FY 2010 Annual Report - Part II - Orascom Development

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ODH Annual Report 2010 investments in foreign operations as well as hedges of the variability risk of interest rates are all accounted for by the Group as cash flow hedges. At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument, in a hedging relationship, is highly effective in offsetting changes in cash flows of the hedged item attributable to the hedged risk. 3.26.2 Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in the ‘other gains and losses’ line item. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item is recognised in profit or loss, in the same line of the consolidated statement of comprehensive income as the recognised hedged item. However, when the hedged forecast transaction results in the recognition of a nonfinancial asset or a non-financial liability, the gains and losses previously recognized in other comprehensive income and accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in profit or loss. 3.26.3 Hedges of net investments in foreign operations Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in other comprehensive income and accumulated under the heading of foreign currency translation reserve. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss, and is included in the ’other gains and losses’ line item. Gains and losses on the hedging instrument relating to the effective portion of the hedge accumulated in the foreign currency translation reserve are reclassified to profit or loss on the disposal of the foreign operation in the same way as exchange differences relating to foreign operation as described at 3.13 above. 4 CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY ___________________________________________________________________________________ In the application of the Group’s accounting policies, which are described in note 3, the directors are required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. 4.1 Critical judgments in applying accounting policies The following are the critical judgments, apart from those involving estimations (see note 4.2 below), that management have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements. 4.1.1 Revenue recognition – Real estate sales The operating cycle of residential construction projects predominantly starts when the Group enters into agreements to sell the real estate units off-plan. The Group treats the sale of real estate units as sale of goods in accordance with IAS 18 Revenue. Management takes the view that the critical event of revenue recognition hinges on the transfer of significant risks and rewards of ownership and control to the buyer. When management makes this assessment it ensures that the detailed criteria for revenue recognition from the sale of goods as set out in IAS 18 - including the transfer of significant risks and rewards of ownership and control to the buyer - are satisfied and that recognition of revenue from the sale of real estate is appropriate in the current year. Given the structure of the real estate sale contracts and the application of IAS 18 as described above, revenue recognition from residential construction projects occurs in independent stages and consists of the sale of land, constructed, but unfinished units and finished units. The transfer of significant risks and rewards of ownership and control of each stage is documented in an official delivery protocol and signed by representatives of the Group as well as the buyer. 4.1.2 Government grants Acquisition by the Group entities of part of the land used in the construction of their real estate projects from governments of the local jurisdictions in which they carry out their activities has not brought these transactions under the scope of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance and, therefore, has not resulted in the recognition of government grants in the current year or in prior periods. In these cases the government is the only possible seller in the market and the Group purchases the land at market prices available to all interested parties and does not obtain finance facilities from the government which would require accounting for government grants. F-24
Orascom Development Holding (Consolidated Financial Statement) 4.1.3 Employee benefits expense Employee benefits expense which are directly related to the sale of goods or rendering of services form part of the operation’s cost of sales. Where employee benefit expense are incurred to perform head quarter functions or relate to non-revenue generating entities, such as corporate companies, holding companies and start up companies, they are allocated to administration expenses. 4.1.4 Sale of six percent stake in former Garranah subsidiaries On 18 May 2010, the Group signed a share sale and purchase agreement to sell to the Garranah family a six percent stake in six subsidiaries whereof four are operating floating hotels (International Stock Company for Floating Hotels & Touristic Establishments, Mirotel for Floating Hotels Company, Tarot Garranah & Merotil for Floating Hotels, El Tarek for Nile Cruises & Floating Hotels), one is active as a tour operator (Tarot Tours Company (Garranah) SAE) and one provides tour transportation services (Tarot Garranah for Touristic Transportation). Pursuant to this agreement, the Group’s interest in these entities decreased from 51 to 45 percent and the Group ceased control over these subsidiaries, but retained significant influence at 31 December 2010. As of the date of this change of ownership interest, the Group did not consolidate these operations but accounted for them as investments in associates. The sale is not disclosed as a discontinued operation in accordance with IFRS 5 in these consolidated financial statements, as management is of the opinion that the disposed subsidiaries did not represent a separate major line of business or a geographical area of operations and were not acquired exclusively with a view to resale. Furthermore, management has the intention to acquire significant shareholdings of companies providing services in the above mentioned activities if they match the Group’s strategy. 4.2 Key sources of estimation uncertainty The following are the key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. 4.2.1 Impairment of tangible assets and investments in associates At the end of each reporting period, the Group reviews the carrying amounts of its tangible assets and investments in associates to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise, they are allocated to the smallest Group of cash-generating units for which a reasonable and consistent allocation basis can be identified. In light of the political development in Egypt, management reconsidered the recoverability of the Group's significant items of property, plant and equipment and its investments in associates, which are included in the consolidated statement of financial position at 31 December 2010 at CHF 926,077,841 and CHF 35,397,484 respectively (31 December 2009 (restated): CHF 957,457,508 and CHF 8,129,189). The operations continue to progress in a satisfactory manner, and customer reaction has reconfirmed management's previous estimates of anticipated revenues from the projects. Management periodically reconsider their assumptions in light of the macroeconomic developments regarding future anticipated margins on their products. Detailed sensitivity analysis has been carried out and the directors are confident that the carrying amount of these assets will be recovered in full, even if returns are reduced. This situation will be closely monitored, and adjustments made in future periods if future market activity indicates that such adjustments are appropriate. 4.2.2 Impairment of available-for-sale financial assets At the end of each reporting period, the Group reviews the carrying amounts of its available for sale financial assets to determine whether there is any objective evidence that an AFS financial asset or group of AFS financial assets is impaired. An AFS financial asset is impaired, and an impairment loss recognized, if and only if, such evidence exists. Objective evidence of impairment may result from one or more events that occurred after the initial recognition of the asset (a ‘loss event’) which the Group considers. These events are disclosed in note 3.24. When considering what is a ‘significant or prolonged decline in fair value’ of an available-for-sale listed equity investment below cost, the Group entity which holds the instrument compares the original cost at the date of acquisition and fair value of the equity security on the re-measurement date. This assessment is made in the functional currency of the entity holding the instrument. Therefore, when the foreign currency, in which the listed equity investment is denominated, depreciates significantly and causes decline in fair value below cost, an impairment loss is recognized. If there is objective evidence that an AFS unquoted equity investment (measured at cost) is impaired, the Group measures the amount of the impairment loss as the difference between carrying amount and the present value of estimated future cash flows discounted at the current rate of return for a similar financial asset. If there is objective evidence that an AFS debt instrument is impaired, the Group measures the amount of the impairment loss at the cumulative fair value loss that has been recognized in other comprehensive income and reclassifies the whole amount from equity to profit or loss. The impairment loss on an AFS debt instrument includes a market participant’s view of recoverable cash flows discounted at the rate that reflects current market interest rates, adjusted for liquidity and other factors a market participant would include in determining fair value. The carrying value of the Group’s available-for-sale financial assets at the end of the current reporting period is CHF 81,406,008 (31 December 2009: CHF 96,629,098). Management has performed a detailed review of the carrying amounts of its available for sale financial assets to determine whether there is any objective evidence that an AFS financial asset or group of AFS financial assets is impaired. The significant assumptions are disclosed in note 3.24. Changes to the assumptions may result in an impairment loss in subsequent years. F-25
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FY 2010 Annual Report - Part II - Orascom Development

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