the Group is a lessee

The Group will recognise new assets and liabilities for its leases of land. The nature of expenses related to those leases will now change because the Group will recognise a depreciation charge for right-of-use assets, other than those classified as investment property and investment property under development under fair value model, and interest expense on lease liabilities. The depreciation charge related to right-of-use assets arising from land lease under trading properties under development will be capitalised as an addition to its cost.

 

Currently, the Group recognises operating lease expense on a straight-line basis over the term of the lease, and recognises assets or liabilities only to the extent that there is a timing difference between actual lease payments and the expense recognised.

 

Based on the information currently available, the Group estimates that it will recognise lease liabilities of US$ 20,667 thousand, increase in investment property and investment property under development carrying amounts of US$ 9,084 thousand and right-of-use assets of US$ 7,804 thousand as at 1 January 2019, with overall effect on retained earnings/accumulated losses of US$ 3,780 thousand at the same date.

 

B.   Leases in which the Group is a lessor

 

No impact is expected for leases in which the Group is a lessor.

 

C.   Transition

 

The Group plans to apply IFRS 16 initially on 1 January 2019, using modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information.

 

5.   CHANGES IN SIGNIFICANT ACCOUNTING POLICIES

 

The Group has initially applied IFRS 15 Revenue from Contracts with Customers from 1 January 2018 (see A). A number of other new standards, including IFRS 9 Financial Instruments (see B), are also effective from 1 January 2018 but they do not have a material effect on the Group's financial statements.

 

A.  IFRS 15 Revenue from Contracts with Customers

Due to the transition method chosen by the Group in applying this standard, comparative information throughout these financial statements has not been restated to reflect the requirements of this standard.

 

The effect of initially applying this standard, IFRS 15, is mainly attributed to the following:

-     Earlier recognition of revenue from sales of residential properties under DDU contracts (see below)

-     Recognition of significant financial component on payments received in advance from customers for residential properties under DDU contracts (see below)

 

IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. Under IFRS 15, revenue is recognised when a customer obtains control of the goods or services. Determining the timing of the transfer of control - at a point in time or over time - requires judgement.

 

The Group has adopted IFRS 15 using the cumulative effect method (without practical expedients), with the effect of initially applying this standards recognised at the date of initial application (i.e. 1 January 2018). Accordingly, the information presented for 2017, has not been restated, i.e. it is presented, as previously reported, under IAS 18 and related interpretations. Additionally, the disclosure requirements in IFRS 15 have not generally been applied to comparative information.

 

The following table summarises the impact, net of tax, of transition to IFRS 15 on retained earnings and Non-controlling interests at 1 January 2018.

 

 

Impact of adopting IFRS 15 at 1 January 2018

 

 

US$ '000

Retained earnings

 

 

Profit from sales of trading properties before tax

 

17,357

Related tax

 

(3,472)

Impact on 1 January 2018

 

13,885

 

 

 

Non-controlling interests

 

 

Profit from sales of trading properties before tax

 

91

Related tax

 

    (18)

Impact on 1 January 2018

 

       73

 

 

 

Translation reserve

 

 

Net profit from sales of trading properties

 

     581

 Impact on 1 January 2018

 

     581

 

The following tables summarise the impacts of adopting IFRS 15 on the Group's statement of financial position as at 31 December 2018 and its statement of profit or loss and other comprehensive income for the year then ended for each of the line items affected. There was no material impact on the Group's statement of cash flows for the year ended 31 December 2018.

 

Impact on the consolidated statement of profit or loss and other comprehensive income

 

For the year ended 31 December 2018

 

 

As reported

 

 

Adjustments

Amounts without adoption

of IFRS 15

 

US$ '000

US$ '000

US$ '000

 

 

 

 

 

 

 

 

Revenue

296,043

(95,921)

200,122

Cost of sales of trading properties

(136,485)

82,980

(53,505)

Others

(117,474)

             -

(117,474)

Profit before tax

42,084

(12,941)

     29,143

Tax expense

  (10,547)

      2,588

    (7,959)

Profit for the year

     31,537

 (10,353)

     21,184

Total comprehensive income for the year

  (39,408)

 (10,353)

  (49,761)

 

 

Impact on the consolidated statement of financial position

 

31 December 2018

 

 

As reported

 

 

Adjustments

Amounts without adoption

of IFRS 15

 

US$ '000

US$ '000

US$ '000

Assets

 

 

 

Trading properties under construction

278,800

123,538

402,338

Others

1,140,625

           -

1,140,625

Total assets

1,419,425

123,538

1,542,963

 

 

 

 

Equity

 

 

 

Translation reserve

(371,659)

10,544

(361,115)

Retained earnings

(627,324)

(24,238)

(651,562)

Non-controlling interests

(63)

(89)

(152)

Others

1,745,124

             -

1,745,124

Total equity

   746,078

(13,783)

   732,295

 

 

 

 

Liabilities

 

 

 

Deferred tax liabilities

54,772

(5,334)

49,438

Advances from customers

65,407

142,655

208,062

Others

   553,168

           -

   553,168

Total liabilities

   673,347

137,321

   810,668

Total equity and liabilities

1,419,425

123,538

1,542,963

 

 

The details of the new accounting policy and the nature of the changes to previous accounting policy in relation to the Group's revenue from sales of trading properties under DDU contracts is set below.

 

Sales of trading properties under DDU contracts

DDU contracts are advance sale contracts for trading properties which are signed while the development of the respective residential property is still ongoing. Under IAS 18, revenue from these contracts and associated costs were recognised at point in time when risks and rewards of ownership were transferred to the customer (i.e. when act of transfer was signed by both parties). Under IFRS 15, the revenue from the contracts with customers for sale of trading properties under such DDU contracts is recognised over time as the construction progresses. The Group has determined that this results in revenue and associated costs to fulfil the contracts being recognised over time, i.e. before the ownership of flats is actually transferred to the customer. The transaction price for such contract is determined by adjusting the promised amount of consideration which is received in advance, for the effect of significant finance component. The contract liability is presented in the statement of financial position as Advances from customers.

 

Therefore, for these contracts, revenue is recognised sooner under IFRS 15 than under IAS 18, and also at higher amount due to the effect of significant finance component. The impacts of these changes on items other than revenue are a decrease in Advances from customers, decrease in Trading properties under development, increase in Cost of sales of trading properties, increase in Deferred tax liabilities and Tax expense.

 

The adoption of IFRS 15 did not have a significant impact on the accounting policies with respect to the other sources of revenue (see note 6).

 

B.   IFRS 9 Financial instruments

IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement.

 

As a result of the adoption of IFRS 9, the Group has adopted consequential amendments to IAS 1 Presentation of Financial Statements, which require impairment of financial assets to be presented in a separate line item in the statement of profit or loss. Previously, the Group's approach was to include the impairment of trade receivables in administrative expenses. The Group did not reclassify impairment losses amounting to US$ 120 thousand (2018) and US$ 147 thousand (2017) to a separate line in profit or loss in these consolidated financial statements, but presented them in administrative expenses as 'Provision for doubtful debts' because considered such reclassification immaterial.

 

There is no material effect on the opening retained earnings on 1 January 2018 from the adoption of IFRS 9.

 

Classification and measurement of financial assets and financial liabilities

 

IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, FVOCI and FVTPL. The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. IFRS 9 eliminates the previous IAS 39 categories of held to maturity, loans and receivables and available for sale. IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities.

 

Classification and measurement of financial assets and financial liabilities (continued)

For an explanation of how the Company classifies and measures financial instruments and accounts for related gains and losses under IFRS 9, see note 6.

 

The measurement of the Group's financial assets and financial liabilities was not materially affected due to adoption of IFRS 9 and its new measurement categories.

 

Impairment of financial assets

IFRS 9 replaces the 'incurred loss' model in IAS 39 with an 'expected credit loss' (ECL) model. The new impairment model applies to:

-   

financial assets measured at amortised cost;

-   

debt investments at FVOCI;

-   

contract assets;

-   

lease receivables;

-   

loan commitments and financial guarantee contracts issued.

 

The new impairment model does not apply to investments in equity instruments.

 

Under IFRS 9, credit losses are recognised earlier than under IAS 39.

 

For assets in the scope of the IFRS 9 impairment model, impairment losses are generally expected to increase and become more volatile. The Company has determined that the application of IFRS 9 impairment requirements at 1 January 2018 does not result in a material additional allowance for impairment.

 

6.   SIGNIFICANT ACCOUNTING POLICIES

 

The Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements.

 

Basis of consolidation

Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.

 

Non-controlling interests (NCI)

NCI are measured at their proportionate share of the acquiree's identifiable net assets at the date of acquisition. Subsequently the Group attributes profit or loss and each components of other comprehensive income (OCI) to the NCI even if this results in a deficit balance. Changes in the Group's interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

 

Loss of control

When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.

 

Interests in equity-accounted investees

The Group's interests in equity-accounted investees, comprise interests in joint ventures. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.

 

Interests in joint ventures are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group's share of the profit or loss and OCI of equity-accounted investees, until the date on which joint control ceases.

 

Transactions eliminated on consolidation

Intra-group balances and transactions and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

 

Foreign currency

Foreign currency transactions

Transactions in foreign currencies are translated into the respective functional currencies of Group entities at the exchange rates at the dates of the transactions.

 

Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at the reporting date. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated into the functional currency at the exchange rate when the fair value was determined. Non-monetary items that are measured based on historical cost in a foreign currency are translated at the exchange rate at the date of the transaction. Foreign currency differences are generally recognised in profit or loss.

 

Foreign operations

The assets and liabilities of foreign operations are translated into US Dollars at the exchange rates at the reporting date. The income and expenses of foreign operations are translated into US Dollars at the exchange rates at the dates of the transactions or average rate for the year for practical reasons.  If the volatility of the exchange rates is high for a given year or period the Group uses the average rate for shorter periods i.e. quarters or months for income and expense items.

 

Foreign currency differences are recognised in OCI and accumulated in the translation reserve, except to the extent that the translation difference is allocated to NCI.

 

When a foreign operation is disposed of in its entirety or partially such that control 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. If the Group disposes of part of its interest in a subsidiary but retains control, then the relevant proportion of the cumulative amount is reattributed to NCI. When the Group disposes of only part of joint venture while retaining joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss.

 

If the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable future, then foreign currency differences arising from such item form part of the net investment in a foreign operation. Accordingly, such differences are recognised in OCI, and accumulated in the translation reserve.

 

The table below shows the exchange rates of Russian Roubles which is the functional currency of the Russian subsidiaries of the Group:

 

                                                                               Exchange rate

                                                                               Russian Roubles

As of:                                                                          for US$1                  % Change

31 December 2018                                                        69.4706                       20.61

31 December 2017                                                        57.6002                       (5.04)

 

Average rate during:

Year ended 31 December 2018                                       62.7078                       7.46

Year ended 31 December 2017                                       58.3529                    (12.95)

 

Financial Instruments

Recognition and initial measurement

Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument.

 

A financial asset (unless it is a trade receivable without a significant financing component) or financial liability is initially measured at fair value plus, for an item not at fair value through profit or loss (FVTPL), transaction costs that are directly attributable to its acquisition or issue. A trade receivable without a significant financing component is initially measured at the transaction price.

 

Classification and subsequent measurement

 

Financial assets ‑ policy applicable from 1 January 2018

On initial recognition, a financial asset is classified as measured at: amortised cost, Fair Value through Other Comprehensive income (FVOCI), or Fair Value Trough Profit or Loss (FVTPL).

 

Financial assets are not reclassified subsequent to their initial recognition unless the Group changes its business model for managing financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the business model.

 

A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:

·  

it is held within a business model whose objective is to hold assets to collect contractual cash flows; and

·  

its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL:

·          

it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

·          

its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents comprise cash at bank, cash in hand and deposits on demand.

 

Financial assets ‑ Business model assessment: Policy applicable from 1 January 2018

The Group makes an assessment of the objective of the business model in which a financial asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes:

·          

the stated policies and objectives for the portfolio and the operation of those policies in practice. These include whether management's strategy focuses on earning contractual interest income, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of any related liabilities or expected cash outflows or realising cash flows through the sale of the assets;

·          

how the performance of the portfolio is evaluated and reported to the Group's management;

·          

the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed;

·          

how managers of the business are compensated ‑ e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and

·          

the frequency, volume and timing of sales of financial assets in prior periods, the reasons for such sales and expectations about future sales activity.

 

Transfers of financial assets to third parties in transactions that do not qualify for derecognition are not considered sales for this purpose, consistent with the Group's continuing recognition of the assets.

 

Financial assets that are held for trading or are managed and whose performance is evaluated on a fair value basis are measured at FVTPL.

 

Financial assets ‑ Subsequent measurement and gains and losses: Policy applicable from 1 January 2018

 

Financial assets at FVTPL

These assets are subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognised in profit or loss. 

Financial assets at amortised cost

These assets are subsequently measured at amortised cost using the effective interest method. The amortised cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognised in profit or loss. Any gain or loss on derecognition is recognised in profit or loss.

Debt investments at FVOCI

These assets are subsequently measured at fair value. Interest income calculated using the effective interest method, foreign exchange gains and losses and impairment are recognised in profit or loss. Other net gains and losses are recognised in OCI. On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss.

Equity investments at FVOCI

These assets are subsequently measured at fair value. Dividends are recognised as income in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment. Other net gains and losses are recognised in OCI and are never reclassified to profit or loss.

 

Financial assets ‑ Classification: Policy applicable before 1 January 2018

The Group classified its financial assets into one of the following categories:

·            loans and receivables;

·            cash and cash equivalents;

·            held to maturity;

·            available for sale; and

·            at FVTPL, and within this category as:

-          held for trading;

-          derivative hedging instruments; or

-          designated as at FVTPL.

 

Financial assets - Subsequent measurement and gains and losses: Policy applicable before 1 January 2018

 

Financial assets at FVTPL

Measured at fair value and changes therein, including any interest or dividend income, were recognised in profit or loss.

Held‑to‑maturity financial assets

Measured at amortised cost using the effective interest method.

Loans and receivables

Measured at amortised cost using the effective interest method.

Available‑for‑sale financial assets

Measured at fair value and changes therein, other than impairment losses, interest income and foreign currency differences on debt instruments, were recognised in OCI and accumulated in the fair value reserve. When these assets were derecognised, the gain or loss accumulated in equity was reclassified to profit or loss.

 

Financial liabilities ‑ Classification, subsequent measurement and gains and losses

Financial liabilities are classified as measured at amortised cost or FVTPL. A financial liability is classified as at FVTPL if it is classified as held‑for‑trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognised in profit or loss. Other financial liabilities are subsequently measured at amortised cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognised in profit or loss. Any gain or loss on derecognition is also recognised in profit or loss.

 

Derecognition of financial assets and liabilities

 

Financial assets

The Company derecognises a financial asset (or, where applicable a part of a financial asset or part of a Company of similar financial assets) when:

·     the contractual rights to receive cash flows from the asset have expired;

·     the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass through' arrangement; or

·     the Company transfers the rights to receive the contractual cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

 

Any interest in such derecognised financial assets that is created or retained by the Company is recognised as a separate asset or liability

 

Financial liabilities

The Company derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire.

 

The Company also derecognises a financial liability when it is replaced by another from the same lender on substantially different terms, or when the terms of the liability are substantially modified, and the cash flows of the modified liability are substantially different, in which case a new financial liability based on the modified terms is recognised at fair value.

 

On derecognition of a financial liability, the difference between the carrying amount extinguished and the consideration paid (including any non‑cash assets transferred or liabilities assumed) is recognised in profit or loss.

 

Share capital

Ordinary shares

Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity. Income tax relating to transaction costs of an equity transaction is accounted for in accordance with IAS 12.

 

Investment Property

Investment property is initially measured at cost and subsequently at fair value with any change therein recognised in profit or loss.

 

Any gain or loss on disposal of investment property (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in profit or loss. When investment property that was previously classified as property, plant and equipment is sold, any related amount included in the revaluation reserve is transferred to retained earnings.  

 

When the use of a property changes from owner-occupied to investment property, the property is remeasured to fair value and reclassified accordingly. Any gain arising on this remeasurement is recognised in profit or loss to the extent that it reverses a previous impairment loss on the specific property, with any remaining gain recognised in OCI and presented in the revaluation reserve. Any loss is recognised in profit or loss.

 

When the use of a property changes such that it is reclassified as property, plant and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting.

 

Investment property under development

Property that is being constructed or developed for future use as investment property is classified as investment property under development and accounted for at fair value until construction or development is complete, at which time it is reclassified as investment property.

 

Certain development assets within the Group's portfolio that are in very early stages of development process were categorised as "land bank" without ascribing current market value to them. Any value ascribed to such land bank projects other than their cost, would result in a gain or loss to be recognised in profit or loss.  This approach was adopted due to abnormal market volatility and will be reviewed in the future once market conditions are more stable.

 

All costs directly related with the purchase and construction of a property, land lease payments, and all subsequent capital expenditure for the development qualifying as acquisition costs are capitalised.

 

Capitalisation of borrowing costs

Borrowing costs are capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.  Capitalisation of borrowing costs commences when the activities to prepare the asset are in process and expenditures and borrowing costs are being incurred. Capitalisation of borrowing costs may continue until the assets are substantially ready for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognised. The capitalisation 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. The capitalised borrowing cost is limited to the amount of borrowing cost actually incurred.

 

Property, plant and equipment

Recognition and measurement

Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

 

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, 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, and capitalise borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.

 

All hotels are treated as property, plant and equipment due to the Group's significant influence on their management.

 

If significant parts of an item of property, plant and equipment have different useful lives, then they are accounted for as separate items (major components) of property, plant and equipment.

 

Any gain or loss on disposal of an item of property, plant and equipment is recognised in profit or loss.

 

Subsequent expenditure

Subsequent expenditure is capitalised only if it is probable that the future economic benefits associated with the expenditure will flow to the Group.

 

Depreciation

Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the straight-line method over their estimated useful lives, and is generally recognised in profit or loss. 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. 

 

Items of property, plant and equipment are depreciated from the date that they are available for use, or in respect of self-constructed assets, from the date that the asset is completed and ready for use.

 

The annual depreciation rates for the current and comparative periods are as follows:

 

                             Buildings                                           1-2%

                             Office equipment                            10-33⅓%

                             Motor vehicles                                  33⅓%

                            

Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.

 

Goodwill

Goodwill arising on the acquisition of subsidiaries represents the excess of the cost of acquisition over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss.

 

Goodwill is measured at cost less accumulated impairment losses. In respect of equity-accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and any impairment loss is allocated to the carrying amount of the equity-accounted investee as a whole.

 

Trading Properties

Trading Properties are measured at the lower of cost and net realisable value. Cost includes expenditure incurred in acquiring the properties and bringing them to their existing condition. In the case of constructed trading properties, cost includes an appropriate share of direct and borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

 

Trading properties under construction

Trading properties under construction are defined as projects in which the Group participates as a contractor or as a promoter, and which include construction work with the intention to sell the entire building as a whole or parts thereof. Each project represents one building or a group of buildings.

 

A group of buildings is considered one project when the buildings at the same building site are being constructed according to one building plan and under one building license, and are offered for sale at the same time. Trading properties include cost of land or of rights to the land that constitutes the relative portion of the area, on which the construction work on projects is performed, plus the cost of the work executed on the projects as well as other costs allocated thereto, less the cumulative amounts recognised in profit or loss as cost of trading properties sold up to the end of the reported period.

 

Direct costs and expenses are charged to projects on a specific basis, whereas borrowing costs are allocated among the projects based on the relative proportion of the costs. Non-specific borrowing costs are capitalised to such qualifying asset, or portion thereof which was not financed with specific credit, by weighted-average rate of the borrowing cost up to the amount of borrowing cost actually incurred. Where the estimated expenses for a building project indicate that a loss is expected, an appropriate provision is set up. Buildings that are under construction are classified as trading properties under construction on the statement of financial position.

 

Deferred income

Rental deposits received in advance are classified under non-current liabilities as deferred income and comprise of rental income received from tenants at the beginning of the lease contracts as guarantee against future unpaid rent or damages.

 

Impairment

Non-derivative financial assets

 

Policy applicable from 1 January 2018

Financial instruments and contract assets

The Group recognises loss allowances for expected credit losses (ECLs) on:

-   financial assets measured at amortised cost;

-   debt investments measured at FVOCI; and

-   contract assets.

The Group measures loss allowances at an amount equal to lifetime ECLs, except for the following, which are measured at 12‑month ECLs:

-   debt securities that are determined to have low credit risk at the reporting date; and

-   other debt securities and bank balances for which credit risk (i.e. the risk of default occurring over the expected life of the financial instrument) has not increased significantly since initial recognition.

Loss allowances for trade receivables and contract assets are always measured at an amount equal to lifetime ECLs.

When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group's historical experience and informed credit assessment and including forward‑looking information.

The Group assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due.

 

The Group considers a financial asset to be in default when:

-   the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); or

-   the financial asset is more than 90 days past due.

The Group considers a debt security to have low credit risk when its credit risk rating is equivalent to the globally understood definition of 'investment grade'. The Group considers this to be Baa3 or higher per Moody's rating agency or BBB‑ or higher per Standard & Poor's Rating Agency. 

12‑month ECLs are the portion of ECLs that result from default events that are possible within the 12 months after the reporting date (or a shorter period if the expected life of the instrument is less than 12 months).

The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk.

Measurement of ECLs

ECLs are a probability‑weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Company expects to receive). ECLs are discounted at the effective interest rate of the financial asset.

Credit-impaired financial assets

At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt securities at FVOCI are credit-impaired. A financial asset is 'credit-impaired' when one or more of the following events that have a detrimental impact on the estimated cash flows of the financial asset have occurred.

Evidence that a financial asset is credit-impaired includes the following observable data:

-     significant financial difficulty of the borrower or issuer;

-     a breach if contract such as default or being more than 90 days past due;

-     the restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise;

-     it is probable that the borrower will enter bankruptcy or other financial reorganization; or

-     the disappearance of an active market for a security because of financial difficulties.

 

Presentation of allowance for ECL in the statement of financial position

Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets.

 

For debt securities at FVOCI, the loss allowance is charged to profit or loss and is recognized in OCI.

 

Write-off

The gross carrying amount of a financial asset is written off when the Group has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. Financial assets that are written off could still be subject to enforcement activities in order to comply with the Group's procedures for recovery of amounts due.

 

Non-derivative financial assets

Policy applicable before 1 January 2018

 

Financial assets not classified as at fair value through profit or loss, including an interest in equity-accounted investee are assessed at each reporting date to determine whether there is objective evidence of impairment.

 

Objective evidence that financial assets are impaired includes:

·        

default or delinquency by a debtor;

·        

restructuring of an amount due to the Group on terms that the Group would not consider otherwise;

·        

indications that a debtor or issuer will enter bankruptcy;

·        

adverse changes in the payment status of borrowers or issuers;

·        

the disappearance of an active market for a security because of financial difficulties; or

·        

observable data indicating that there is a measureable decrease in the expected cash flows from a group of financial assets.

 

For an investment in an equity security, objective evidence of impairment includes a significant or prolonged decline in its fair value below its cost.

 

Financial assets measured at amortised cost

The Group considers evidence of impairment for these assets at both an individual asset and a collective level. All individually significant assets are individually assessed for impairment. Those found not to be impaired are then collectively assessed for any impairment that has been incurred but not yet individually identified. Assets that are not individually significant are collectively assessed for impairment. Collective assessment is carried out by grouping together assets with similar risks characteristics.

 

In assessing collective impairment, the Group uses historical information on the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends.

 

An impairment loss is calculated as the difference between an asset's carrying amount and the present value of the estimated future cash flows discounted at the asset's original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account. When the Group considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, then the previously recognised impairment loss is reversed through profit or loss.

 

Equity-accounted investees

An impairment loss in respect of an equity-accounted investee is measured by comparing the recoverable amount of the investment with its carrying amount. An impairment loss is recognised in profit or loss, and is reversed if there has been a favourable change in the estimates used to determine the recoverable amount.

 

Non-financial assets

At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than investment property, investment property under development, VAT recoverable, inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated.

 

For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets.

 

The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

 

An impairment loss is recognised if the carrying amount of an asset exceeds its recoverable amount and recognised in profit or loss.

 

An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

 

Assets held for sale

Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use.

 

Such assets, or disposal groups, are generally 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 rate basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets, investment property or investment property under development, which continue to be measured in accordance with the Group's other accounting policies. Impairment losses on initial classification as held-for-sale or held-for-distribution and subsequent gains and losses on remeasurement are recognised in profit or loss.

 

Once classified as held-for-sale, intangible assets, and property, plant and equipment are no longer amortised or depreciated and any equity-accounted investee is no longer equity accounted.

 

Employee benefits

Short-term employee benefits

Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid 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.

 

Share-based payment transactions

The grant-date fair value of equity-settled share-based payment options granted to employees is generally recognised as an expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the options. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest.

 

The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognised as an expense, with a corresponding increase in liabilities, over the period during which the employees become unconditionally entitled to payment. The liability is remeasured at each reporting date and at settlement date based on the fair value of share appreciation rights. Any changes in the liability are recognised in profit or loss.

 

Provisions

A provision is recognised 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 recognised as finance cost.

 

Revenue

Revenue from contracts with customers

The Group has initially applied IFRS 15 from 1 January 2018. Information about the Group's accounting policies relating to contracts with customers is provided in note 8(C). The effect of initially applying IFRS 15 is disclosed in note 5.

 

Investment property rental income

Rental income from investment property is recognised as revenue on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease.

 

Gross Profit

Gross profit is the result of the Group's operations and comprises revenue and other income net of all cost for trading properties sold and operating, administrative and other expenses, recognised in profit or loss during the year.

 

Finance income and finance costs

Finance income include interest income on funds invested and net gain on financial assets at fair value through profit or loss. Interest income is recognised as it accrues in profit or loss, using the effective interest method.

 

Finance costs include interest expense on borrowings, unwinding of the discount on provisions and deferred consideration, net loss on financial assets at fair value through profit or loss and impairment losses recognised on financial assets. 

 

Borrowing costs are recognised in profit or loss using the effective interest method, net of interest capitalised.

 

Foreign currency gain or loss on financial assets and financial liabilities is reported on a net basis as either finance income or finance cost depending on whether foreign currency movements are in a net gain or net loss position.

 

Income tax

Income tax expense comprises current and deferred tax. It is recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in OCI.

 

Current tax

Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. The amount of current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax also includes any tax arising from dividends.

 

Current tax assets and liabilities are offset only if they relate to income taxes levied by the same taxation authority and the taxation authority permits the entity to make or receive a single net payment. In Group's financial statements, a current tax asset of one entity in the group is offset against a current tax liability of another entity in the group if, and only if, the entities concerned have a legally enforceable right to make or receive a single net payment and the entities intend to make or receive such a net payment or to recover the asset and settle the liability simultaneously.

 

Deferred tax

Deferred tax is recognised 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 recognised 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 and temporary differences related to investments in subsidiaries and joint arrangements to the extent that the Group is able to control the timing of reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future.

 

Deferred tax assets are recognised for unused tax losses, unused 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 used. Future taxable profits are determined based on business plans for individual subsidiaries in the Group. 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 realised; such reductions are reversed when the probability of future taxable profits improves.

 

Unrecognised deferred tax assets are reassessed at each  reporting date and recognised to the extent that it has become probable that future taxable profits will be available against which they can be used.

 

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. For this purpose the carrying amount of investment property measured at fair value is presumed to be recovered through sale and the Group has not rebutted this presumption.

 

Deferred tax assets and liabilities are offset if, and only if, the entity has a legally enforceable right to set off current tax liabilities and assets; and the deferred tax liabilities and assets relate to income taxes levied by the same tax authority on either the same taxable entity or different taxable entities, but these entities intend to settle current tax liabilities and assets on a net basis, or their tax assets and liabilities will be realised simultaneously for each future period in which these differences reverse.

 

The provision for taxation either current or deferred is based on the tax rate applicable to the country of residence of each subsidiary.

 

Discontinued operations

                    A discontinued operation is a component of the Group's business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which:

·   

represents a separate major line of business or geographical area of operations;

·        

is part of a single co-ordinated plan to dispose of a separate major line of business or geographic area of operations; or

·   

is a subsidiary acquired exclusively with a view to re-sale.

 

Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held-for-sale.

 

When an operation is classified as a discontinued operation, the comparative statement of profit or loss and OCI is re-presented as if the operation had been discontinued from the start of the comparative year.

 

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 the owners of the Company by the weighted average number of ordinary shares outstanding during the year.  Diluted EPS is determined by adjusting the profit or loss attributable to the owners of the Company and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees.

 

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 segments results are reviewed regularly by the Group's management to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

 

7.     OPERATING SEGMENTS

 

        The Group has five reportable segments, as described below, which are the Group's strategic business units. The strategic business units offer different types of real estate products and services and are managed separately because they require different marketing strategies as they address different types of clients. For each strategic business unit the Group's management reviews internal management reports on at least monthly basis. The following summary describes the operation in each of the Group's reportable segments.

 

·         

Development Projects-Residential projects: Include construction and selling of residential properties.

·         

Development Projects-Commercial projects: Include construction of investment properties.

·         

Asset Management: Includes the operation of investment property for lease or sale.

·         

Hotel Operation: Includes the ownership and operation of hotels.

·         

Land bank: Includes the investment in and holding of property for future development.

·         

Other: Includes the management services provided for the projects.

 

        Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before income tax, as included in the internal management reports that are reviewed by the Group's management team. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing is determined on an arm's length basis.

 

 

 

 

 

 

 

Reportable segments

 

 

 

 

Development projects

Asset management

Hotel Operation

Land bank

Other

Total

 

Commercial projects

Residential projects

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

2017

2018

2017

2018

2017

2018

     2017

2018

2017

2018

2017

2018

2017

 

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External revenues

1,921

-

169,640

61,971

92,632

85,665

30,854

29,298

42

2,055

4

62

295,093

179,051

Inter-segment revenue

27

-

2

24,241

5,233

5,707

4

4

5

26

8,300

10,195

13,571

40,173

Segment revenue

1,948

-

169,642

86,212

97,865

91,372

30,858

29,302

47

2,081

8,304

10,257

  308,664

219,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment (loss) profit

before tax

 

(8,333)

 

-

 

29,908

 

(14,259)

 

18,493

 

37,454

 

5,446

 

9,360

 

(2,185)

 

7,643

 

(5,373)

 

(9,171)

 

37,956

 

31,027

Interest income

1

-

359

136

673

93

197

145

-

-

-

-

1,230

374

Interest expense

-

-

(358)

(188)

(27,764)

(47,969)

(2,819)

(1,511)

-

-

-

-

(30,941)

(49,668)

Depreciation

-

-

(46)

(49)

(97)

(53)

(675)

(685)

(2)

(3)

(73)

(56)

(893)

(846)

Share of profit of joint-ventures

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

1,957

 

-

 

-

 

-

 

-

 

-

 

1,957

Loss on disposal of 

properties

 

-

 

-

 

-

 

-

 

-

 

(3,934)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(3,934)

Other material

non-cash items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment loss on

properties

 

-

 

-

-

(9,548)

-

-

-

-

-

-

 

-

 

-

-

(9,548)

Increase/(decrease) in

fair value of properties

 

(9,460)

 

-

-

(2,163)

(953)

7,041

-

-

(1,081)

6,692

 

-

 

-

(11,494)

11,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets

118,219

-

359,133

418,891

758,359

866,433

69,577

81,487

52,839

196,326

885

1,270

1,359,012

1,564,407

Capital expenditure

4,561

-

152,842

97,823

536

998

-

-

1,387

4,278

-

-

159,326

  103,099

Segment liabilities

453

-

96,405

145,918

520,871

622,352

52,811

61,360

990

1,646

978

1,409

672,508

  832,685

 

 

 

 

 

        Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items.

 

 

2018

2017

 

 

 

US$'000

US$'000

 

 

Revenues

 

 

 

 

Total revenue for reportable segments

308,664

219,224

 

 

Unallocated revenue

950

-

 

 

Elimination of inter-segment revenue

 (13,571)

  (40,173)

 

 

Consolidated revenue

 296,043    

 179,051

 

 

 

 

 

 

 

Profit before tax

 

 

 

 

Total profit/(loss) before tax for reportable segments

37,956

31,027

 

 

Unallocated amounts:

 

 

 

 

Other profit or loss

4,128

(3,657)

 

 

Share of the after tax profit of joint ventures

           -

    1,957

 

 

Consolidated profit/(loss) before tax

  42,084

  29,327

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

Total assets for reportable segments

1,359,012

1,564,407

 

 

Other unallocated amounts

     60,413

     39,881

 

 

Consolidated total assets

 1,419,425

1,604,288

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

Total liabilities for reportable segments

672,508

832,685

 

 

Other unallocated amounts

        839

          656

 

 

Consolidated total liabilities

 673,347

   833,341

 

 

 

 

 

 

 

 

 

 

Reportable segment totals

 

Adjustments

Consolidated totals

 

US$'000

US$'000

US$'000

 

 

 

 

Other material items 2018

 

 

 

Interest income

1,230

187

1,417

Interest expense

(30,941)

-

(30,941)

Capital expenditure

159,326

-

159,326

Depreciation

(893)

(6)

(899)

Decrease in fair value of properties

(11,494)

           -

(11,494)

 

 

 

 

 

 

 

 

 

Reportable segment totals

 

Adjustments

Consolidated totals

 

US$'000

US$'000

US$'000

Other material items 2017

 

 

 

 

 

 

 

Interest income

374

324

698

Interest expense

(49,668)

-

(49,668)

Capital expenditure

103,099

-

103,099

Depreciation

(846)

-

(846)

Impairment loss on properties

(9,548)

-

(9,548)

Increase in fair value of properties

  11,570

             -

  11,570

       

Geographical segments

Geographically the Group operates only in Russia and has no significant revenue or assets in other countries or geographical areas. Therefore no geographical segment reporting is presented.

 

Major customer

There was no concentration of revenue from any single customer in any of the segments.

 

8.     REVENUE

 

The effect of initially applying IFRS 15 on the Group's revenue from contracts with customers is described in note 5. Due to the transition method chosen in applying IFRS 15, comparative information has not been restated to reflect new requirements.

 

A.  Revenue streams and disaggregation of revenue from contracts with customers

The Group generates revenue primarily from the sale of residential properties, rentals of investment properties and hotels operation. In the following table, revenue from contracts with customers is disaggregated by timing of transfer - over time or at point in time and by type of revenue.

 

 

 

2018

      2017

 

 

US$ '000

US$ '000

Revenue from contracts with customers

 

 

 

Revenue from sale of trading properties - transferred at a point in time (note 21)

 

 

14,672

 

61,844

Revenue from sale of trading properties - transferred over time (note 5, note 22)

 

 

154,900

 

           -

Hotel operation income

 

30,854

29,189

Construction consulting/management fees

 

           3 

      166

 

 

200,429

  91,199

Other revenue

 

 

 

Investment property rental income

 

94,665

87,852

Non-core activity revenue

 

949

-

 

 

 95,614

 87,852

 

 

 

 

Total revenue

 

 

 296,043

  179,051

 

 

 

Reconciliation with reportable segments in note 7: the revenue from contracts with customers included in line Revenue from sale of trading properties is presented in the reportable segment Development projects - Residential projects, Hotel operation income is presented in reportable segment Hotel operation, and Construction consulting/management fees is presented in reportable segment Other.

 

B.  Contract balances

The following table provides information about contract liabilities from contracts with customers.

 

31 December 2018

1 January 2018

 

US$ '000

US$ '000

Contract liabilities - included in 'Advances from customers'

65,407

45,889

 

The contract liabilities primarily relate to the advance consideration received from customers for advance sales of residential properties, which are under development, for which revenue is recognised over time. This will be recognised as revenue according to the progress of the construction of the residential projects, approximately within two years. The amount of US$ 42,175 thousand recognised in contract liabilities as the beginning of the period has been recognised as revenue for the year ended 31 December 2018.

 

C.  Performance obligations and revenue recognition policies

Revenue recognition policies for revenue from contracts with customers is presented in the below table.

 

Type of product

Nature, timing of satisfaction of performance obligations, significant payment terms

Revenue recognition under IFRS 15 (applicable after 1 January 2018)

Revenue recognition under IAS 18 (applicable before 1 January 2018)

Sales of trading properties under DDU contracts

DDU contracts are advance sale contracts for trading properties which are signed while the development of the respective residential property is still ongoing. The consideration is paid by customers in advance, shortly after the contract is signed and registered with state authorities according to local legal requirements. According to the relevant Russian law governing these specific types of contracts, the customers have no right to unilaterally terminate contract if the developer performs without default, i.e. the developer has right not to return the money and deliver the flat. Due to this, the Group concluded that the performance obligations are satisfied over time. This results in revenue and associated costs to fulfil the contracts being recognised over time.

Revenue from these contracts are recognised over time - i.e. before the flats and other residential property units are completed and transferred to customers by signing of acts of transfers. Progress is determined based on the cost-to-cost method - i.e. actual incurred cost vs budgeted. The related costs are recognised in profit or loss when they are incurred. The transaction price for such contracts is determined by adjusting the promised amount of consideration which is received in advance, for the effect of significant finance component. Advances received are included in contract liabilities which are presented in the statement of financial position as Advances from customers.

Revenue from these contracts and associated costs were recognised at point in time when risks and rewards of ownership were transferred to the customer (i.e. when act of transfer was signed).

 

 

 

C.  Performance obligations and revenue recognition policies (continued)

 

Type of product

Nature, timing of satisfaction of performance obligations, significant payment terms

Revenue recognition under IFRS 15 (applicable after 1 January 2018)

Revenue recognition under IAS 18 (applicable before 1 January 2018)

Sales of trading properties under regular sale contracts

The regular sale contracts are signed with customers upon sale of completed residential property units (flats, parking etc). Control is transferred to the customer when act of transfer was signed. The payment of consideration is due upon signing of the contract but before the act of transfer is signed.

Revenue from these contracts and associated costs are recognised at point in time when control is transferred to the customer, (i.e. when act of transfer was signed).

Revenue from these contracts and associated costs were recognised at point in time when risks and rewards of ownership were transferred to the customer (i.e. when act of transfer was signed).

Hotel services

Hotel services comprise accommodation, , treatments and other services offered at the hotels operated by the group and sales of food and beverages

Revenue is recognised upon transfer of the service to the client and acceptance by the client.

Revenue was recognised upon transfer of the service to the client and acceptance by the client.

Construction consulting/ management services

Revenue from construction management is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.

 

9.    OTHER INCOME

 

2018

2017

Other income consists of:

US$ '000

US$ '000

 

 

 

Penalties charged to tenants

1,446

317

Reimbursement of depositary fees

192

-

Reimbursement of property tax

211

1,918

Sundries

 1,423

   1,584

 

   3,272

      3,819

 

10.   OPERATING EXPENSES

 

2018

2017

 

US$ '000

US$ '000

 

 

 

Maintenance, utility and security expenses

20,613

19,475

Agency and brokerage fees

1,979

2,354

Advertising expenses

7,413

6,843

Salaries and wages

14,688

15,545

Consultancy fees

2,498

651

Depreciation

791

740

Insurance

429

527

Rent

1,516

1,897

Property and other taxes

13,367

8,908

Other operating expenses

        70 

      114

 

 

 63,364

 57,054

The average number of employees employed by the Group during the year 2018 was 1,217 (2017: 1,159).
 

 

11.   ADMINISTRATIVE EXPENSES

 

2018

2017

 

US$ '000

US$ '000

 

 

 

Consultancy fees

726

444

Legal fees

1,336

1,362

Auditors' remuneration

535

811

Valuation expenses

43

60

Directors' remuneration

923

1,334

Salaries and wages

56

52

Depreciation

107

106

Insurance

140

143

Provision for doubtful debts

120

147

Donations

41

78

Other administrative expenses

  1,497

   1,468

 

  5,524

   6,005

 

The expenses in relation to the statutory audit firm fees for mandatory statutory audit of the annual financial statements amounted to US$244 thousand (2017: US$202 thousand), for other assurance services amounted to US$281 thousand (2017: US$599 thousand) and for non-audit services amounted to US$94 thousand (2017: US$10 thousand).

 

12.   OTHER EXPENSES

 

2018

2017

 

US$ '000

US$ '000

 

 

 

Prior years' VAT non recoverable

2,489

105

Sundries

  2,053

   2,281

 

  4,542

   2,386

 

13.   FINANCE INCOME AND FINANCE COSTS

 

2018

2017

 

US$ '000

US$ '000

 

 

 

Interest income

1,417

698

Net change in fair value of financial assets

218

50

Net foreign exchange gain

           -

    12,371

Finance income

   1,635

    13,119

 

 

 

Interest expense on loans and borrowings

(30,941)

(49,668)

Net change in fair value of financial assets

(2,986)

-

Other finance costs

(1,253)

(722)

Net foreign exchange loss

   (2,277)

             -

Finance costs

  (37,457)

  (50,390)

 

 

 

Net finance (costs)/income

  (35,822)

  (37,271)

 

 

 

The net foreign exchange loss recognised during 2018 is a result of the weakening of the Russian Rouble to the US Dollar by 20.6% by the end of 2018 in comparison to exchange rate prevailing at the end of 2017. The currency risk exposure was partially mitigated by converting a part of the bank loans from US Dollars to Euro during 2018.

 

The net foreign exchange gain recognised during 2017 is a result of the weakening of the US Dollar to the Russian Rouble by 5%, during 2017.  The recognised gain is mainly attributable to the US Dollar denominated loans held by Russian subsidiaries or branches where the functional currency is the Russian Rouble.

 

Subject to the provisions of IAS23 "Borrowing costs" in 2018 the Group capitalised an amount of US$9,414 thousand of finance cost to the residential development projects that are in construction phase, due to significant finance component identified in the contracts with customers according to the provisions of the new IFRS 15 'Revenue from contracts with customers' (see note 22) (2017 Nil).

 

14.   TAX EXPENSE

 

2018

2017

 

US$ '000

US$ '000

Current tax expense

 

 

Current year

(4,289)

     (12,799)

Adjustment for prior years

      (26)

         (64)

 

   (4,315)

  (12,863)

Deferred tax expense

 

 

Origination and reversal of temporary differences

   (6,232)

  (21,128)

 

 

 

Total tax expense

(10,547)

  (33,991)

 

 

 

       

The provision for taxation either current or deferred is based on the tax rates applicable to the country of residence of each Group entity. Cypriot entities are subject to 12.5% corporate rate whereas Russian subsidiaries and branches are subject to 20% corporate rate.

 

 

 

2018

 

2017

 

%

US$ '000

%

US$ '000

 

 

 

 

 

Profit/(loss) for the year after tax

 

31,537

 

(4,664)

Total tax expense/(benefit)

 

 10,547  

 

  33,991

Profit/(loss) before tax

 

 42,084

 

  29,327

 

 

 

 

 

Tax using the Company's domestic tax rate

12.5

5,261

12.5

3,671

Effect of tax rates in foreign jurisdictions

3.9

1,627

7.9

2,315

Tax exempt income

(90.3)

(37,993)

(111.1)

(32,595)

Non-deductible expenses

87.3

36,759

195.3

57,270

Change in estimates related to prior years

0.6

268

  7.0

2,057

Current year losses for which no deferred tax asset recognised

 

11.0

 

   4,625

 

4.3

 

   1,273

 

 

 10,547

115.9

   33,991

 

 

 

 

15.     EARNINGS PER SHARE

 

 

2018

2017

Basic earnings per share

                                    US$ '000

   US$ '000

 

 

 

 

 

Profit/(loss) attributable to ordinary shareholders

     31,510

     (4,918)

 

 

 

 

 

 

Weighted average number of ordinary shares

Shares in thousands

Shares in thousands

 

 

 

 

 

 

 

 

 

Weighted average number of shares

1,047,694

1,047,694

 

 

 

 

 

 

 

 

 

Earnings per share (cent)

          3.01

       (0.47)

 

             

 

 

16.   INVESTMENT PROPERTY

 

Reconciliation of carrying amount

 

 

2018

2017

 

 

 

US$ '000

US$ '000

 

 

 

 

Balance 1 January

818,060

915,350

Renovations/additional cost

793

998

Disposals

(812)

(140,026)

Fair value adjustment

(3,707)

18,218

Effect of movement in foreign exchange rates

(70,668)

     23,520

Reclassification to trading properties under development (note 22)

   (1,076)

               -

Balance 31 December

 742,590

   818,060

           

 

Investment property comprises mainly retail and commercial property which is operated by the Group and is leased out to tenants.

 

The investment property was revalued by independent appraisers on 31 December 2018. The cumulative adjustments, for all projects, are shown in "Fair value adjustment" in the table above.

 

The (decrease)/increase due to the effect of the foreign exchange rates is a result of the strengthening of the US Dollar to the Russian Rouble by 20.6%, during 2018 (2017: weakening by 5%).

 

The disposals of investment property during 2017 represent the below two transactions:  

-   Two out of the three buildings of Ozerkovskaya III also known as Aquamarine III Business Centre owned by Krown Investments LLC for a total consideration of US$135 million to one of the leading Russian banks. According to the transaction, Krown Investments LLC sold Building 2 and Building 4 of the office premises, underground parking and a share of commonly owned service areas of the Business Centre. The transaction consists of two Russian law governed agreements: a sales-purchase agreement of 39,635.8 sq. m of gross buildable area (including 328 underground parking units) and a sale-purchase agreement of a circa 57% share in the title to the premises of 3,728.6 sq. m of gross buildable area. The consideration received amounted to Russian rouble 7.89 billion, equivalent to US$135 million net of the applicable Russian VAT, brokerage fees and cost of agreed repairs resulting in a loss of approximately US$4 million before taxes.

-   An agreement based on which the Group acquired the additional 26% interest in Bizar LLC increasing its ownership to 100% in exchange for one of the four buildings owned by Bizar LLC of a total value of US$5,341 thousand, refer to note 35 for further details on the acquisition of NCI.

 

Measurement of fair value

 

Fair value hierarchy

 

The fair value of investment property was determined by external, registered independent property appraisers, having appropriate recognised professional qualifications and recent experience in the location and category of the property being valued. The independent appraisers calculate the fair value of the Group's investment property portfolio every six months. The same applies for investment property under development in note 17.

 

The fair value measurement for investment property of US$742,590 thousand (2017: US$818,060 thousand) has been categorised as a level 3 fair value based on the inputs to the valuation technique used.

 

Level 3 fair value

The table presented in reconciliation of carrying amount above shows the reconciliation from the opening balances to the closing balances for level 3 fair values, since all fair values of investment properties of the Group, are categorised as level 3.

 

Valuation technique and significant unobservable inputs

        The following tables show the valuation technique used in measuring the fair value of investment property, as well as the significant unobservable inputs used.

       

Valuation technique

Significant unobservable inputs

Inter-relationship between key unobservable inputs and fair value measurement

 

 

 

Discounted cash flows: The valuation model considers the present value of net cash flows to be generated from each property, taking into account rental rates and expected rental growth rate, occupancy rate and void periods together reflected in vacancy rates, construction cost, opening and completion dates, lease incentive costs such rent free periods, taxes and other costs not paid by tenants.  The expected net cash flows are discounted using the risk-adjusted discount rates plus the final year stream is discounted with an all-risk yield.  Among other factors, discount rate estimation considers type of property offered (retail, commercial, office) quality of building and its location, tenant credit quality and lease terms.

·   Average Rental rates per sq.m.: Office  class A $450, class B $183-$271, Retail $516-$962

·   Expected market rental growth: Office 4%  average; Retail 1-4% average

·   Vacancy rate: Office class A 1%, class B 8.8%-12%; Retail 4.5%-5%

·   Risk-adjusted discount rates: 12%-21%

·    All-Risk Yield 9.0%-15.25%

The estimated fair value would increase/(decrease) if:

·    Average rental rates were higher/(lower)

·    Expected market rental growth was higher/(lower)

·    Void periods were shorter/(longer)

·    The vacancy rates were lower/(higher)

·    The risk-adjusted discount rates were lower (higher)

·    All-risk yields were lower/(higher)

 

 Investment property

 

 

Type of of property

 

Rental rates

$ per annum

per sq.m.

Expected market

 rental growth

 

 

Vacancy

Rate, %

Risk

adjusted

discount rates

 

 

All-risk

yield

 Aquamarine III

Office,

Class A

 

450

 

4%

 

1%

 

12%

 

9%

 AFI Mall

Retail

720

1%

5%

15%

9.75%

 Plaza IB

Office,

Class B

Office 271

Retail 962

 

4%

 

8.8%

 

18%

 

13.5%

 Plaza II

Retail

516

4%

4.5%

21%

9.5%

 Paveletskaya I

Office,

Class B

 

183

 

4%

 

12%

 

18%

 

15.0%

 H2O

Office,

Class B

 

183

 

4%

 

12%

 

17.75%

 

15.25%

 Riverside station

Office,

Class B

 

256

 

4%

 

10%

 

17.5%

 

13.5%

 

 

Investment properties at fair value are categorised in the following:

 

2018

2017

 

US$ '000

US$ '000

 

 

 

 Retail properties

637,300

696,000

 Office space properties

  105,290  

   122,060

 

  742,590

   818,060

 

 

 

Fair value sensitivity Analysis

 

Presented below is the effect on the fair value of the AFIMALL project, of an increase/(decrease) in the below inputs at the reporting date. This analysis assumes that all other variables remain constant.

 

Discount rate/exit yield

-0.50%

 -0.25%

0.00%

+0.25%

+0.50%

Market value (US$'000)

670,200

 653,300

637,300

622,100

607,600

 

 

 

 

 

 

Rental income

-5.00%

 -2.5%

0.00%

+2.5%

+5.00%

Market value (US$'000)

601,200

619,500

637,300

655,800

674,300

 

 

 

 

 

 

Vacancy rate

-5.00%

 -2.5%

6.50%

+2.5%

+5.00%

Market value (US$'000)

673,800

655,500

637,300

619,100

600,900

 

Fair value sensitivity Analysis continued

 

Presented below is the effect on the fair value of the rest of the investment property projects, of an increase/(decrease) in the below inputs at the reporting date. This analysis assumes that all other variables remain constant.

 

In thousands of dollars

ERVs

-10%

-5%

0

5%

10%

Yields

 

 

 

 

 

-0.5

95,730

102,720

109,720

116,580

123,590

-0.25

93,760

100,580

107,380

114,270

121,080

0

91,860

98,580

105,290

112,020

118,650

0.25

90,120

96,660

103,300

109,850

116,390

0.5

88,430

94,890

101,360

107,730

114,210

 

 

 

 

 

17.   INVESTMENT PROPERTY UNDER DEVELOPMENT

 

2018

2017

 Reconciliation of carrying amount

US$ '000

US$ '000

 

 

 

 Balance 1 January

163,240

232,900

 Construction costs

5,691

4,865

 Transfer to trading properties under construction (note 22)

-

(74,100)

 Fair value adjustment

(7,787)

(6,648)

 Effect of movements in foreign exchange rates

 (19,264)

     6,223

 Balance 31 December

 141,880

 163,240

 

On 31 March 2017 the Group transferred "Bolshaya Pochtovaya" project to trading properties under construction. The transfer was performed following the change in use evidenced by the commencement of development of trading properties with a view to sell. The amount of US$74,100 thousand represents the fair value of the project at the date of the transfer. The fair value was based on the valuation provided by the independent appraisers on 31 December 2016 which according to management assessment was not significantly different from the fair value at the date of change in use.

 

The investment property under development was revalued by independent appraisers on 31 December 2018. The cumulative adjustments, for all projects, are shown in line "Fair value adjustment" in the table above.

 

The (decrease)/increase due to the effect of the foreign exchange rates is a result of the strengthening of the US Dollar to the Russian Rouble by 20.6%, during 2018 (2017: weakening by 5%).

 

Fair value hierarchy

The fair value measurement for investment property under development of US$141,880 thousand (2017: US$163,240 thousand) has been categorised as a level 3 fair value based on the inputs to the valuation technique used. 

 

Level 3 fair value

The table presented above is the reconciliation from the opening balances to the closing balances for level 3 fair values, since all fair values of investment properties under development of the Group, are categorised as level 3.

 

Valuation technique and significant unobservable inputs

        The following tables show the valuation technique used in measuring the fair value of investment property under development, as well as the significant unobservable inputs used.

       

Valuation technique

Significant unobservable inputs

Inter-relationship between key unobservable inputs and fair value measurement

 

 

 

Discounted cash flows: The valuation model considers the present value of net cash flows to be generated from each property, taking into account rental rates and expected rental growth rate, occupancy rate and void periods together reflected in vacancy rates, construction cost, opening and completion dates, lease incentive costs such rent free periods, taxes and other costs not paid by tenants.  The expected net cash flows are discounted using the risk-adjusted discount rates plus the final year stream is discounted with an all-risk yield.  Among other factors, discount rate estimation considers type of property offered (retail, commercial, office) quality of building and its location, tenant credit quality and lease terms.

·   Average Rental rates per sq.m.: Office  prime class-$500-525, class B $130, Retail $126-$525

·   Expected market rental growth: Office 4%  average; Retail 4% average

·   Vacancy rate: Office prime class A 5%, class B 10%; Retail 0-10%

·   Risk-adjusted discount rates (16%-23.5%)

·    All-Risk Yield 9.25%-13%

The estimated fair value would increase/(decrease) if:

·    Average rental rates were higher/(lower)

·    Expected market rental growth was higher/(lower)

·    Void periods were shorter/(longer)

·    The vacancy rates were lower/(higher)

·    The risk-adjusted discount rates were lower (higher)

·    All-risk yields were lower/(higher)

 

 

Investment property under development

 

Type of

property

Rental rates

$ per annum

per sq.m

Expected

 market

rental growth

 

Vacancy

 Rate, %

Risk

adjusted

discount rates

 

All-risk

yield

Starokaluzhskoye shosse

 

Retail

 

126-198

 

4%

 

0%

 

16%

 

11.5%

 Plaza IC

Office,

Class A

Office - 525

Retail - 525

 

4%

 

5%

 

21%

 

9.25%

 Plaza IV

Office,

Class A

Office - 500

Retail - 500

 

4%

 

5%

 

23.5%

 

9.25%

 Kosinskaya

Office,

Class B

Office - 130

Retail - 210

 

4%

 

10%

 

18.0%

 

13%

 

 

Fair value sensitivity Analysis

 

Presented below is the effect on the fair value of the investment property under development projects, of an increase/(decrease) in the below inputs at the reporting date. This analysis assumes that all other variables remain constant.

 

 In thousands of dollars

 

 

 

 

ERVs

-10%

-5%

0

5%

10%

 

Yields

 

 

 

 

 

 

-0.5

148,260

158,930

169,610

180,080

190,860

 

-0.25

128,650

138,820

148,990

159,160

169,340

 

0

121,940

131,910

141,880

151,950

161,920

 

0.25

115,530

125,400

135,160

145,030

154,800

 

0.5

104,820

114,280

123,950

133,420

143,080

 

               

 

In addition to the above table, if the development costs were higher by 10%, then the fair value of investment property under development projects would be lower by US$14,600 thousand and vice-versa.

 

 

 

18.   PROPERTY, PLANT AND EQUIPMENT

 

Buildings

 under

construction

 

Land &

 Buildings

 

Office Equipment

 

Motor

Vehicles

 

 

Total

 

US$ '000

US$ '000

US$ '000

US$ '000

US$ '000

Cost

 

 

 

 

 

Balance at 1 January 2018

4,241

76,446

2,727

1,163

84,577

Additions

-

1,183

323

86

1,592

Disposals

-

(222)

(134)

-

(356)

Effect of movement in foreign exchange rates

   (691)

 (10,183)

    (484)

   (201)

 (11,559)

Balance at 31 December 2018

  3,550

  67,224

  2,432

  1,048

  74,254

 

 

 

 

 

 

Accumulated depreciation

 

 

 

 

 

Balance at 1 January 2018

-

3,636

2,400

908

6,944

Charge for the year

-

650

171

77

898

Disposals

-

(81)

(125)

-

(206)

Effect of movement in foreign exchange rates

          -

    (676)

    (413)

   (161)

  (1,250)

Balance at 31 December 2018

          -

  3,529

  2,033

     824

   6,386

 

 

 

 

 

 

Carrying amount

 

 

 

 

 

At 31 December 2018

   3,550

 63,695

      399

    224

 67,868

 

 

 

Buildings

 under

construction

 

 

Land &

 Buildings

 

 

Office Equipment

 

 

Motor

Vehicles

 

 

 

Total

 

US$ '000

US$ '000

US$ '000

US$ '000

US$ '000

Cost

 

 

 

 

 

Balance at 1 January 2017

3,947

29,725

2,426

963

37,061

Additions

-

302

176

6

484

Additions due to acquisition of previously

held interest in a joint venture

 

-

 

45,418

 

16

 

146

 

45,580

Disposals

-

(167)

(21)

-

(188)

Effect of movement in foreign exchange rates

       294

   1,168

    130

     48

   1,640

Balance at 31 December 2017

    4,241

 76,446

 2,727

1,163

 84,577

 

 

 

 

 

 

Accumulated depreciation

 

 

 

 

 

Balance at 1 January 2017

          -

  2,863

2,202

781

5,846

Charge for the year

-

662

99

85

846

Disposals

-

(30)

(21)

-

(51)

Effect of movement in foreign exchange rates

            -

      141

    120

     42

     303

Balance at 31 December 2017

            -

   3,636

 2,400

   908

  6,944

 

 

 

 

 

 

Carrying amount

 

 

 

 

 

At 31 December 2017

    4,241

 72,810

    327

    255

 77,633

 

 

 

 

 

 

 

 

 

 

 

 

             
 

 

19.   LOANS RECEIVABLE

 

2018

2017

 

US$ '000

US$ '000

Long-term loans

 

 

Loans to related companies (note 38)

1,163

-

Loans to non-related companies

   1,648 

   1,669

 

   2,811

   1,669

Short-term loans

 

 

Loans to related companies

-

     427

Loans to non-related companies

     578

     663

 

     578

  1,090

 

Terms and loan repayment schedule

 

Terms and conditions of outstanding loans were as follows:

 

 

Currency

Nominal

Year of

2018

2017

 

 

interest rate

maturity

US$ '000

US$ '000

 

 

 

 

 

 

 

Secured loans to related companies

EUR

5.2%+ EURIBOR

2023

1,163

-

Unsecured loans to related companies

USD

3.08%

 

2018

 

-

 

427

Unsecured loans to non-related companies

 

RUR

 

6%

 

2021-2022

 

1,622

 

1,632

 

RUR

2.5%

2020

26

28

 

RUR

5.5-7%

2019

370

203

 

RUR

5%

2018

208

469

 

 

 

 

3,389

2,759

               

 

20.   VAT RECOVERABLE

 

Represents VAT paid on construction costs and expenses which according to the Russian VAT law can be recovered upon completion of the construction.  Part of this VAT is expected to be recovered after more than 12 months from the balance sheet date.  Due to the uncertainties in the Russian tax and VAT law, the management has assessed the recoverability of this VAT and has provided for any amounts that their recoverability was deemed doubtful or questionable (see note 12).  Under Russian VAT legislation, VAT can also be claimed during the period of construction provided that all required documentation is presented to the VAT authorities. The Group was successful in recovering VAT during the year, and it is estimated that part of the VAT recoverable as at the year-end will be recovered within the next 12 months, which is classified as trade and other receivables, note 24.

 

 

21.   TRADING PROPERTIES

 

2018

2017

 

US$ '000

US$ '000

 

 

 

Balance 1 January

10,792

6,854

Transfer from trading properties under construction (note 22)

23,054

63,202

Additions

56

-

Cost of trading properties sold

(11,681)

(59,747)

Effect of movements in exchange rates

  (3,139)

        483

Balance 31 December

   19,082

   10,792

 

Trading properties comprise unsold apartments, commercial premises and parking spaces.

The transfer from trading properties under construction during 2018 represents the completion of the construction of a number of flats, commercial premises and parking places of "AFI Residence Paveletskaya" project, phase 1. The amount of transfer represents the book value of the flats, commercial premises and parking places which had not been sold under advance sale agreements (DDU) before the completion of phase 1.

During 2018, 158 sale agreements were signed and the cost of sales was recognised in the income statement, upon transferring of the control to the buyers according to the signed acts of transfer.

The transfer from trading properties under construction during 2017 represents the completion of the construction of a number of flats, offices and parking places of "Odinburg" project.

 

22.   TRADING PROPERTIES UNDER CONSTRUCTION

 

2018

2017

 

US$ '000

US$ '000

 

 

 

Balance 1 January

349,735

243,327

Effect of adoption of IFRS 15 as at 1 January 2018[8]

 (59,801)

              -

Restated balance at 1 January

 289,934

  243,327

Transfer from investment property under development (note 17)

-

74,100

Transfer from investment property (note 16)

1,076

-

Transfer to trading properties (note 21)

(23,054)

(63,202)

Construction costs

159,186

96,481

Finance cost capitalised8

9,414

-

Cost of trading properties sold8

(124,804)

-

Impairment

-

(9,548)

Effect of movements in exchange rates

  (32,952)

    8,577

Balance 31 December

 278,800

 349,735

 

Trading properties under construction comprise "Odinburg", "AFI Residence Paveletskaya", "Botanic Garden" and "Bolshaya Pochtovaya" projects which involve primarily the construction of residential properties. During 2018, 1,509 advance sale agreements (DDU) were signed. The incurred cost to fulfil signed DDU contracts as at 31 December 2018 were recognised in cost of sales in the income statement.

The properties are tested for impairment at the year-end based on internal assessment. No impairment loss was recognised in 2018. An impairment loss of US$9,548 thousand was recognised in the profit or loss in 2017 so as to present the properties at their lower of cost or net realisable value.

 

23.   OTHER INVESTMENTS

 

 

2018

2017

 

US$ '000

US$ '000

 

 

 

Equity securities

5,244

20

Investment in listed debt securities

2,022

5,255

Investment in funds

   9,146  

   5,240

 

 16,412 

 10,515

 

Reconciliation from opening to closing balances:

 

2018

2017

 

US$ '000

US$ '000

 

 

 

Balance 1 January

  10,515

6,088

Coupon interest accrued

209

336

Interest received

(145)

(222)

Additions

20,995

16,408

Disposals/redemption of bonds

(12,997)

(12,417)

Fair value loss

(2,165)

   322

Balance 31 December

16,412 

10,515

 

During the year the Group had a net investment cash outflow into Other investments of US$8,018 thousand (acquisitions amounted to US$20,995 thousand and proceeds from sale amounted to US$12,977 thousand).

 

By the end of 2018 Other investments comprised US$16,412 thousand, whereas US$5,244 thousand were invested in long-term equity instruments and US$11,168 were invested in short-term easily convertible into cash instruments.

 

As at 2018 year-end, the Group holds portfolio of investments comprising investment in mutual funds, equity securities and listed debt securities, which are all classified as financial assets at fair value through profit or loss based on the Group's business model (note 6).

 

24.   TRADE AND OTHER RECEIVABLES

 

2018

2017

 

US$ '000

US$ '000

 

 

 

Advances to builders

35,919

29,313

Amounts receivable from related parties (note 38)

184

109

Trade receivables net

5,008

3,458

Other receivables

5,603

21,713

VAT recoverable (note 20)

5,755

9,889

Tax receivable

   2,100

     5,920

 

 54,569

   70,402

Trade receivables net

Trade receivables are presented net of an accumulated provision for doubtful debts and unrecognised revenue of US$7,686 thousand (2017: US$10,522 thousand).

 

Other receivables (continued)

Other receivables at 31 December 2017 included an amount of US$16 million representing the remaining balance of the total consideration from the disposal of the two buildings of Aquamarine III Business Centre, for further details on the disposal refer to note 16. During 2018, this amount was collected.

 

25.   CASH AND CASH EQUIVALENTS

 

2018

2017

Cash and cash equivalents consist of:

US$ '000

US$ '000

 

 

 

Cash at banks

88,798

95,102

Cash in hand

      205

       366

 

 

 

Cash and cash equivalents as per statement of cash flows

 89,003

  95,468

 

26.   SHARE CAPITAL AND RESERVES

 

2018

2017

1.  Share capital

US$ '000

US$ '000

Authorised

 

 

2,000,000,000 shares of US$0.001 each

  2,000

  2,000

 

 

 

Issued and fully paid

 

 

523,847,027 A ordinary shares of US$0.001 each

523,847,027 B ordinary shares of US$0.001 each

524

     524

524

     524

 

  1,048

  1,048

 

There were no changes to the authorised or the issued share capital of the Company during the year ended 31 December 2018.

 

2.  Share premium

It represents the share premium on the issue of shares on 31 December 2006 for the conversion of the shareholders' loans to capital US$421,325 thousand. It also includes the share premium on the issued shares which were represented by GDRs listed in the LSE in 2007.  It was the result of the difference between the offering price, US$14, and the nominal value of the shares, US$0.001, after deduction of all listing expenses. An amount of US$1,399,900 thousand less US$57,292 thousand transaction costs was recognised during the year 2007. On 5 July 2010 an amount of US$524 thousand was capitalised as a bonus issue.

 

3.  Employee Share option plan

The Company had established an employee share option plan operated by the Board of Directors, which was responsible for granting options and administrating the employee share option plan. Eligible were employees and directors, excluding independent directors, of the Company.  The employees share option plan was discretionary and options would be granted only when the Board so determined at an exercise price derived from the closing middle market price preceding the date of grant. No payment would be required for the grant of the options. In any 10 year period not more than 10 per cent of the issued ordinary share capital may be issued or be issuable under the employee share option plan.

 

If a participant ceased to be employed his options would normally lapse subject to certain exceptions. In the event of a takeover, reorganisation or winding up vested options might be exercised or exchanged for new equivalent options where appropriate.  Shares/GDRs issued under the plan would rank equally with all other shares at the time of issue. The Board of Directors might satisfy, (with the consent of the participant), an option by paying the participant in cash or other assets the gain as an alternative of issuing and transferring the shares/GDRs.

 

Following the lapse of the ten years period all options have vested during the year 2016 and expired during the year 2017.

 

4.  Translation reserve

The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations to the Group presentation currency and the foreign exchange differences on loans designated as loans to an investee company which are accounted for as part of the investor's investment (IAS21.15) as their repayment is not planned or likely to occur in the foreseeable future. These foreign exchange differences are recognised directly to Translation Reserve.

        

5.  Capital reserve

Represents the effect of the acquisition, in 2015, of the 10% non-controlling interests in Bioka Investments Ltd and its subsidiary Nordservice LLC previously held at 90% and the effect of the acquisitions during the period of the 5% non-controlling interests in Beslaville Management Limited and its subsidiary Zheldoruslugi LLC previously held at 95% and of the 26% non-controlling interest in Bizar LLC previously held at 74%, refer to note 35 for further details.

 

27.   LOANS AND BORROWINGS

    

2018

2017

 

 

US$ '000

US$ '000

 

Non-current liabilities

 

 

 

Secured bank loans

487,348

492,484

 

 

 

Current liabilities

 

 

Secured bank loans

16,176

86,468

Unsecured loans from other non-related companies

      257

       307

 

 16,433

  86,775

 

a.  The loans on 31 December 2018 were as follows:

 

(i)    A secured loan from VTB Bank JSC ("VTB") acquired by one of the Group's subsidiaries, Bellgate Constructions Ltd ("Bellgate"), based on a loan agreement signed on the 28 December 2017. This loan was used to refinance previous loan from VTB. Bellgate received the loan in five tranches, during January and February 2018, in Euros and Russian Rubles. The blended interest rate on the loan is circa 5.4% per annum (assuming EUR/RUR exchange rate and Russian Central Bank key lending rate as at 31.12.2018). The interest and the principal of the loan are to be paid quarterly, while the term of the loan is 5 years.

 

(ii)   Secured loans from VTB acquired by Group's subsidiaries, Sanatorium Plaza Kislovodsk and Sanatorium PlazaSPA Zheleznovodsk (Sanatoriums), based on loan agreements signed on the 12 October 2018. The loans were used to refinance the previous loans of Sanatoriums from VTB (which were received to finance the acquisition of the additional 50% stake in the Sanatorium Plaza Kislovodsk and to repay intra group loans). Sanatoriums received the loans in Euros. The interest rate on the loans is 4.2% per annum. The interest and the principal of the loans are to be paid quarterly with a balloon payment of circa 60% at maturity, while the terms of the loans are up to 4 years.

 

During 2018, the Group's subsidiary MKPK PJSC (the owner of the AFI Residence Paveletskaya Project) received a loan from VTB in the amount of RUR711 million to refinance the previously incurred costs for the construction of the project. The loan carried floating interest rate of the Russian Central Bank key lending rate + 1.5%. The loan was fully repaid in June 2018.

 

There are the following financial covenants in the loan agreements to be met:

- LTV (Loan-to-Value)

- NAV (Net assets value)

- DSCR

- Forecast DSCR

- EBITDA/ (Interest ltm + Debt)

- CAPEX /EBITDA

 

The Group has complied with loan covenants during 2018 and as at 31 December 2018.

 

a.   Terms and debt repayment schedule

Terms and conditions of outstanding loans at 31.12.2018 were as follows:

 

                     

Currency

Nominal

Year of

2018

 

 

interest rate

maturity

US$ '000

 

 

 

 

 

Secured loan from VTB Bank to Bellgate

RUR

key rate +0.75%

2018-2022

135,785

Secured loan from VTB Bank to Bellgate

EUR

4.2%

2018-2022

323,953

Secured loans from VTB Bank to Sanatorium Plaza

EUR

4.2%

2018-2022

25,758

Secured loan from VTB Bank to Sanatorium Plaza SPA

EUR

4.2%

2018-2022

18,028

Other

RUR

3-12%

on demand

       257

 

 

 

 

503,781

 

 

 

 

Terms and conditions of outstanding loans at 31.12.2017 were as follows:

 

 

                     

Currency

Nominal

Year of

2017

 

 

interest rate

maturity

US$ '000

 

 

 

 

 

Secured loan from VTB Bank to Bellgate

RUR

9.5%

2018-2022

167,545

Secured loan from VTB Bank to Bellgate

USD

3m USD LIBOR+

5.02%

2018-2022

276,887

Secured loan from VTB Bank to Krown

USD

3m USD LIBOR+

7%

2017-2018

83,404

Secured loan from VTB Bank to Sanatorium Plaza

 

USD

3m USD LIBOR+

4.5%

2018-2022

 

21,404

Secured loan from VTB Bank to Sanatorium Plaza

USD

5.5%

2018-2022

11,515

Secured loan from VTB Bank to Sanatorium Plaza SPA

USD

5.5%

2018-2022

18,196

Other

RUR

3-12%

on demand

       308

 

 

 

 

579,259

 

 

 

 

2018

2017

The loans and borrowings are payable as follows:

US$ '000

US$ '000

 

 

 

Less than one year

16,433

86,775

Between one and five years

487,348

492,484

More than five years

            -

            -

 

503,781

579,259

 

b.   Securities:

The secured bank loans are secured over investment property and hotels with carrying amounts of US$637,300 thousand (2017: US$696,000 thousand), US$50,332 thousand (2017: US$56,706 thousand) respectively.

 

28.   DEFERRED TAX ASSETS AND LIABILITIES

 

Deferred tax (assets) and liabilities are attributable to the following:

 

2018

 

           2017

 

US$ '000

  US$ '000

 

 

 

 

Investment property

77,663

69,885

Investment property under development

9,345

9,890

Property, plant and equipment

9,940

10,376

Trading properties

(537)

(1,476)

Trading properties under construction

18,405

25,478

Trade and other receivables

(3,687)

(3,702)

Trade and other payables

1,829

1,193

Other items

105

(29)

Tax losses carried forward

 (58,291)

 (68,963)

Deferred tax liability

  54,772

  42,652

 

29.   TRADE AND OTHER PAYABLES

 

             2018

       2017

 

       US$ '000

 US$ '000

 

 

 

Trade payables

10,742

13,756

Payables to related parties (note 38)

192

183

Amount payable to builders

18,056

15,340

VAT and other taxes payable

4,800

28,982

Other payables

   3,588

   6,845

 

 37,378

 65,106

The above are payable within one year and bear no interest.

 

VAT and other taxes payable

Balance at 31 December 2017 include an amount of US$24,618 thousand of tax payable arising from the disposal of the two buildings of Aquamarine III Business Centre, for further details on the disposal refer to note 16.

 

30.   ADVANCES FROM CUSTOMERS

Represent advances received from customers for the sale of residential properties at "Odinburg", "AFI Residence Paveletskaya", "Botanic Garden" and "Bolshaya Pochtovaya" projects.

 

During the year the Group has signed 1,509 advance sale contracts with customers ("DDU") for flats, parking places and offices and received additional down payments from customers.  Reconciliation from opening to closing balance is presented below:

 

 

31/12/18

31/12/17

 

US$ '000

US$ '000

 

 

 

Balance 1 January as previously reported

123,766

51,301

Effect of adoption of IFRS 15 as at 1 January 2018[9]

 (77,877)

           -

Restated balance at 1 January

45,889

51,301

Customer advances during year

174,514

110,490

Effect of recognition of revenue

(144,204)

(41,647)

Effect of movements in exchange rates

 (10,792)

    3,622

Balance 31 December

    65,407

123,766

 

31.   DEFERRED INCOME

Represents rental income received from tenants at the beginning of the lease contracts as guarantee against future unpaid rent or damages.

32.   FINANCIAL INSTRUMENTS - FAIR VALUES AND RISK MANAGEMENT

 

A.  Accounting classifications and fair values

 

The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.

 

Carrying amount

Fair value

 

Loans

Receivable

 Trade and

other

receivables

 

Other

investments

Cash

and cash

  equivalents

Other financial liabilities

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

                   

 

31 December 2018

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Financial assets measured at fair value

 

 

 

 

 

 

 

 

 

 

Investment in equity securities

-

-

5,244

-

-

5,244

-

-

5,244

5,244

Investment in fund

-

-

9,146

-

-

9,146

-

-

9,146

9,146

Investment in listed debt securities

-

-

2,022

-

-

2,022

2,022

-

-

2,022

 

-

-

16,412

-

-

16,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets not measured at fair value

 

 

 

 

 

 

 

 

 

 

Loans receivable

3,389

-

-

-

-

      3,389

 

 

 

 

Trade and other receivables

-

 10,832

-

-

-

    10,832

 

 

 

 

Cash and cash equivalents

-

-

-

89,003

-

    89,003

 

 

 

 

 

3,389

 10,832

-

89,003

-

103,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities not measured at fair value

 

 

 

 

 

 

 

 

 

 

Interest bearing loans and borrowings

-

-

-

-

(503,781)

(503,781)

-

-

(506,854)

(506,854)

Trade and other payables

-

-

-

-

 (22,334)

 (22,334)

 

 

 

 

 

-

-

-

-

(526,115)

(526,115)

 

 

 

 

 

 

 

 

Carrying amount

Fair value

 

Loans

Receivable

 Trade and

other

receivables

 

Other

investments

Cash

and cash

  equivalents

Other financial liabilities

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

                   

 

31 December 2017

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Financial assets measured at fair value

 

 

 

 

 

 

 

 

 

 

Investment in fund

-

-

5,240

-

-

5,240

-

-

5,240

5,240

Investment in listed debt securities

-

-

5,255

-

-

5,255

5,255

-

-

5,255

 

-

-

10,495

-

-

10,495

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets not measured at fair value

 

 

 

 

 

 

 

 

 

 

Loans receivable

2,759

-

-

-

-

      2,759

 

 

 

 

Trade and other receivables

-

  25,280

-

-

-

    25,280

 

 

 

 

Cash and cash equivalents

-

-

-

95,468

-

    95,468

 

 

 

 

 

2,759

 25,280

-

95,468

-

123,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities not measured at fair value

 

 

 

 

 

 

 

 

 

 

Interest bearing loans and borrowings

-

-

-

-

(579,259)

(579,259)

-

-

(579,415)

(579,415)

Trade and other payables

-

-

-

-

 (25,230)

  (25,230)

 

 

 

 

 

-

-

-

-

(604,489)

 (604,489)

 

 

 

 

 

B.  Measurement of fair values

 

Valuation technics and significant unobservable inputs

 

The following table shows the valuation techniques used in measuring Level 3 fair values at 31 December 2018 and 31 December 2017 for financial instruments measured in fair value in the statement of financial position, as well as the significant unobservable inputs used.

 

 

 

Type

 

 

 

Valuation technique

 

Significant unobservable inputs

Inter-relationship between key unobservable inputs and fair value measurement

Investment in fund

The securities and other assets of each Segregated Portfolio are valued by the Fund based on market quotations. If market quotations are not readily available, or if the Investment manager determines that special circumstances exist which effect the value of a security, the valuation of those securities and other assets will be determined in good faith by the Investment manager, whose determination will be final, conclusive and binding on all parties.

Not applicable

Not applicable

Investment in equity securities

Investment in private non-listed equity securities is valued by the Group using discounted cash flows method based on the nature and specific terms of investment share purchase agreement, which includes a 'down side protection'.

Not applicable

Not applicable

 

 

C.  Financial risk management

 

The Group has exposure to the following risks arising from financial instruments:

·   credit risk

·   liquidity risk

·   market risk

·   operational risk

 

Risk management framework

The Board of Directors has overall responsibility for the establishment and oversight of the Group's risk management framework and is responsible for developing and monitoring the Group's risk management policies.

 

The Group's risk management policies are established to identify and analyse 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 maintain a disciplined and constructive control environment in which all employees understand their roles and obligations.

 

The Audit Committee overseas 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. The Board of Directors requests management to take corrective actions as necessary and submit follow up reports to the Audit Committee and the Board, addressing deficiencies found.

 

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 tenants and investments in debt securities.

 

The carrying amount of financial assets and contract assets represents the maximum credit exposure.

 

Trade and other receivables, including contract assets

Financial assets which are potentially subject to credit risk consist principally of trade and other receivables as well as credit exposures with respect to rental customers and buyers of residential properties including outstanding receivables. The carrying amount of trade and other receivable represents the maximum amount exposed to credit risk. There is no concentration of credit risk to any single customer in any of the Group's segments. Geographically there is no concentration of credit risk. The Group has policies in place to ensure that sales of flats and parking lots as well as renting of vacant spaces are made to customers and tenants with an appropriate credit history and monitors on a continuous basis the ageing profile of its receivables.

 

Impairment

At 31 December 2018, the ageing of trade and other receivable that were not impaired was as follows:

 

        2018

   2017

 

US$ '000

US$ '000

Neither past due nor impaired

1,606

315

Past due 1-30 days

2,595

20,460

Past due 31-90 days

876

1,078

Past due 91-120 days

310

 2,022

Past due 121 days

 1,513

  1,405

 

 6,900

25,280

 

Management believes that the unimpaired amounts that are past due by more than 30 days are still collectible in full, based on historical payment behaviour and extensive analysis of customer credit risk, including underlying customers' credit ratings if they are available.

 

Expected credit losses assessment for individual customers as at 1 January and 31 December 2018

The Group uses an allowance matrix to measure the ECLs of trade receivables and other receivables from individual customers, which comprise a large number of small balances.

 

Loss rates are estimated based on actual credit loss experience as well as current conditions and the Group's view of economic conditions over the expected lives of receivables.

 

The movement in the allowance for impairment in respect of trade and other receivables during the year was as follows:

 

Individual impairments

Collective impairments

 

US$ '000

US$ '000

Balance at 31 December 2016

    24

 8,261

Impairment loss/(reversal) recognised

38

-

Amounts written-off

-

(8,699)

Exchange difference effect

      20

    438

Balance at 31 December 2017

      82

         -

Impairment loss/(reversal) recognised

90

-

Amounts written-off

(56)

-

Exchange difference effect

    (19)

         -

Balance at 31 December 2018

      97

         -

 

Debt securities

The Group limits its exposure to credit risk by investing only in liquid securities and only with counterparties that have a high credit rating. Management actively monitors credit ratings and given that the Group only has invested in securities with high credit ratings, management does not expect any counterparty to fail to meet its obligations.

 

Cash and cash equivalents

The Group held cash at bank of US$88,798 thousand at 31 December 2018 (2017: US$95,102). The cash and cash equivalents are held with bank and financial institution counterparties with a high credit rating. The utilisation of credit limits is regularly monitored.

 

Impairment on cash and cash equivalents has been measured on a 12-month expected credit loss basis and reflects the short maturities of the exposures. The Group monitors changes in credit risk by tracking published external credit ratings to assess whether there has been a significant increase in credit risk at the reporting date. The Group considers that its cash and cash equivalents at 31 December 2018 have overall low credit risk based on external credit ratings of the counterparties.

 

The Group has no other significant concentrations of credit risk. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group.

 

Guarantees

The Company's policy is to provide financial guarantees only to wholly-owned subsidiaries.

 

Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.

 

Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Group aims to maintain flexibility in its funding requirements by keeping cash and committed credit lines available.

 

The Group's liquidity position is monitored by the management which take necessary actions if required. The Group structures its assets and liabilities in such a way that liquidity risk is minimised.

 

The Group maintains the following lines of credit as at 31 December 2018:

·    

A secured bank loan facility from VTB Bank JSC for RUR 9.65 billion and EUR 290 million, which was obtained to refinance previous Bellgate loan and remaining liability of Krown loan. All the tranches were drawn during January-February 2018.

·    

A secured bank loan facility from VTB Bank JSC to finance the acquisition of the additional 50% stake in the "Plaza Spa Kislovodsk" project in the amount of US$ 22.5 million, subsequently converted to Euro currency during 2018.

·    

Secured bank loan facilities from VTB Bank JSC in the amount of US$11.6 million and US$18.4 million to repay existing intra group loans, which was subsequently converted to Euro currency during 2018.

 

 

The following are the remaining contractual maturities of financial liabilities at the reporting date, including estimated interest payments and excluding the impact of netting agreements:

 

31 December 2018

Carrying

Contractual

6 months

6-12

 

 

 

 

Amount

Cash flow

or less

months

1-2 years

2-5 years

 

 

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

 

 

 

 

 

 

 

 

 

Secured bank loans

503,524

(604,479)

(20,404)

(22,437)

(44,700)

(516,939)

 

Unsecured loans

257

(257)

(257)

-

-

-

 

Trade and other payables

22,334

(22,334)

(22,334)

-

-

-

 

 

Carrying

Contractual

6 months

6-12

 

 

 

Amount

Cash flow

or less

months

1-2 yea