FY 2012 Annual Report - Orascom Development

F-29 Orascom Development 2012 Annual Report F-30
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, management is required to make judgments,
estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources.
The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant.
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 and
IFRIC 15 Agreements for the Construction of Real Estates. 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 and
IFRIC 15 - 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 reporting period.
Given the structure of the real estate sale contracts and the application of IAS 18 and IFRIC 15 as described above, revenue
recognition from residential construction projects can occur in independent stages which consist 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.
Regarding the Acuro deal, which is further explained in note 42, no revenue has been recognized in 2012 due to management’s
assessment that significant risk and rewards will be transferred to the buyer on completion of construction stages and the handing
over of the properties.
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 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.
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 is 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 15% stake in Garranah investments and sale of tour operations
On 1 November 2012, the Group signed a share sale and purchase agreement to sell to the Garranah family an additional 15%
percent stake in five investments 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) and one is active as a tour operator (Tarot Tours Company (Garranah) SAE). The company that provides
tour transportation services (Tarot Garranah for Touristic Transportation) has been sold completely.
Pursuant to this agreement, the Group’s interest in the four operating floating hotels and the tour operator decreased from 45 to
30 percent however the Group keeps its significant influence over these investments in associates. All interests held in the
company providing tour transportations services have been sold. Legal procedures to transfer title were still in process at year end.
Included in this sale and purchase agreements is also the sale of the residual entity of the Group operation in the tour operations
segment. This sale is disclosed as a discontinued operation in accordance with IFRS 5 in these consolidated financial statements,
as management is of the opinion that being the residual entity of the tour operations segment the sale represents a separate
major line of business. This part of the transaction also included an additional purchase of 8.8% in the subsidiary Royal for
Investments.
4.1.5 Deferred taxation on investment property
For the purposes of measuring deferred tax liabilities or deferred tax assets arising from investment properties management
concluded that the Group’s investment properties are held under a business model whose objective is to consume substantially all
of the economic benefits embodied in the investment properties over time, rather than through sales. Therefore, in determining
the Group’s deferred taxation on investment properties, management has determined that the presumption that the carrying
amounts of investment properties measured using the fair value model are recovered entirely through sale is rebutted. As a result,
the Group has recognised any deferred taxes on changes in fair value of investment properties.
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 2012 at CHF 1,002,981,620 and CHF 18,852,835 respectively (31 December 2011: CHF 969,362,187 and
CHF 29,349,124).
As at 30 June 2o12 the impairment review of investments in associates resulted in an impairment loss of CHF 12.2 million on some
of the investments in Garranah entities. As at 30 September 2012 further indirect impairment of CHF 6.4 million was recognized
through provisions based on the estimated sales price of the 15% stake in Garranah Group subsidiaries. The impairment losses are
shown as other gains and losses (for further details see note 10).
Other than that no other items of property, plant and equipment or investments in associates were impaired. Management is
aware that the slow-down in processes and logistics still impacts the business operations considerably. However, occupancy rates
have started to improve in the last few months and management expects that the slowdown in construction activities mainly leads
to a shift of those revenues to other financial periods. These facts have 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
management is 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 Valuation of financial assets at FVTOCI
Basically the fair value of financial assets at FVTOCI is based on stock quotes. However, due to extraordinary situations, as for
example the political situation in Egypt, such market prices might not reflect the real value at all times. In such cases alternative
valuation methods are used to determine the fair value.
4.2.3 Useful lives of property, plant and equipment
The carrying value of the Group's property, plant and equipment at the end of the current reporting period is CHF 1,002,981,620
(31 December 2011: CHF 969,362,187). Management’s assessment of the useful life of property, plant and equipment is based on
the expected use of the assets, the expected physical wear and tear on the assets, technological developments as well as past
experience with comparable assets. A change in the useful life of any asset may have an effect on the amount of depreciation that
is to be recognized in profit or loss for future periods.
Losses on disposal of the 15% stake in Garranah Group entities of CHF 6.4 million were recognized on sale of the 15% stake.
However, as such losses were already recognized as indirect impairment through provisions based on the estimated sales price in
the third quarter of 2012, they are shown as impairment and not as loss from disposal of part of the investments in associates.
Together with the gains from the sale of the tour transportation services company these losses were recognised through “other
gains and losses” (refer to note 10 for further details).
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