Annual Report • Dec 31, 2015
Annual Report
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| 1. Introduction2 | |
|---|---|
| 2. Executive Chairman's Statement 3 | |
| 3. Understanding AFI Development9 | |
| 3.1 Group Structure9 | |
| 3.2 AFI Development strategy 11 | |
| 3.3 Projects portfolio 13 | |
| 3.4 Board of Directors 25 | |
| 3.5 Management team 27 | |
| 4. Operational review 29 | |
| 4.1 Market Update 2015 29 | |
| 4.2 Project-specific activities and update 31 | |
| 5. Principal business risks and uncertainties affecting the Company 38 | |
| 6. Corporate Governance and compliance with the UK Listing Rules 44 | |
| 6.1 Compliance with the UK Listing Rule 9.2.2AR 44 | |
| 6.2 Compliance with the UK Corporate Governance Code 45 | |
| 6.3 Financial reporting and the 'going concern' basis for accounting 45 | |
| 6.4 Viability Statement 46 | |
| 6.5 Working processes at the Board of Directors 47 | |
| 6.6 Risk Management Processes and internal control 55 | |
| 7. Directors' remuneration report 61 | |
| 8. Financial Statements 65 | |
| 8.1 Management discussion and analysis of financial condition and results of operations 65 | |
| 8.2 Board of Directors Report and Directors Responsibility Statement 81 | |
| 8.3 Audited Report and Consolidated Financial Statements 87 | |
| 8.4 Parent Company Separate Financial Statements 153 | |
| 8.5 Independent Auditors'Report 178 |
AFI Development Plc ("AFI Development" or "the Company") is one of the leading real estate development and investment groups focused mainly on the Russian market.
AFI Development is a publicly traded subsidiary of Africa Israel Investments Ltd, an international real estate investment and development group based in Israel with over 70 years of experience in real estate development. Incorporated in Cyprus in 2001, AFI Development builds large scale, integrated and high profile commercial and residential properties to international standards.
AFI Development has been listed on the Main Market of the London Stock Exchange since 2007. It 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.
In 2010, AFI Development obtained a premium listing on the London Stock Exchange, becoming the only public development company operating in Russia to attain this distinctive listing status.
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 centers, hotels, residential projects and mixed-use properties. AFI Development's strategy is to sell the residential properties it develops and to either lease the commercial properties or sell them for a favorable return.
This document may contain "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.
Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as "will", "anticipates", "aims", "due", "could", "may", "should", "expects", "believes", "intends", "plans", "targets", "goal" or "estimates." By their 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, the following:
Any written or oral forward-looking statements, made in this document or subsequently, which are attributable to the Company or any persons acting on their behalf are expressly qualified in their entirety by the factors referred to above. No assurances can be given that the forward-looking statements in this document will be realized. Subject to compliance with applicable law and regulations, the Company does not intend to update these forward-looking statements and does not undertake any obligation to do so.
As expected, 2015 was another difficult year for both AFI Development and the Russian market as a whole. With continued decline in oil prices and the consequent rouble devaluation trend, Bank of Russia maintained its key lending rate at 11% due to significant inflation risks. Given the high cost and low availability of financing, there was little impetus for corporate development, which thwarted economic recovery in 2015.
In this environment, the real estate market in Russia remained under pressure with vacancy rates up across all asset classes and rental rates experiencing a significant decline in US dollar terms. The 'de-dollarisation' trend continued into 2015 with the transition of lease rates to roubles for many properties.
By year-end, the vacancy rate in Moscow shopping centres reached an average of 8.3% with average rental rates down by 15% year-on-year. Nevertheless, international retailers remain interested in the Moscow market as reflected in the market entry of 40 new international retailers during 2015.
As a result of these trends, the value of our portfolio was revised downward during the fourth quarter of the year, from US\$2.0 billion at the end of 2014 to US\$1.4 billion at the end of 2015. The higher long term vacancy rates in both retail and office segments and lower estimated rental value (ERV) were among the key drivers of the revaluations.
Our continued focus on the development of selected residential projects is reflected in the progress achieved at our Odinburg development, where nearly all apartments in Building 1 have been sold with Building 2 under construction, as well the launch of construction and presale of apartments at the Paveletskaya II residential development.
We are pleased to report that AFIMALL City remains among the most popular shopping malls in Moscow with increasing footfall, driven by successful sales promotions throughout 2015.
However, as a result of difficult market conditions, our rental revenue in 2015 declined to US\$92.9 million, from US\$141.4 million in 2014. This trend, in combination with the abovementioned valuation loss, led to a net loss of US\$466.7 million for the year.
Looking to 2016, we expect market conditions to remain challenging due to the continued economic downturn in Russia compounded by geopolitical risks driven by developments in
Ukraine and Syria. Whilst demand across all classes of real estate remains subdued, we are encouraged by the level of interest from international retailers in the Moscow market and will continue to adapt our strategy to ensure sustainable growth of our business in the future.
As at 31 December 2015, based on the Jones Lang LaSalle LLC ("JLL") independent appraisers' report, the value of AFI Development's portfolio of investment properties stood at US\$0.93 billion, while the value of the portfolio of investment property under development stood at US\$0.2 billion.
Consequently, the total value of the Company's assets, mainly based on independent valuation as of 31 December 2015, was US\$1.4 billion, compared to US\$2.0 million as at 31 December 2014.
The main reasons behind the decrease in the portfolio valuation were as follows:
For additional information, please refer to the "Portfolio Valuation" section in the Management Discussion and Analysis (the "MD&A").
We completed 2015 with approximately US\$42.5 million of cash, cash equivalents and marketable securities on our balance sheet and a debt1 to equity level of 77%. This position reflects the Company's ability to successfully balance liquidity requirements from a number of sources.
Our 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, 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.
1 Debt includes all loans and borrowings. For further details please see note 28 to the Financial Statements.
The Company is looking to improve its liquidity position by negotiating with the VTB Bank.
For additional information, please refer to the "Liquidity" section of the MD&A.
Following the year-end the following key events occurred:
During 2015, in a difficult environment for all shopping centres across Russia, AFIMALL managed to retain the occupancy levels, which were at the level of 78% in the end year. AFIMALL has firmly established itself as one of the most popular shopping centres located in central Moscow, with a quality tenant mix and comfortable leisure, dining and entertainment zones.
The Mall welcomed several new tenants during the year, most notably one of the leading Russian restaurant chains "Chaihona №1" and a well-known children's goods store
"Detsky Mir". Recent openings include a Jo Malone London perfumery outlet, a Tschibo family store and British shoe retailer Clarks.
In 2015, marketing programmes at AFIMALL City focused mainly on targeted sales promotions, which positively impact traffic to the Mall and sales activity in the short-term and expectedly in the longer term.
Following the disposal of Building 1 to diamond miner ALROSA, AFI Development retains title to the remaining three buildings of the complex, which have a combined GBA of 61,579 sq.m and GLA of 46,247 sq.m. The Company is currently in negotiations with potential buyers and tenants regarding lease or purchase transactions. Several new tenants leased space in the complex during 2015, most notably Brown-Forman, the Kentucky-based producer of premium spirits.
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), has produced strong results in 2015. The Caucasus resorts, in particular, benefited from the growing domestic tourism demand in Russia.
Construction works of Phase 1 ("Korona") of this development are currently underway. During Q4 2015, the final fit-out, engineering systems installations and landscaping works at Building 1 of the first phase of Odinburg were finalised. The apartments at Building 1 are almost fully sold, the marketing and sales activities have been focusing on the Building 2. As of the date of publication of this report, 706 out of 723 contracts for sales of apartments in Building 1 have been signed, while for Building 2 132 out of 706 contracts have been signed. In March 2016 the Company met all formal requirements to start the delivery of apartments in Building 1, which is planned to start by the end of the month.
In December 2015, AFI Development successfully launched the main construction phase of the project. Flats and "apartments" pre-sales started simultaneously with the construction launch. The project is being marketed as "AFI Residence Paveletskaya". As of the date of publication of this report, 31 contracts for sales of flats and 3 for sales of "apartments" have been signed.
Design works and preparations for construction at Bolshaya Pochtovaya continue. The Company plans to start construction of the project in H2 2016.
In light of the changing residential market environment, AFI Development is reviewing the planning and designs of the project.
The Directors of AFI Development as at the date of this announcement are as set out below:
Mr Lev Leviev, Executive Chairman of the Board
Mr Avraham Novogrocki, Non-Executive Director
Mr Christakis Klerides, Senior Non-Executive Independent Director
Mr Moshe Amit, Non-Executive Independent Director;
Mr Panayiotis Demetriou, Non-Executive Independent Director
Lev Leviev, Executive Chairman
In this section we provide an overview on AFI Development Group's structure, our operations and our development projects.
AFI Development PLC acts as a holding company for the Group's investments in subsidiaries, usually structured as special purpose vehicles organised to develop and operate particular projects, and joint ventures. The majority of our real estate projects are managed by our operating subsidiary, OOO AFI RUS, which acts as a management company for the Russian subsidiaries and for the branches of international subsidiaries. Another important operating company in AFI Development Group is OOO Stroyinkom-K, a Russian company licensed to perform various technical and supervisory functions in the development and construction process, which is heavily regulated in Russia. It serves as project manager for most of our Russian projects which are under development.
AFI Development Hotels Ltd. is a subsidiary, which operates the Company's hospitality projects.
AFI Ukraine Ltd. is a dedicated subsidiary holding stakes in the Company's projects in the Ukraine.
A list of significant subsidiaries and jointly controlled entities of AFI Development PLC can be found in Note 34 to the consolidated financial statements. A simplified structure of the AFI Development Group is presented in the Exhibit 1 below (this is not a legal structure, it is intended to illustrate how the Company's holding structure and operations are organised):
Exhibit 1: Simplified structure of the AFI Development Group
AFI Development is focused on developing and redeveloping high quality, integrated, large-scale, commercial and residential real estate assets including offices, shopping centres, hotels, mixed-use properties and residential projects. As part of our strategy, we aim to sell the residential units we develop and to lease the commercial properties, whilst not excluding opportunistic sales of select developments. We are committed to growing our high quality income-generating real estate portfolio.
In addition to being large scale and highly complex, our projects are regenerative for their local environments and involve significant improvements to existing infrastructure. As such, we aim to enhance the overall value of the neighbourhoods which we enter, creating more comfortable living and working conditions.
Moscow is a rapidly expanding city in an economy that is undergoing a period of sustained growth. AFI Development has been part of this expansion for the last ten years and aims to develop projects that meet the needs of a growing, global city. We create new urban environments in the districts we develop, changing the everyday experience of Muscovites for the better.
During our years of successful operations in Moscow, we have worked closely with the City authorities. As such, Moscow authorities have long recognised the high value-add nature of our projects and we have every confidence in our continued successful cooperation with the authorities going forward.
Our experienced management team, with strong knowledge and a proven track record of operating in the Russian market, aims to maintain a diversified portfolio whilst using a flexible, phased development approach. This enhances our ability to leverage our development platform and complete our projects on a cost-efficient basis while making our projects cash-generative at the earliest possible opportunity.
The high quality of our developments enables us to attract the most desirable international and local tenants on favourable terms. To ensure high retention rates, we aim to sign leases of increasing length with our tenants and place greater emphasis on on-going tenant relations.
Our expectation for the medium to long-term is that the Moscow real estate market will continue to offer a high volume of business activity, high development potential
due to its size, its position as the largest financial centre in Russia and as one of the largest capital cities in Europe. We believe that the current macroecnomic headwinds are temporary and do not change our view on the long-term fundamental strength of the Moscow market. We plan to maintain our development focus on this market into the medium to long-term, with expectations of further market improvement. At the same time, we will continue to review our land bank outside of Moscow and reactivate select projects based on availability of financing and strength of demand.
AFIMALL City is a retail and entertainment development, located in the high-rise business district of Moscow, "Moscow-City". With a total GBA of 283,182 sq.m (including parking), and GLA of 107,208 sq.m, the project has a shopping gallery of nearly 400 shops and an 11-screen movie theatre with 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.
AFIMALL City has direct underground access from three metro stations (Vystavochnaya, Mezhdunarodnaya, Delovoy Tsentr) and from the Third Transportation Ring. A railway station"City" is planned to open in September 2016.
| Type | Retail |
|---|---|
| Company share | 100% |
| GBA, (sq.m) | 283,182 |
| GLA, (sq.m) | 107,208 |
| Parking, units | 2,075 |
| Valuation by JLL as at 31.12.2015 (US\$ million) |
685.2 |
| Status | Yielding |
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 with common underground parking and creates 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 an aspirational environment among Moscow's commercial developments. The project is located within the Garden Ring, and is served by two metro stations. In 2013 AFI Development disposed of the Building 1 in the complex to ALROSA mining company.
| Type | Office | |
|---|---|---|
| Company share | 100% | |
| GBA, (sq.m) | 61,579* | |
| GLA, (sq.m) | 46,247 | |
| Parking, units | 466 | |
| Valuation by JLL as at 31.12.2015 (US\$ million)* |
199.3 | |
| Status | In negotiations with tenants for sale/lease |
* After the disposal of Building 1 to ALROSA mining company in Q4 2013
| Type | Office, business park |
|---|---|
| Company share | 74% |
| GBA, (sq.m) | 11,612 |
| GLA, (sq.m) | 10,250 |
| Parking, units | 135 |
| Valuation by JLL as at 31.12.2015 (US\$ million)* |
11.5 |
| Status | Yielding |
*AFI Development share only
The project comprises completed reconstruction of four Class B+ office buildings, forming a gated business park. The project is conveniently located in central Moscow, between the Garden Ring and the Third Transportation Ring, and is within walking distance from Kievskaya transportation hub.
| Type | Office, business park |
|
|---|---|---|
| Company share | 100% | |
| GBA, (sq.m) | 16,246 | |
| GLA, (sq.m) | 13,412 | |
| Parking, units | 126 | |
| Valuation by JLL as at 31.12.2015 (US\$ million) |
11.5 | |
| Status | Yielding |
The Paveletskaya I office complex comprises a reconstructed Class B building.
| Type | Office | |
|---|---|---|
| Company share | 100% | |
| GBA, (sq.m) | 10,080 | |
| GLA, (sq.m) | 8,990 | |
| Parking, units | 81 | |
| Valuation by JLL as at 31.12.2015 (US\$ million) |
8.9 | |
| Status | Yielding |
The project comprises a Class B office building reconstructed around the frame of a former administrative building. It is located in a dynamically developing business area on the border of Moscow's Central and Southern Administrative Districts.
| Type | Residential | |
|---|---|---|
| Company share | 100% | |
| GBA, (sq.m) | 821,051 | |
| GSA residential/ GSA commercial/ GLA shopping centres, (sq.m) |
462,815/19,5 60/16,800 |
|
| Parking, units | 3,399 | |
| Book value * | 148.5 | |
| Status | Construction stage |
* Odinburg is a part of Company trading properties and therefore presented in the Financial Statements at cost.
Odinburg is located in the town of Odintsovo in the Moscow region (11 km west of Moscow). The entire residential district takes up an area of 33.14 hectares. The development is planned to include multi-functional infrastructure comprising two schools, two kindergartens, a medical centre and other facilities.
The project involves construction of a multi-storey residential micro district consisting of two phases:
Each phase includes commercial premises on ground floors that are planned to be disposed to end users. In addition, the project envisages stand-alone shopping centres with areas to be leased to tenants.
| Type | Residential | |
|---|---|---|
| Company share | 100% | |
| GBA, (sq.m) | 133,510 | |
| GSA residential/ GSA commercial (sq.m) |
61,759/17,092 | |
| Parking, units | 1,114 | |
| Valuation by JLL as at 31.12.2015 (US\$ million) |
55.5 | |
| Status | Construction stage |
Paveletskaya Phase II is a modern residential complex in proximity to the 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 can be easily accessed by private or public transport. The property is currently under construction.
Part of the commercial areas in the project are designated as "apartments". These"apartments"are premises legally not zoned for housing, but, according to the common practice on the Russian market, are widely sold for residence (a person cannot register in this address, but the premises can be used for housing). The prices
of "apartments" are normally lower than of similar flats (properly zoned housing units).
The project consists of three phases:
Phase I – includes several residential buildings with total General Buildable Area (GBA) of 50,370 sq.m and total General Sellable Area (GSA) of 30,824 sq.m. This phase is planned to include 175 flats, 220 apartments, 5,847 sq.m of flexible commercial space.
Phase II – is planned to have GBA of 52,080 sq.m and total GSA of 27,593 sq.m. This phase is planned to include flats and 1,403 sq.m of flexible commercial space.
Phase III – is planned to have GBA of 31,060 sq.m and total GSA of 20,452 sq.m. This phase is planned to include flats and 9,842 sq.m of flexible commercial space.
The project is a class A office complex located at 50/2, 2nd Brestskaya street, Moscow. One of the key attractions of this project is the excellent access both by public and private transportation, and its location in a well-developed and established business district. It is located in proximity to Four Winds Plaza and other class A office properties in the well-developed office area between the Garden Ring and Belorussky railway station.
| Type | Offices | |
|---|---|---|
| Company share | 95% | |
| GBA, (sq.m) | 108,000 | |
| GLA, (sq.m) | 61,350 | |
| Parking, units | 1,210 | |
| Valuation by JLL as at 31.12.2015 (US\$ million) * |
65.2 | |
| Status | Concept stage |
*AFI Development share only
Plaza IV development project is located two hundred meters from Tverskaya Zastava square at 11 Grouzinsky Val, Moscow. The project comprises a major office development with supporting retail zone on the ground floors.
| Type | Mixed-use retail/office |
|
|---|---|---|
| Company share | 100% | |
| GBA, (sq.m) | 111,770 | |
| GLA, (sq.m) | 70,000 | |
| Parking, units | 1,200 | |
| Valuation by JLL as at 31.12.2015, (US\$ million) |
27.8 | |
| Status | Pipeline |
Kossinskaya is mixed-use building with nine aboveground floors and a single underground level. The property was constructed in 2005.
| Type | Residential | |
|---|---|---|
| Company share | 100% | |
| GBA, (sq.m) | 170,350 | |
| GSA residential / GSA commercial, (sq.m) |
56,952/34,208 | |
| Parking, units | 1,771 | |
| Valuation by JLL as at 31.12.2015, (US\$ million) |
71.5 | |
| Status | Pre construction |
Bolshaya Pochtovaya is a mixed-use project with dominant residential use on a land area of 5.65 hectares. The future development is located in the Central Administrative district of Moscow. The land plot borders the Yauza river, which will significantly enhance the views from the project. The project is located in an attractive neighbourhood, which benefits from developed social infrastructure: transport, shops and cultural/leisure amenities. The launch of the main construction phase is planned in H2 2016.
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, within walking distance from Botanichesky Sad and Sviblovo metro stations. The future residential complex has a land plot of 3.2 Ha and a gross building (GBA) of 217,605 sq.m (including "city share").
| Type | Residential | |
|---|---|---|
| Company share | 100% | |
| GBA, (sq.m) | 217,605 | |
| GSA residential / GSA commercial, (sq.m) |
111,768/5,149 | |
| Parking. units | 1,334 | |
| Valuation by JLL as at 31.12.2015, US\$ million |
18.6 | |
| Status | Planning stage |
| Type | City-hotel | |
|---|---|---|
| Company share | 100% | |
| GBA, (sq.m) | 8,848 | |
| Number of rooms | 159 | |
| Status | Operating |
The four-star hotel, which offers a full range of business and leisure facilities, is located in the historical centre of Moscow, near the Kremlin, and forms part of AFI Development's major Ozekovskaya Embankment mixed-use development.
| Type | Hotel/Spa resort |
|---|---|
| Company share | 50% |
| GBA, (sq.m) | 25,000 |
| Number of rooms | 275 |
| Status | Operating |
Plaza Spa Hotel in Kislovodsk is a four star hotel located on a 1.5 hectare land plot. It comprises two hotel buildings, a spa, a health and fitness center, a swimming pool, saunas, restaurants and conference facilities. Located in the Caucasus mineral waters region, the Plaza Spa Kislovodsk caters to guests seeking treatment for disturbances of the cardiovascular and nervous systems, as well as respiratory diseases.
| Type | Hotel/Spa | |
|---|---|---|
| Company share | resort 100% |
|
| GBA, (sq.m) | 11,701 | |
| Number of rooms | 134 | |
| Status | Operating |
The Spa Hotel Zheleznovodsk is a modern mid-class spa and medical resort in the Caucasus mineral waters region. The hotel is adjacent to the main park of Zheleznovodsk, featuring a thermal water source, and has a direct access to the park. A spa treatment area occupies approximately 1,100 sq.m, which includes 45 treatment rooms, saunas, a jacuzzi, an indoor swimming pool and extensive medical and diagnostic facilities.
| Type | Office |
|---|---|
| Company share | 50% |
| GBA, (sq.m) | 28,241 |
| GLA, (sq.m) | 22,035 |
| Parking, units | 138 |
| Status | Completed |
Four Winds Plaza is one of the most prestigious recently built class A office buildings in central Moscow. Designed by NBBJ and co-developed by AFI Development and Snegiri Development, Four Winds Plaza hosts the Russian headquarters of Morgan Stanley, Barclays Capital and Moody's among its high quality tenant mix. Four Winds Plaza is easily accessible from Mayakovskaya and Belorusskaya metro stations, as well as from 1st Tverskskaya Yamskaya streets and the Garden Ring. The Company disposed of its share in the project in January 2013.
| Type | Residential | |
|---|---|---|
| GBA, (sq.m) | 41,364 | |
| GSA, (sq.m) | 18,100 | |
| GLA, (sq.m) | 5,069 | |
| Number of apartments | 108 | |
| Parking, units | 323 | |
| Status | Completed |
Four Winds Residential is a luxury residential building, with commercial area on the ground floor, which is part of the Four Winds mixed-use development. The construction was
completed at the end of 2008. The project includes a fitness and retail zone, which is leased to third party tenants.
| Type | Residential |
|---|---|
| GBA, (sq.m) | 41,980 |
| GSA, (sq.m) | 15,821 |
| Number of apartments | 114 |
| Status | Completed |
Ozerkovskaya (Aquamarine) II is a high-end residential complex includes 114 luxury apartments of between 70 and 300 sq.m. The complex has its own amenities including a courtyard with a playground, a recreational area, flower garden and lawns, and a 240 sq.m pond, which is converted into an ice skating rink in winter.
AFI Development Plc is managed by the Board of Directors, which consists of five2 directors with vast experience in the fields of finance, banking and real estate.
Of the company's seven directors, four are independent.
Mr Leviev has served as the Chairman of the Board of Directors since 1 January 2008. On 22 November 2012 he became Executive Chairman. He holds a 48.13% stake in Africa Israel Investments Ltd and also serves as its Chairman. He is also the owner and the President of the LLD Diamonds Ltd Group and is the President of the Federation of Jewish Communities of the CIS.
Mr Groysman joined the AFI Development Group in May 2011 as the CEO of OOO AFI RUS, the main Russian operating subsidiary. From 2012 to 2015 Mr Groysman served as Executive Director of AFI Development Plc. Mr Groysman has over 30 years of experience in real estate development, investments, asset and property management. Prior to joining AFI Development, Mr Groysman was the general manager of Sawatzky Property Management, the company he established in 1992 and which later become one of the leaders of the Moscow property management market. Mr Groysman graduated from the Israel Institute of Technology.
Mr Novogrocki joined the Board of Directors of AFI Development in August 2012. Mr Novogrocki is the CEO of Africa Israel Investments Ltd., major shareholder of AFI Development PLC. Prior to assuming the CEO role, Mr Novogrocki served as CEO of Africa Israel Investments subsidiaries, namely Africa Israel Industries Ltd. (from 2008 to 2012) and Packer Steel Industries Ltd. (from 2007 to 2012), as well as Deputy CEO and CFO of Africa Israel Industries Ltd. In total, Mr Novogrocki has been working in the Africa Israel Group for 15
2 At the Annual General Meeting of Shareholders on 21 October 2015 the directors Mr Mark Groysman and Mr John Porter were not proposed for re-election and ceased to be members of the Board from this date.
years. Mr Novogrocki holds MBA and BA in Economics and Business Administration degrees of Bar-Ilan University, Israel.
Mr Klerides is senior independent non-executive director of AFI Development and Chairman of the Audit Committee. Mr Klerides was the Minister of Finance of Cyprus from 1999 to 2003 and currently provides finance and business consultancy services through his family-owned company, CMK Eurofinance Consultants Limited. Mr Klerides is a Fellow of the Chartered Association of Certified Accountants.
Mr Amit serves as an independent non-executive director of AFI Development PLC and is Chairman of the Remuneration Committee. He is also Chairman of the Board of Directors of Excellence Investment Ltd and holds board memberships at a number of companies, including Delek Group Ltd, Isracard Ltd and Hapoalim Capital Markets – Investment Bank Ltd. For more than 40 years Mr Amit worked at Bank Hapoalim, one of the major Israeli banking institutions. Mr Amit holds a banking management diploma from the Israeli Banking Association Institute and a Bachelor degree in political science and sociology from Bar-Ilan University, Israel.
Mr Porter served as an independent non-executive director of AFI Development PLC from 2007 till 2015. Among other directorships, he is also the Chairman of Sinocare Group, which owns and operates hospitals in the People's Republic of China. Sinocare serves the broad community and aims to raise the standard of health care for the Chinese middle class. Mr Porter has had a history of involvement with the life sciences, helping to found Natus Medical and serving for 5 years as a director of Ivax Corpnow (now part of Teva). Mr Porter holds degrees from the Universities of Oxford, Paris and Stanford. He serves on the
Board of Advisors to the Said Business School, Oxford and has served two terms on the Board of Advisors to Stanford Business School.
Mr Demetriou serves as an independent non-executive director of AFI Development PLC. He is qualified as a lawyer in both Cyprus and England (Barrister at Law). Mr Demetriou is a former Member of Cyprus Parliament and of the European Parliament as well as an Honorary Member of the Parliamentary Assembly of the Council of Europe. He currently provides legal services through his law office, Panayiotis Demetriou & Associates LLC.
The Russian operations of the Company are concentrated in the main Russian operating subsidiary AFI RUS LLC. Led by its CEO, Mr Mark Groysman, the senior management team of AFI RUS LLC consists of highly experienced professionals:
CEO of OOO AFI RUS from May 2011, Mr Groysman is a seasoned real estate professional with over 25 years of experience in real estate development, investments, asset and property management. Prior to joining AFI Development, Mr Groysman was the general manager of Sawatzky Property Management, the company he established in 1992 and which later become one of the leaders of the Moscow property management market.
Mrs Pirogova joined the management team in October 2011. She has long and successful track record in the Russian real estate with a focus on M&A deals and tax issues. For the seven years prior to joining AFI Development, Natalia was involved in the Russian business of Fleming Family and Partners Limited as the Financial Director and the Managing Partner and worked for Marbleton Advisers Limited as the Managing Director.
Mrs Leviev-Eliazarov's core experience is concentrated in management of large shopping centres. Before relocating to Moscow she was managing shopping centres for Africa-Israel Investments Ltd. in Israel and had established long-term business relationships with a variety of international retail chains.
Dmitry Kurnikov joined AFI Development in April 2014. He has more than 15 years of work experience in real estate development. Prior to joining AFI Development Dmitry Kurnikov held senior roles in big development companies BARKLI, Forum Properties, Central Properties, Insigma where he led the development of such projects as office centres "Hermitage Plaza", "Aurora Business Park", "Dvintsev", "Pavlovskiy", and elite residential complexes "Italian Quarter" and "Roman House".
Mr Potashnikov has been with AFI Development since 2005. Prior to joining the Company he was Deputy Chief Engineer in the Mayor's office of Arara Ba Negev, Israel. Mr Potashnikov and his team are responsible for the Company relationships with Russian local authorities and pre-development approval processes.
The Russian economy continued to contract during 2015 with high inflation and low wages denting consumer purchasing power.
The country's macroeconomic environment was affected by the geopolitical situation in Ukraine and Syria, the continued decline in oil prices and the weak rouble. As a result, GDP contracted by 3.8% with industrial production down by 3.1%. The rate of inflation declined to 15.8% by year-end with the downward momentum expected to continue in 2016. Given the lower than expected oil price, the Russian government tightened its fiscal stance further, putting additional pressure on the economy. With the key lending rate of 11%, interest rates remain at historically high levels.
Despite the current market volatility, however, investor interest in Russian real estate remains relatively high, although lower than in previous years. The commercial real estate investment volume in 2015 reached US\$2.8 billion, with the office segment leading.
(Sources: Russia Property Investment, Q4 2015, CBRE; Russian Investment Market, Q4 2015, JLL; Oxford Economics Russia Country Economic Forecast, 25 January 2016)
2015 saw a record-breaking volume of renewals and renegotiations. Take-up increased by 18% compared to 2014, amounting to 870,400 sq.m, due to a number of major transactions closed by state agencies and state-owned companies.
Given the current market conditions of high vacancy, limited demand and rental rate decline, the volume of new office construction decreased further in 2015. The volume of new office delivery amounted to 721,500 sq.m for the year, down nearly 50% on 2014.
By end-2015, total vacancy rates decreased to 16%, from 17% seen in Q3 2015. A significant decline was recorded in Class A offices, from 27.4% in Q3 to 23.1% by year-end.
The main trend for 2015 is the final transition of lease rates to roubles across all asset classes. In US dollar terms, rental rates in 2015 decreased up to 50% due to the increasing rouble
devaluation in the last quarter of 2015. Going forward, rental rates in rouble terms are expected to remain stable compared to 2015.
(Source: The International Monetery Fund, Moscow Office Market, Q4 2015, JLL; Russian Investment Market, Q4 2015, JLL; CBRE Marketview, Moscow Office Market, Q4 2015)
At 560,000 sq.m, new supply to the Moscow retail market was 40% lower than forecast for 2015. By year-end, the vacancy rate in Moscow shopping centres reached an average of 8.3%, up 2.3 percentage points year-on-year. Based on the same level of new supply in 2016, the vacancy rate is expected to rise to 11% by the end of 2016.
Rental rates for Moscow shopping centres declined by 15% during 2015. Generally, rental rates are denominated in roubles or subject to a fixed exchange rate of 50-55 roubles per 1 USD. Prime rents for shopping gallery space stood between US\$1,700 and US\$3,220 per sq.m per annum. These indicators are not expected to improve during 2016 given the weaker economy and levels of expected completions in 2016.
Nevertheless, international retailers remain interested in the Moscow retail market as reflected in the market entry of 40 new international retailers in 2015.
(Source: Moscow Retail, Q4 2015, CBRE Research; Moscow Office Market, Q4 2015, JLL; Moscow Shopping Centre Market, Q4 2015, JLL)
In 2015 the supply of primary residential housing in Moscow reached 3.8 million sq.m, 14.4% above the level delivered in 2014 and the highest since 2007.
The focus of development activity remains on "new Moscow" territories where around 2 million sq.m were delivered in 2015, up from circa 1.6 million sq.m commissioned in 2014. The "old Moscow" saw a moderate increase year-on-year of 0.2 million sq.m to around 1.8 million sq.m by year-end.
On a quarterly basis, the supply of Moscow primary residential housing in Q4 2015 was approximately 1.9 million sq.m (about 27,100 residential units), an increase of 32% compared to the previous quarter and 60% year-on-year.
While the growth of primary residential real estate in Moscow continued in 2015, the weighted average asking price per sq.m decreased significantly to US\$2,967 per sq.m at the end of December 2015. This trend was driven primarily by the oversupply of primary residential real
estate accompanied by the rapidly decreasing real income and weak consumer confidence in the current economic environment.
The level of mortgage application approval rates decreased by 45% during the first 11 months of 2015, representing a 46% drop in monetary terms. The state mortgage lending support programme introduced in March 2015 acted as a key driver of housing demand in 2015, preventing further deterioration in mortgage approval rates.
(Sources: Blackwood Q4 2015, Rosstat, Peresvet Invest Analytics, Russian Central Bank, Urban Planning Policy Department of Moscow)
AFIMALL City is a major retail scheme located in the high-rise business district of Moscow, "the Moscow-City". With a total GBA of nearly 283,1823 sq.m (including parking), and GLA of nearly 107,000 sq.m, the project has a shopping gallery of nearly 400 shops and an 11-screen movie theatre with 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 2015 marketing programmes at the Mall focused primarily on targeted sales promotion and included a series of prize draws for most active shoppers and sales events to mark AFIMALL's birthday in May and "Black Friday" in November.
The footfall at the mall continues to grow: average monthly footfall in December 2015 was 3% higher than as in December 2014.
The Moscow authorities have increasingly come to recognise the importance of providing a wide range of transportation options for projects such as Moscow City, as demonstrated by international experience at Canary Wharf and La Défence. As such, 2015 saw significant progress in the construction of the ambitious transportation hub, to be the largest in Russia, which will connect the new circular railroad (planned to be open for passenger traffic in 2016) with two metro stations at Moscow City (Mezhdunarodnaya and Delovoy Tsentr). The railway passenger terminal "City" is planned to open in September 2016.
3 This is the area after the disposal of part of the parking space to "VTB Bank" JSC.
As the transportation access and amenities in the business district gradually improve, the office space in the district becomes more attractive for quality tenants. According to CBRE, a record 163,000 sq.m were taken up in Moscow City during 2015. Half of this volume was driven by two large-scale transactions: the Moscow authorities leased around 50,000 sq.m in OKO Tower, while state-owned Transneft acquired the Evolution Tower (79,000 sq.m of office space). However, the vacancy rate in the district remains relatively high at 29% according to a CBRE estimate, due to a large volume of new deliveries.
According to independent appraisers JLL, the market value of AFIMALL City as of 31 December 2015 was US\$685.2 million.
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 three Class A buildings of 46,247 sq.m of combined lettable space4 and common underground parking for 446 cars. 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 an aspirational environment among Moscow's commercial developments.
AFI Development is in negotiations with potential buyers and tenants regarding selling or leasing the project either in full or in parts. Several tenants have already leased space in the complex. Most notably, Brown-Forman, the Kentucky-based producer of Jack Daniel's whiskey, Finlandia vodka and other well-known spirits, selected Aquamarine III for its Russian headquarters.
According to independent appraisers JLL, the market value of the remaining buildings of the Complex as of 31 December 2015 was US\$199.3 million.
The Company's portfolio includes three hospitality projects, one located in Moscow and the remaining two located in the Caucasus Mineral Waters region.
4 After the disposal of Building 1 to ALROSA in 2013.
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 an A-class office centre Aquamarine III and completed elite residential complex Aquamarine II.
The Hotel provides high level services and offers 159 spacious rooms, a fitness-centre, spacentre, 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.
Despite slowdown in international business activity in Moscow and continuous rouble depreciation versus the US dollar, the hotel demonstrated strong performance in 2015, with average occupancy at 78%.
The balance sheet value of the project as of 31 December 2015 was US\$13.1 million.
Plaza Spa Zheleznovodsk is a sanatorium project which was launched in the summer of 2012 and is located in Zheleznovodsk, in the Caucasus mineral waters region. The hotel comprises 134 guest rooms on 9,526 sq.m of gross buildable area. The spa provides diagnostic assessment and treatment of urological diseases.
During 2015 the hotel demonstrated excellent performance and growing occupancy, which reached an average of 75% for the year. The hotel benefited strongly from the growing domestic demand for quality resorts.
The balance sheet value of the project as of 31 December 2015 was US\$9.1 million.
The Plaza Spa is located in the city centre of Kislovodsk, in the Caucasus mineral waters region. The facility was put into operation in 2008 after a full reconstruction and now has a total of 275 rooms spread over 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 the staff regularly attend training sessions for new methods of treatment to aid rehabilitation of patients.
Similarly to Plaza Spa Zheleznovodsk, the hotel demonstrated excellent performance with average annual occupancy of 76%.
The balance sheet value of the Company share in the project (50%) as of 31 December 2015 was US\$11.6 million.
In October 2013, AFI Development began construction at "Odinburg", one of the Company's largest residential projects with a total area of over 33 hectares located 11 km west of Moscow in the town Odintsovo.
The development is planned to include multi-functional infrastructure comprising of two schools, two kindergartens, a medical centre and other facilities.
The project involves construction of a multi-storey residential micro district consisting of two phases:
The construction works of Phase 1 ("Korona") are underway. Construction of Building 1 within this development is complete with the works now focused on Building 2. The apartments at Building 1 are almost fully sold and the focus of marketing and sales activities is currently on Building 2. As of the date of publication of this report, 706 out of 723 contracts for sales of apartments in Building 1 have been signed, while for Building 2 132 out of 706 contracts have been signed. In March 2016, the Company met all formal requirements for delivery of apartments in Building 1, which is planned to start by the end of the month.
The balance sheet value of the project as of 31 December 2015 was US\$148.5 million.
Paveletskaya II is residential complex located on the Paveletskaya Embankment close to Moscow City centre. The project is located in the Danilovsky Subdistrict (the south
administrative district of Moscow) and can be easily accessed by private or public transport. The new business-class residential complex, marketed as "AFI Residence Paveletskaya" will be built on a land plot of 5.5 Ha and will feature several buildings of various height with a total GBA of 133,510 thousand sq.m. AFI Residence Paveletskaya will include a sports complex and commercial areas. The project is to be constructed in three phases.
The main construction phase of the project was launched in December 2015 and pre-sales of apartments started at the same time. The preliminary construction works started already in Q3 2015, and the project was reclassified from Investment properties under development category to Trading properties under construction category of assets on the balance sheet as of 30 September 2015. As of the date of publication of this report, 31 contracts for sales of flats and 3 for sales of "apartments" have been signed.
Based on an independent valuation of the Company portfolio by JLL as of 31 December 2015, the fair value of Paveletskaya Phase II is US\$55.9 million.
Bolshaya Pochtovaya is a mixed-use project with predominantly residential use. It is located in an attractive neighbourhood in the central administrative district of Moscow. The area benefits from a developed infrastructure: 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 170,350 sq.m on a land area of 5.65 hectares.
The development plan for the property anticipates construction of 170,350 sq.m GBA, which includes a residential area of 56,952 sq.m, a commercial area of 34,208 sq.m and 1,771 underground parking spaces. AFI Development is currently developing the design of the project and plans to start construction in H2 2016.
Based on an independent valuation of the Company portfolio by JLL as of 31 December 2015, the fair value of Bolshaya Pochtovaya is US\$71.5 million.
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, within walking distance from Botanicheskuiy Sad and Sviblovo metro stations. The future residential complex has a land plot of 3.2 Ha and a gross building (GBA) of 217,6055 sq.m (including "city share"): 111,768 sq.m of residential
5 According to the updated City development plan
area, 14,927 sq.m of commercial premises and 1,025 underground and above ground parking lots.
AFI Development has been reviewing the planning and designs of the project to meet the changing consumer demand.
Based on an independent valuation of the Company portfolio by JLL as of 31 December 2015, the fair value of Botanic Garden is US\$18.6 million.
Tverskaya Plaza Ic is a Class A office 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 61,810 sq.m (including underground parking of approximately 467 parking spaces) and an estimated GLA of 37,035 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. AFI Developments plans to start construction of this project as soon as it has secured debt financing on favourable terms and the market situation improves.
Based on an independent valuation of the Company's portfolio by Jones Lang LaSalle as of 31 December 2015, the fair value of Tverskaya Plaza Ic is US\$65.5 million.
Plaza IV is a Class A office complex with supporting ground level retail zones, located at 11, Gruzinky Val. The project has a GBA of 108,000 sq.m (including underground parking) and an estimated GLA of 61,350 sq.m
During 2015, the Company completed the steps for securing the land lease agreement with Moscow authorities.
Based on an independent valuation of the Company portfolio by Jones Lang LaSalle as of 31 December 2015, the fair value of the Company share in Plaza IV (95%) was US\$65.2 million.
Kossinskaya is mixed-use building totalling 111,700 sq.m with nine aboveground floors and a single underground level. The property was constructed in 2005. In November 2014, AFI Development's Board of Directors decided to place on hold and reconsider further implementation of the development concept of Kossinskaya as apparel and fashion wholesale
trade centre "Expolon", in light of the current economic situation in Russia. The Company continues to explore various development options in light of the current economic situation.
Based on an independent valuation of the Company portfolio by JLL as of 31 December 2015, the fair value of Kossinskaya is US\$27.8 million.
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 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.
This section presents information about the Company's exposure to each of the risks listed below, the Company's objectives, policies and processes for measuring and managing risks.
The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework and is responsible 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 how management monitors 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 Company's Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee and the whole Board of Directors. The Board of Directors requests the management to take corrective actions as necessary and make follow up reports to the Audit Committee and to the Board on addressing deficiencies found.
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.
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-creditquality 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.
The Company 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 existing counterparty to fail to meet its obligations, except as disclosed in note 33 to the Company's Audited Financial Statements for year 2014.
The Company's policy is to provide financial guarantees only to wholly-owned subsidiaries in exceptional cases. In negotiations with lending banks the Company is aiming to avoid recourse to AFI Development on loans taken by subsidiaries. As at 31 December 2015, there were two outstanding guarantees: one for the amount of US\$1 million in favour of VTB Bank JSC under a loan facility agreement of Bellgate Construction Limited (AFIMALL City) and the second one for the amount of US\$ 193.4 million in favour of VTB Bank JSC under a loan facility agreement of Krown Investments LLC (Ozerkovskaya III).
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.
AFI Development's liquidity position is monitored on a daily basis by the management, which takes necessary actions if required. The Company structures its assets and liabilities in such a way that liquidity risk is minimised.
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 both foreign currency exchange rates and interest rates. We do not use financial instruments, such as foreign exchange forward contracts, foreign currency options and forward rate agreements, to manage these market risks. To date, we have not utilised any derivative or other financial instruments for trading purposes.
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 2014, 27% of our financial liabilities were fixed rate. For more detail see note 33 to our consolidated financial statements.
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 and Russian Rouble.
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 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. Compliance with Company standards is supported by a programme of periodic reviews undertaken by way of internal audits. The results of the
internal audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and the Board of Directors.
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.
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 (which currently comprise the majority of our projects) 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 and 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.
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 recognizing or avoiding impairment charges
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.
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.
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 nonmarket performance conditions attached to the transactions are not taken into account in determining fair value.
There were no related party transactions (as defined in UK Listing Rules) in the financial year ended 31 December 2015 or in the period since 31 December 2015.
In the current section of the report the Company provides disclosures and statements of compliance with various UK Listing Rules applicable to it, in particular as required under the UK Listing Rule 9.8.4 R.
The Board of Directors states as follows:
AFI Development Plc has a controlling shareholder, Africa Israel Investments Limited, which was holding a 64.88% interest in AFI Development Plc as of 31 December 2015.
The Company has entered into a Relationship Agreement under the UK Listing Rule 9.2.2A R (a) with its controlling shareholder, Africa Israel Investments Limited, on 16 September 2014 ("the Relationship Agreement). This agreement replaced the previous relationship agreement made by the Company with its controlling shareholder in 2007.
The Board of Directors is satisfied that the Company has complied with the independence provisions in the Relationship Agreement during 2015.
So far as the Company is aware, the independence provisions included in the Relationship Agreement have been complied with during 2015 by the controlling shareholder and any of its associates.
All independent directors supported the above statement.
At the Annual General Meeting of Shareholders held on 6 November 2014 the Company adopted changes to its Articles of Association to allow election and re-election of independent directors in accordance with the provisions of UK Listing Rules 9.2.2.E R and 9.2.2F R.
At the Annual General Meeting of Shareholders held on 21 October 2015, the Company had a separate meeting of independent shareholders of the Company's B-shares (the premium listed shares) to approve the re-election of its independent directors, as required by the UK Listing Rules 9.2.2E R. All independent directors were approved by the meeting of independent shareholders. The Company is therefore in compliance with the UK Listing Rule 9.2.2E R.
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 2014 UK Corporate Governance Code 6 (the "Code") or to explain its reasons for noncompliance. 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.
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 required by section A.3.1 of the Code) by virtue of the fact that he is, indirectly, a major shareholder of the Company. Mr Leviev holds a controlling stake in Africa Israel Investments Ltd., the major shareholder of the Company. The directors consider Mr Leviev to be a key member of the Company's leadership and are of the opinion that his oversight, management role and business reputation are important to the Company's success. The directors are therefore of the view that Mr Leviev should continue as Executive Chairman as it would be beneficial for the Company.
The Board seeks to present a balanced and understandable assessment of the Company's position and prospects, and details are given in the Directors' Report.
The directors are responsible for the preparation of the Annual Report and financial statements of the Company.
The Full Year 2015 financial statements were approved by the Board of Directors on 17 March 2015, and published on 18 March 2015. After having reviewed a cash flow projection for the 12 months period, having discussed it with management and the Company auditors, the directors reached a reasonable expectation that the Company had adequate resources to continue in operational existence for the coming 12 months. For this reason, they adopted the going concern basis in preparing the accounts.
6 A copy of the Code can be downloaded free of charge from the Financial Reporting Council website at http://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Corporate-Governance-Code.aspx
However, after the aforementioned publication of the preliminary annual report and audited consolidated financial statements for 2015, the Company's operating subsidiary AFI RUS LLC received on 29th March 2016 two letters from Bank VTB PJSC ("the Bank"), one in relation to Bellgate Construction Limited ("Bellgate") and the second - to Krown Investments LLC ("Krown") (the borrowers under the AFIMALL City and the Ozerkovskaya III loan facilities respectively). The letters, identical in their language, stated that the Bank had reached a conclusion that Bellgate and Krown experienced, in the opinion of the Bank, material adverse changes in their financial conditions and there had appeared other circumstances that indicated that their obligations under the loan facility agreements could be not met on time. According to the letters, the Bank proposed that the Company "implement steps aimed at removing possible negative consequences of the aforesaid circumstances, no later than 30 calendar days from today", otherwise the Bank will exercise its right under the loan facility agreements to claim early repayment of the loans. The management of AFI RUS LLC, under the mandate from the Board of Directors, is currently negotiating possible solutions with the Bank, while the Board of Directors is closely monitoring the developments.
As of the date of publication of this Annual Report, the Board of Directors is aware of the risk that the settlement with the Bank may not be reached and the Bank may require re-payment of the loans ahead of schedule.
The Board assessed the prospects of the Company over a period of five years in December 2015 and a 12 months cash flow projection in March 2016. The Board approves detailed Company business plans for each calendar year, which include five years projections, the period that the Board considers most appropriate
Where appropriate, sensitivity and scenario analysis are used to stress-test the resilience of the Company and its business model to the potential impact of the principal risks, or a combination of those risks.
The Board confirms that its assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency and/or liquidity, and which are set out in the Principal Risks and Uncertainties section of this report was robust.
When the Full Year 2015 financial statements were approved by the Board of Directors on 17 March 2015 (published on 18 March 2015), on the basis of this robust assessment of the principal risks facing the Company, and on the assumption that they are managed or mitigated in the ways disclosed, the Board's review of the business plan and other matters
considered and reviewed during the year, the Board reached a reasonable expectation that the Company would be able to continue in operation and meet its liabilities as they fall due till March 2017.
However, after the preliminary annual report and audited consolidated financial statements for 2015 were published, the Company's operating subsidiary AFI RUS LLC received, on 29th March 2016, two letters from Bank VTB PJSC ("the Bank"), one in relation to Bellgate Construction Limited ("Bellgate") and the second – to Krown Investments LLC ("Krown") (the borrowers under the AFIMALL City and the Ozerkovskaya III loan facilities respectively). The letters, identical in their language, stated that the Bank had reached a conclusion that Bellgate and Krown experienced, in the opinion of the Bank, material adverse changes in their financial conditions and there had appeared other circumstances that indicated that their obligations under the loan facility agreements could be not met on time. According to the letters, the Bank proposed that the Company "implement steps aimed at removing possible negative consequences of the aforesaid circumstances, no later than 30 calendar days from today", otherwise the Bank will exercise its right under the loan facility agreements to claim early repayment of the loans. The management of AFI RUS LLC, under the mandate from the Board of Directors, is currently negotiating possible solutions with the Bank, while the Board of Directors is closely monitoring the developments.
As of the date of publication of this Annual Report, the Board of Directors is aware of the risk that the settlement with the Bank may not be reached and the Bank may require re-payment of the outstanding loans ahead of schedule.
Throughout 2015, the Company had a strong non-executive representation on the Board. Of the five7 directors currently on the Board, there are four non-executive directors, three of whom are independent. The three independent non-executive directors are Christakis Klerides, Panayiotis Demetriou and Moshe Amit. Christakis Klerides continued to serve as Senior Independent Director, a position he was appointed to in 2010. None of the directors that the Board determined as independent has been an employee of the Company, has had a material business relationship with the Company, has received additional remuneration from
7 At the Annual General Meeting of Shareholders on 21 October 2015, the directors Mr John Robert Camber Porter and Mr Mark Groysman were not proposed for re-election and ceased to be directors. The number of directors had been reduced from seven to five.
the Company apart from director's fee, has had close family ties with any of the Company's advisers, directors or senior employees, holds cross-directorships or has significant links with other directors, represents a significant shareholder or has served on the Board for more than nine years.
The biographies of directors are provided in this report in the 'Board of Directors' section above and can also be reviewed on the website of the Company at: http://www.afidevelopment.com/en/about/board-of-directors
The Board is satisfied that no one individual or group of directors has unfettered powers of discretion, that an appropriate balance exists between the executive and non-executive members of the Board and that between them, the directors bring the range of skills, knowledge and expertise necessary to lead the Company.
The roles of the Executive Chairman and Chief Executive are split and clearly defined. The Executive Chairman, Mr Lev Leviev, provides strategic leadership and leads key negotiations with the Moscow Authorities, other government authorities in regions of AFI Development operations, with key lenders and with its counterparties in transactions of strategic importance. Additionally, the Executive Chairman is generally responsible for the governance of the Board, for facilitating the effective contribution of all directors and for ensuring that Board members are aware of the views of major shareholders. The Chief Executive in the Company's structure is the CEO of AFI RUS LLC, the main operating subsidiary of the Company. The Chief Executive, Mr Mark Groysman, occupies this position since 2011. Mr Groysman is responsible for all aspects of the operation and management of the business in the Russian Federation. His role includes developing an appropriate business strategy for Board approval, and ensuring that the agreed strategy is implemented in a timely and effective manner.
On 21 October 2015, Mr Mark Groysman ceased to be executive director and from this date the only executive director at the Board has been the Executive Chairman, Mr Lev Leviev. Mr Groysman continues to concentrate on leading the Russian operations and managing the Company's projects and is reporting to the Board without being its executive member.
The Board of Directors normally meets at least five times a year to review trading performance, budgets and funding; to set and monitor strategy; to examine acquisition opportunities; and to report to shareholders. There is a formal schedule of matters specifically reserved to the Board for decisions8 . The Board is responsible for the strategy, approval of
8 A copy of the schedule can be found on the Company website: www.afi-development.com.
annual budgets, approval of interim and final financial results, maintaining the system of internal control, compliance and risk management, approving major transactions and other matters.
To enable the Board to perform its duties, each director has full access to all relevant information. It is the Executive Chairman's responsibility to ensure that the Board is provided with accurate, timely and clear information in relation to the Company and its business.
| Name | Board | Audit Committee |
Remuneration Committee |
Nomination Committee |
|---|---|---|---|---|
| Lev Leviev* | 3 | - | - | - |
| Mark Groysman | 6 | - | - | - |
| Avraham Novogrocki* | 7 | - | - | 0 |
| Christakis Klerides | 9 | 5 | 1 | 0 |
| Moshe Amit | 9 | 5 | 1 | 0 |
| John Porter | 6 | 3 | 1 | 0 |
| Panayiotis Demetriou | 9 | - | 1 | 0 |
| Dates held | 01.07.2015 | |||
| 16.03.2015 | 16.03.2015 | 16.03.2015 | ||
| 22.05.2015 | 22.05.2015 | |||
| 19.06.2015 | ||||
| 01.07.2015 | ||||
| 04.08.2015 | ||||
| 24.08.2015 | 24.08.2015 | |||
| 17.11.2015 | 17.11.2015 | |||
| 21.12.2015 | 21.12.2015 | 21.12.2015 | ||
| No. of meetings held during 2015 |
9 | 5 | 1 | 0 |
Attendance at Board Meetings in 2015 was as follows:
Note: Where '-' is shown, the director listed is not a member of the committee.
*In the meetings dated 19.06.2015 and 01.07.2015 the directors Mr Leviev and Mr Novogrocki could not participate due to the related party character of the issues discussed.
The matters discussed at the board meetings included:
All directors, the Board and each of the Board Committees are authorised to obtain independent legal or other professional advice as necessary, to secure the attendance of external advisers at their meetings and to seek information from any employees of the Company in order to perform their duties.
At the Board Meeting on 21 December 2015 the non-executive directors met without the Chairman present to appraise the Chairman's performance in 2015.
Non-executive directors are invited to join the Board for a three-year period, subject to reelection by shareholders as provided for in the Company's articles of association.
The Board has adopted a policy and procedures for managing and, where appropriate, approving conflicts or potential conflicts of interest.
Insurance cover is in place to protect board members and officers against liability arising from legal action taken against them in the course of their duties.
The appointment and removal of the Company Secretary is a matter for the Board. All directors have access to the advice and services of the Company Secretary.
In 2015 AFI Development conducted performance evaluations for the Board its committees and individual directors in-house using the "Board Governance Analysis" service package of the UK Institute of Directors.
The appraisal of the Chairman's performance was conducted in December 2015 by the nonexecutive directors, under the leadership of Mr Christakis Klerides, the Senior Independent Director.
The Company's Executive Chairman, Mr Lev Leviev, holds a 48.13% stake in Africa Israel Investments Ltd and also serves as its Chairman. In addition he is the owner and the President of the LLD Diamonds Ltd, and the President of the Federation of Jewish Communities of the CIS.
In accordance with the Code, the Company has established an Audit Committee, a Nomination Committee and a Remuneration Committee, each of which has defined terms of reference which are summarised below and available on the Company's website: www.afidevelopment.com. Members of these committees are appointed principally from among the independent directors. Each committee and each director has the authority to seek independent professional advice where necessary and to discharge their respective duties at the Company's expense.
The Nomination Committee is comprised of three directors: Moshe Amit (Chairman), Christakis Klerides and Avraham Novogrocki. All members of the Committee, except Mr Novogrocki, are independent non-executive directors. The Nomination Committee meets as required for its role. It is responsible for preparing selection criteria and appointment procedures for members of the Board and reviewing on a regular basis the structure, size and composition of the Board. In undertaking this role, the Committee refers to the balance of skills, knowledge, independence and experience required on the Board based on the Company's stage of development and in light of such considerations, makes its appointment recommendations to the Board. When assessing candidates, the Nomination Committee uses objective criteria; all appointments are based on merit. The Nomination Committee also considers future appointments and makes recommendations regarding the composition of the Audit and Remuneration Committees.
When appointing new directors to the Board, objective criteria are applied. Appointments are made on merit with due regard to the benefit of diversity on the Board, both in terms of a broad range of skills, expertise and experience, and with respect to gender. The Company is committed to the principle of diversity and equal opportunities. As of 31 December 2015, female representation across the workforce of AFI Development was approximately 70%, while at the middle management level the figure was approximately 51%. In addition, 33% of the senior management team of OOO AFI RUS, the Company's main operating subsidiary, are female.
During 2015 the Nomination Committee did not meet.
The Remuneration Committee consists of three directors: Panayiotis Demetriou (Chairman), Moshe Amit and Christakis Klerides. All committee members are independent non-executive directors. The Remuneration Committee is responsible for:
The remuneration of non-executive directors is determined by the Chairman outside the framework of the Remuneration Committee, although this can be reviewed by the Remuneration Committee. No director or manager may be involved in any discussions or decisions relating to his or her own remuneration.
The Remuneration Committee discussed the existing executive remuneration practices in place and came to the opinion that the remuneration package of executive directors should be determined on an individual basis, in the context of both the market in which the Company operates and good corporate governance practice. In determining executive directors' individual remuneration packages, the Remuneration Committee applies the provisions of Schedule A to the Code. As of 31 December 2015, the Company had one executive director, Mr Lev Leviev.
The Remuneration Committee met on one occasion in 2015. It discussed and made recommendations to the Board on the review of remuneration packages of executive directors and senior executives.
The Remuneration Committee did not appoint any external consultants during 2015.
The Audit Committee comprises two independent directors and meets at least five times each year at appropriate times in the reporting and audit cycle of the Company and more frequently if required. The members of the Audit Committee are: Christakis Klerides (Chairman) and Moshe Amit (John Porter was a Committee member till 21 October 2015,
when he ceased to be a director). All members of the Committee are independent nonexecutive directors.
The purpose of the Audit Committee is to assist the Board in fulfilling its responsibilities of oversight and supervision of, among other things:
The Audit Committee supervises and monitors, and advises the Board on risk management and control systems and the implementation of codes of conduct. In addition, the Audit Committee supervises the submission by the Company of financial information and a number of other audit-related issues (both external and internal) and makes recommendations to the Board accordingly.
In 2015 the Committee recommended to extend the appointment of Messrs KPMG Limited as the Company external auditors and to approve its remuneration. Messrs KPMG Limited serve as the Company auditors since its IPO in 2007 and the Committee is fully satisfied with its work and that the remuneration of the auditors is adequate and competitive (the Company did not conduct a tender for external audit since 2007).
External auditors are present at every meeting of the Audit Committee. The auditors' reports are reviewed and discussed by the Committee members to ensure the Committee understands all issues and, if required, appropriate action can be taken.
The Audit Committee held five meetings during 2015. The Board is satisfied that at all stages during 2015 at least two members of the Audit Committee had recent and relevant financial experience, while Mr Klerides possessed accounting competence.
The matters reviewed and considered by the Audit Committee in 2015 included:
The Internal Audit Report on the H2O Project – Asset Management;
The Internal Audit Report in Investor and Public Relations.
During 2015 the Committee did not discuss any significant issues in relation to the financial statements.
During 2015, the Company did not pay any dividends. In the future, the Company may consider making dividend payments in respect of its ordinary shares, when and if commercially prudent, after taking into account profits, cash flow and capital investment requirements. No dividends will be paid otherwise than out of profits.
The Company takes its commitment to health and safety very seriously. It reviews its policies, procedures and standards on a regular basis to ensure that its properties and developments offer a safe environment for its employees, customers and suppliers, as well as for other visitors.
The Company works with its suppliers and contractors to ensure that they meet the Company's high health and safety standards.
The directors place considerable importance on maintaining open and clear communication with the Company's investors. The Company's investor relations department is dedicated to facilitating communication with shareholders.
The Company maintains an ongoing dialogue with its shareholders, discussing a wide range of relevant issues including strategy, performance, the market, management and governance within the constraints of the information already known to the market. The principal methods of communication with shareholders are the Company's news announcements, the interim report, the annual review and financial statements, the annual general meeting, the investors' conference calls and the corporate website. In addition, the Company undertakes regular meetings with investors and participates in sector conferences. Upon request, individual meetings with existing or potential investors can be arranged via the Investor Relations department of the Company.
The main shareholder of the Company is Africa-Israel Investments Limited ("AFI Investments"), which holds a 64.88% interest in AFI Development. AFI Development maintains on-going reciprocal communications with AFI Investments on several levels, including at a Board level, as the CEO of AFI Investments, Mr Avraham Novogrocki, is a Board member, and AFI Investments' Chairman, Mr Lev Leviev, is the Executive Chairman of AFI
Development. Additionally, several senior managers of AFI Investments regularly attend board meetings of AFI Development. Senior representatives of AFI Investments are therefore able to share views with non-executive directors, including the senior independent director, during AFI Development's Board meetings, to ensure that its views, issues and concerns are clearly communicated to AFI Development's directors.
The remaining shareholder base of AFI Development consists of a diverse group of small shareholders, each of whom holds a stake of less than 3%. Communication with these shareholders is maintained through public and regulatory channels.
During the course of a year, shareholders are kept informed of the progress of the Company through results statements and other announcements that are released through the Regulated Information Service of the London Stock Exchange and other news services. Company announcements are made available simultaneously on the Company's website, affording all shareholders full access to material information. Shareholders can also raise questions directly with the Company at any time through a facility on the Company's website.
Following publication of quarterly results the Company organises conference calls, during which interested investors, analysts, business journalists and the general audience can converse with senior representatives of the Company. The times and contact numbers of these conference calls are announced in advance via the Regulated Information Service of the London Stock Exchange and published on the Company website.
The Company's annual general meeting allows individual shareholders the opportunity to question the Executive Chairman and members of the Board. Notice of the annual general meeting is sent to shareholders at least 21 days before the meeting. At the meeting, after each resolution has been passed, details are given of the number of proxies lodged together with details of the number of votes cast for and against each resolution.
On 17 March 2014 the Board of Directors appointed Mr Ami Faivel as the internal auditor of the Company. Mr Faivel continued to serve as the internal auditor during 2015.
The internal auditor is responsible for the recommendation of an annual auditing plan to the Audit Committee. Subsequently, the internal auditor carries out auditing assignments in accordance with such a plan and oversees and reports on the Company's compliance with the plan's recommendations. The internal auditor is available for any meetings of the Audit Committee and/or of the Board of Directors.
The Board has overall responsibility for maintaining the Company's system of internal control to safeguard shareholders' investments and the Company's assets, as well as for monitoring the effectiveness of this system. The Audit Committee supervises, monitors and advises the Board of Directors on risk management and control systems together with the implementation of codes of conduct and the auditing plan recommended by the internal auditor.
The Company implements its procedures according to the best practice on internal control provided in the UK Financial Reporting Council "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting" ("the FRC Guidance"). The Company's system of internal control supports identification, evaluation and management of the risks affecting the Company and the business environment in which it operates.
Additionally, as part of the Africa Israel Investments Group, AFI Development has to comply with the requirements of the Israel Securities Authority's regulations and guidelines for the execution of an effective evaluation of internal control over financial reporting and disclosure by the Board and management.
These regulations were introduced to improve the quality and accuracy of financial reporting and disclosure for "reporting companies" in Israel, within the meaning thereof in the Securities Law 1968 (hereinafter – "the Israeli Securities Law"), by improving the internal control infrastructure over the financial reporting and disclosure processes in companies and by strengthening management commitment to ensuring their quality and accuracy. For this purpose, the regulations include an obligation on the part of "reporting companies" in Israel to attach to their financial statements a management declaration regarding the accuracy of the financial information included therein. The regulations also introduce a reporting obligation to prepare a separate report of the Board and management regarding the effectiveness of the internal control over financial reporting and disclosure. Additionally, "reporting companies" have an obligation to attach an opinion report of an external auditor regarding the effectiveness of the internal control.
As a practical result, management of a "reporting company" is required to establish a system of internal control over the financial reporting and the disclosure processes, which is intended to provide a reasonable level of confidence regarding the accuracy and reliability of financial reports and disclosures.
The management of the "reporting company" is required to monitor the company's system of internal control on an ongoing basis in order to ensure that the effectiveness of the internal control is constantly adapted to changes in the company and its activities.
The Company's systems of risk management and internal control are designed, inter alia, to provide a reasonable amount of confidence as to the reliability of the Company's financial reporting, to ensure that the financial reports are prepared in accordance with the requirements of the law and to ensure that the information that the Company is required to disclose in its reports and announcements is gathered, processed, summarised and reported on time and in the format set forth in the Disclosure and Transparency Rules and the Listing Rules of the UK Listing Authority.
The system of internal control at AFI Development is structured along four main groups of controls:
Compilation and preparation of the statements including the relevant disclosures; Discussion and approval of the financial statements by the relevant corporate organs.
In order to comply with the provisions of the FRC Guidance, the Company included in its system of internal control specific controls over business operations and risk management, which are monitored together with the controls over financial reporting and disclosure, as required by the Israeli Securities Law.
AFI Development Group employs a full time dedicated internal controller, who is responsible for day-to-day management of the internal control system, preparation and maintenance of necessary documentation, liaising with internal auditors and for internal control reporting to senior management.
Authority is delegated from the Board through the senior management to the operating divisions and clear reporting lines and assigned responsibilities exist amongst different management levels within each division. Segregation of duties is applied throughout the Company.
The Company has a clearly set out organisational structure with well-defined reporting lines between the Board and the heads of each operating division.
The Board of Directors has ultimate decision-making power over significant matters relating to the financial management of the Company such as material changes in banking arrangements (including a change of bankers facilities and signatory category limits), approval of project budgets, General Annual Budget and the Annual Working Programme, changes to the Company's capital structure, and acquisitions and disposals of subsidiaries or projects.
The Company has comprehensive project-based budgeting and reporting processes as well as a finance reporting process, and produces monthly operational results and forecasts.
Detailed annual budgets for the coming year are presented to the Board in December.
Senior management of the Company has implemented the appropriate controls for the Company's financial reporting processes.
In the course of the investment appraisal process the following guidelines are followed by the Company's management:
The Company has a well-defined strategy, which is determined by the senior management and approved by the Board.
The policies and procedures relating to the core business processes are formally documented and communicated to the relevant employees.
The Company retains legal counsel in all relevant jurisdictions in order to ensure on-going compliance with all applicable laws and regulations.
Assurances on compliance with the internal control systems are obtained through a number of monitoring processes, including a formal annual quarterly confirmation of compliance provided by Mr Mark Groysman and Mrs Natalia Pirogova, respectively the Chief Executive Officer and the Chief Financial Officer of AFI RUS LLC.
Based on results of a test of the effectiveness of the Company's risk management and internal control systems conducted as at 31 December 2015, the Board concluded that for the period ending on 31 December 2015 the risk management and internal control systems were effective. The Board continues to monitor the effectiveness of these systems on an ongoing basis as follows:
AFI Development Plc. became a premium listed company on the London Stock Exchange in 2010 and during 2011 the Remuneration Committee and the Board of Directors revised the principles for executive and non-executive directors' remuneration to meet the requirements of the Code. The same principles were applied during 2015.
The Company believes that its remuneration policies should be effective in attracting, retaining and motivating directors to produce superior results for the Company and in continuously creating sustainable value for its shareholders. The Company makes a clear distinction between the remuneration structure for executive and non-executive directors.
Non-executive directors have a non-performance-related remuneration structure, reflecting the time commitment and responsibilities of their role. Non-executive directors are encouraged to participate in Board meetings in person (the attendance fee for "teleconference participation" in Board meetings is 50% of the attendance fee for "in
person participation"). In addition, the base fee of the Senior Independent Director is higher than that of the other non-executive directors to reflect the additional duties and responsibilities conferred to such a director under the Code.
Executive directors' remuneration, is performance related and includes bonuses and a long term incentive component (usually participation in the Company's share option plan). The Remuneration Committee designs remuneration packages for executive directors on an individual basis, taking into account the provisions of Schedule A of the Code.
The AFI Development Share Option Plan (the "Share Option Plan") was adopted by the Board on 12 April 2007. The Remuneration Committee has responsibility for granting options and supervising and administering the Share Option Plan. The Plan is discretionary and options will only be granted when the Remuneration Committee so determines. All employees and directors (except independent directors) of the Company, and those of the Company's holding company or any of its subsidiaries, are eligible to participate in the Share Option Plan at the discretion of the Remuneration Committee. Options are currently intended to be granted only to senior managers, directors (except non-executive directors) and key personnel of the Company or any of its subsidiaries.
The exercise price of an option for each A Ordinary Share, B Ordinary Share or Global Depository Receipt, is determined by the Remuneration Committee and should not be lower than the closing market price on the day preceding the day of grant, unless the Remuneration Committee determines at its discretion that a lower price is required, for example, in order to facilitate the recruitment or retention of a key executive. In any 10 year period, not more than 10% of the Company's issued ordinary share capital may be issued or be issuable under the Share Option Plan and any other employee share plan that the Company operates. Options that have been released or lapsed without being exercised are ignored for the purposes of this maximum limit.
Subject to the participant discharging any relevant tax liability, options will normally be exercisable at the following times: (a) as to one-third of the A Ordinary Shares, B Ordinary Shares or GDRs in respect of which options were granted from the second anniversary of the grant, (b) as to a further one-third of the A Ordinary Shares, B Ordinary Shares or GDRs from the third anniversary of grant, and (c) as to the remainder of the A Ordinary Shares, B Ordinary Shares or GDRs from the fourth anniversary of grant. A different vesting schedule may be determined by the Remuneration Committee at grant. The vesting of options already granted is not subject to any performance conditions. The Remuneration Committee may, however, determine that options granted in the future should be subject to performance conditions.
If a participant dies, her/his options will be exercisable within a period of 12 months following her/his death. If a participant ceases to be an employee or director by reason of injury, disability, redundancy, the sale of the business for which he works to a third party, or retirement, her/his options may generally be exercised within 6 months of cessation. If a participant ceases to be an employee or director for any other reason, her/his options will normally lapse unless and to the extent the Remuneration Committee decides otherwise.
The Remuneration Committee may satisfy (generally with the consent of the participant) an option on exercise by paying to the participant in cash or other assets the gain (i.e. the difference between the market value of the relevant B Ordinary shares or GDRs on the date of exercise and the exercise price), as an alternative to issuing or transferring the B Ordinary Shares or transferring or procuring the transfer of GDRs to the participant.
The Remuneration Committee may amend the rules of the Share Option Plan at any time. The Share Option Plan will terminate upon the tenth anniversary of approval, if not terminated earlier by the Remuneration Committee. Termination of the Share Option Plan will not affect the subsisting rights of the participants.
In 2015, the Company did not grant any share options under the Share Option Plan.
The aggregate emoluments of each of the directors (including benefits in kind) for the financial accounting period ending 31 December 2015 were as follows:
| Name | Salary/Fee, US\$ | Benefits in kind, US\$ |
Annual bonuses, US\$ |
Pension, US\$ |
Total, US\$ |
|---|---|---|---|---|---|
| Lev Leviev | 1,200,000 | 0 | 0 | 0 | 1,200,000 |
| Mark Groysman | 500,000 | 0 | 0 | 0 | 500,000 |
| Avraham Novogrocki |
0 | 0 | 0 | 0 | 0 |
| Christakis Klerides | 70,071 | 0 | 0 | 0 | 70,071 |
| Moshe Amit | 64,800 | 0 | 0 | 0 | 64,800 |
| John Porter | 54,576 | 0 | 0 | 0 | 54,576 |
| Panayiotis Demetriou |
67,534 | 0 | 0 | 0 | 67,534 |
As of 31 December 2015, there was no long term incentive plan available for the directors.
GDRs:
As of 31 December 2015, there were valid options over 1,017,240 GDRs granted with an exercise price of US\$7 vesting one-third on the second anniversary of the date of grant, a further one-third on the third anniversary and the remaining one-third on the fourth anniversary of the date of grant provided the participants remain in employment until the vesting date. The vesting is not subject to any performance conditions. The options for all 1,017,240 GDRs vested and their contractual life is 10 years from the date of the grant.
As of 31 December 2015, there were valid options over 46,098,538 B Ordinary shares. Options over 15,191,563 B Ordinary shares were granted on 21 May 2012 with an exercise price of US\$0.7208 and an option for 31,430,822 B Ordinary Shares was granted on 22 November 2012 with an exercise price of US\$0.5667. All options are vesting one-third on the second
anniversary of the date of grant, a further one-third on the third anniversary and the remaining one-third on the fourth anniversary of the date of grant provided that the participants remain in employment until the vesting date. The vesting is not subject to any performance conditions. As of 31 December 2015, 9,778,477 options with an exercise price of US\$0.7208 and 20,953,881 options with an exercise price of US\$0.5667 have vested and become exercisable. If an Optionholder ceases to hold any office in, or be employed by, any Member of the AFI Development Group by reason of dismissal by the Optionholder's employer (except as a result of the Optionholder having been guilty of gross breach of duty or other serious breach of their employment contract, and as determined by the Remuneration Committee in its absolute discretion), the Optionholder shall remain entitled to exercise the option (to the extent already exercisable at the date of termination) within the period of 90 calendar days following the date of termination. If and to the extent that the Option has not been exercised nor otherwise lapsed in accordance with the Rules of the Share Option Plan, it shall lapse on the fifth anniversary of the date of the grant.
| Name of director |
Title | Amount of shares and class |
Date granted | Exercise price | Performance conditions |
Vesting dates and amount of shares vesting |
|---|---|---|---|---|---|---|
| Lev Leviev | Executive Chairman |
31,430,822 B Ordinary Shares |
22 November 2012 |
US\$0.5667 | None | 22 Nov 2014: 10,476,941 shares 22 Nov 2015: 10,476,941 shares 22 Nov 2016: |
| 10,476,940 shares | ||||||
| Mark Groysman |
Executive Director |
5,238,470 B Ordinary Shares |
21 May 2012 | US\$0.7208 | None | 21 May 2014: 1,746,157 shares 21 May 2015: 1,746,157 shares |
| 21 May 2016: 1,746,156 shares |
As of 31.12.2015, Company directors held the following share options:
No pensions and contributions are currently payable to the directors by the Company.
As at 31 December 2015, the Company's portfolio consisted of 8 investment properties, 6 investment properties under development, 2 trading property under development, 1 inventory of real estate and 4 hotel projects. The portfolio comprises commercial projects focused on offices, shopping centres, hotels, mixed-use properties and residential projects in prime locations in Moscow. The total value of the Company's assets, based predominantly on independent valuation as of 31 December 2015, was US\$1.4 billion9 . About 66% of the assets book value is attributed to yielding properties.
Revenues for 2015 decreased by 35% year-on-year to US\$93.7 million mainly due to the fact that the 2015 revenue was influenced by USD depreciation. Average exchange rate of RUB to USD more than doubled during 2015. AFI Development recorded a 15.6% year-on-year decrease in gross profit to US\$42.1 million due to the same reason. Cash, cash equivalents and marketable securities decreased by 54% to US\$42.5 million as at 31 December 2015 due to the fact that debt service and financing of construction work partly performed by own capital.
In 2015 AFI Development incurred net loss of US\$466.7 million, compared to net loss of US\$287.3 in 2014, mainly due to valuation loss of US\$490.5 million in Q4 2015.
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:
Our properties and projects are mainly located in Russia. As a result, Russian macroeconomic trends and country-specific risks significantly influence our performance.
The following table sets out certain macroeconomic information for Russia as of and for the dates indicated:
9 According to the IFRS rules, Investment property and Investment property under development are presented on a fair value basis, Trading property, Trading property under construction and Property, plant and equipment are presented on a cost basis.
| Year ended 31 December 2015, % |
Year ended 31 December 2014,% |
|
|---|---|---|
| Real Gross Domestic Product growth | -3.8 | 0.6 |
| Consumer prices | 15.8 | 7.8 |
Source: The International Monetary Fund
The following factors affected our performance in 2015:
During 2015, the Company did not make any disposals.
During 2015, the Company made the following acquisition:
On 19 August 2015 the Company acquired remaining 10% share in Bioka Investments Limited, company holding development rights in the Botanic Garden project, and became 100% owner of the project. Total consideration of the transaction amounted to US\$1.6 million.
Our consolidated financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union ("EU"), which were in effect at the time of preparing our consolidated financial statements, and the requirements of the Companies Law of Cyprus, Cap. 113. IFRS differs in various material respects from US GAAP and UK GAAP.
The key elements of our revenue recognition policies are as follows:
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 those employees who have provided construction consulting and construction management services with respect to our investment and trading property. 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.
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.
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.
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.
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.
An external, independent valuation company, having 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 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.
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 primarily from interest on our bank deposits and interest on loans to our joint ventures.
Our finance expense comprises 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 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 being incurred. Capitalisation of borrowing costs may continue until the assets are substantially 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 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%.
We capitalise all costs directly related to the purchase and construction of properties being 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 our employee costs related to such projects.
In addition, we capitalise financing costs related to development projects only during the period of construction of the projects. We do not, however, commence the capitalising of financing costs related to expenditures on a project until construction on each project begins. 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.
Our consolidated financial statements are presented in US Dollars, which is our functional currency. The functional currency of our Russian subsidiaries and joint ventures and one Cyprus company 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 denominated payables and receivables of our Russian subsidiaries.
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 a revised Russian VAT legislation, VAT can also be claimed during the period of construction provided that all required documentation is presented to the VAT authorities. We have accordingly included recoverable VAT as an asset on our balance sheet, the size of which we expect will slightly decrease as the development of our projects advances and necessary documents will be obtained.
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, we are not allowed to capitalise certain of the costs in relation to the design, construction and financing of projects that we capitalise for the purposes of our consolidated financial statements under IFRS. 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. However, such tax losses may only be carried forward to offset gains for a ten-year period under Russian tax law and they may only be utilised in the Russian subsidiary/branch in which such tax losses were generated.
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.
| US\$ million | For the year ended 31 December 2015 |
For the year ended 31 December 2014 |
Change 2015 / 2014 | |
|---|---|---|---|---|
| Revenue | ||||
| Construction consulting/management services |
0.1 | 0.2 | (0.1) | (39.1)% |
| Rental income | 92.9 | 141.4 | (48.5) | (34.3)% |
| Sale of residential | 0.7 | 2.4 | (1.7) | (72.0)% |
| 93.7 | 144.1 | (50.4) | (35.0)% | |
| Expenses | ||||
| Other income | 3.1 | 3.5 | (0.4) | (11.4)% |
| Operating expenses | (40.5) | (62.5) | 22.0 | (35.2)% |
| Administrative expenses | (10.6) | (22.3) | 11.7 | (52.3)% |
| including Bad debt provisions and write-offs |
0.1 | (4.6) | 4.7 | (102.2)% |
| Cost of sales of residential |
(0.6) | (1.6) | 1.0 | (62.7)% |
| Other expenses | (1.6) | (6.8) | 5.1 | (75.7)% |
| (50.4) | (89.7) | 39.3 | (43.9)% | |
| Share of the after tax (loss)/profit of joint |
(1.3) | (4.5) | 3.1 | (70.3)% |
Summary of statement of comprehensive income for 2015 and 2014
| Gross profit | 42.1 | 49.9 | (7.8) | (15.6)% |
|---|---|---|---|---|
| Profit on disposal of investments in subsidiaries |
- | 0.1 | (0.1) | - |
| Valuation loss on properties |
(434.4) | (85.9) | (348.5) | 405.8% |
| Impairment loss on inventory of real estate |
(12.7) | (8.9) | (3.8) | 42.3% |
| Results from operating activities |
(404.9) | (44.7) | (360.2) | 805.1% |
| Finance income | 4.2 | 7.0 | (2.8) | (39.9)% |
| Finance expense | (46.2) | (60.8) | 14.7 | (24.1)% |
| FX Gain/( Loss) | (110.3) | (224.8) | 114.5 | (50.9)% |
| Net finance income/(costs) |
(152.3) | (278.6) | 126.3 | (45.3)% |
| Profit before income tax | (557.2) | (323.3) | (233.8) | 72.3% |
| Income tax expense | 90.5 | 36.0 | 54.5 | 151.1% |
| Loss from continuing operations |
(466.7) | (287.3) | (179.4) | 62.4% |
To date, we have derived revenues from three sources: rental income, sale of residential properties and construction consulting and management fees.
We derive rental income from our investment properties and hotels that we acquired or developed in the past.
| For the year | For the year | Change 2015/2014 | ||||
|---|---|---|---|---|---|---|
| US\$ million | ended 31 December 2015 |
ended 31 December 2014 |
US\$ million | %% | ||
| Investment property | ||||||
| AFIMALL City | 71.3 | 107.0 | (35.7) | (33.4)% | ||
| H2O office building | 1.2 | 2.1 | (0.9) | (44.0)% | ||
| Berezhkovskya office building |
2.3 | 4.3 | (2.0) | (46.0)% | ||
| Paveletskaya I | 1.4 | 4.0 | (2.6) | (66.1)% | ||
| Premises at Bolshaya Pochtovaya |
2.7 | 5.1 | (2.4) | (46.7)% | ||
| Premises at Plaza IV (Gruzinsky Val) |
0.0 | 0.1 | (0.1) | (52.3)% | ||
| Premises at Tverskaya Zastava Square |
1.9 | 3.4 | (1.5) | (43.8)% | ||
| Ozerkovskaya (Aquamarine) III |
0.6 | 0.1 | 0.5 | 470.5% | ||
| Other land bank assets | 0.2 | 0.1 | 0.0 | 10.9% | ||
| Hotels | ||||||
| Aquamarine hotel | 5.1 | 7.2 | (2.1) | (29.3)% | ||
| Plaza Spa Hotel (Zheleznovodsk) |
6.2 | 8.0 | (1.8) | (22.6)% | ||
| Total | 92.9 | 141.4 | (48.5) | (34.3)% |
| For the year | For the year Change 2015/2014 |
|||
|---|---|---|---|---|
| US\$ million | ended 31 December 2015 |
ended 31 December 2014 |
US\$ million | |
| Revenue | ||||
| Ozerkovskaya II | 0.6 | 2.4 | (1.8) | (74.1)% |
| 4 Winds residential | 0.1 | - | 0.1 | 100.0% |
| Total | 0.7 | 2.4 | (1.7) | (72.0)% |
Operating expenses. Our operating expenses decreased by US\$22.0 million, from US\$62.5 million in 2014 to US\$40.5 million in 2015. The year-on-year decrease of 35.2% is attributable to cost saving and rouble devaluation versus the dollar.
Administrative expenses. Our administrative expenses decrease by US\$11.7million or 52.3% year-on-year, from US\$22.3 million in 2014 to US\$10.6 million in 2015. The decrease is attributable to decrease in bad debt provision from US\$4.6 of charge in 2014 to US\$0.1 of reverse in 2015 and other cost saving process in the Company.
Net valuation gain/(losses) on properties. Net result of investment property valuation decreased from a loss of US\$85.9 million in 2014 to a loss of US\$434.4 million in 2015. For additional information, please refer to "Portfolio Valuation" section below.
Impairment loss on inventory of real estate. Net result of real estate impairment decreased from a loss of US\$8.9 million in 2014 to a loss of US\$12.7 million in 2015. For additional information, please refer to "Portfolio Valuation" section below.
Finance income. Our finance income decreased by US\$2.8 million or 39.9% year-on-year, from US\$7 million in 2014 to US\$4.2million in 2015. The decrease was a result of the change in the Company financial investments portfolio.
Finance expense. Our finance expense decreased by US\$14.7million or 24.1% year-on-year, from US\$60.8 million in 2014 to US\$46.2 million in 2015. The decrease is due to repayment of principal amount of loans by US\$38.0 million and overall rouble devaluation versus the dollar.
FX Gain/(Loss). We recorded a foreign exchange loss of US\$110.3million in 2015, against a loss of US\$224.8 million in 2014. This was a result of Russian Rouble depreciation versus the US Dollar during 2015.
Income tax expense. Our current tax expense increased to US\$0.8 million compared to US\$0.6million in 2014.
Profit/Loss for the year. Due to the factors described above, we recorded a US\$466.7 million net loss for 2015 compared to net loss of US\$287.3 million for 2014.
| US\$ thousand | For the year ended 31 December 2015 |
For the year ended 31 December 2014 |
|---|---|---|
| Net cash from operating activities | 34,374 | 64,494 |
| Net cash from/(used in) investing activities | (14,815) | (116,540) |
| Net cash from/(used in) financing activities | (80,003) | (42,183) |
| Cash and cash equivalents at 31 December* |
26,545 | 86,756 |
|---|---|---|
| Cash and cash equivalents at 1 January | 86,756 | 193,330 |
| Net increase/(decrease) in cash and cash equivalents |
(60,211) | (106,574) |
| Effect of exchange rate fluctuations | 233 | (12,345) |
* Note: the cash and cash equivalents do not include US\$15.9 million (2014: US\$6.5 million) fair value of marketable securities.
Net cash from operating activities decreased to US\$ 34.4 million in 2015, from US\$64.5million in 2014. The decrease is attributable to the fact that sales of residential units in Odinburg, nominated in Russian rouble, created lower USD positive cash flow due to rouble depreciation.
Net cash outflow from investing activities amounted to US\$ 14.8 million is attributable to payments for construction of investment property under development and acquisition of investments in marketable securities.
Net cash used in financing activities increased to a negative US\$80.0 million in 2015 from a negative US\$42.2 million in 2014 due to the fact that the Company repaid part of principal amount and interests during 2015.
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.
We completed 2015 with of approximately US\$42.5 million cash, cash equivalents and marketable securities on our balance sheet and a debt10 to equity level of 77%.
Our 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 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.
| Project | Lending bank | Max debt limit (US\$ mn) |
Principal balance as of Dec-31, 2015 (US\$ mn) |
Available (US\$ mn) |
Nominal Interest rate |
Currency | Maturity (dd.mm.yy) |
|---|---|---|---|---|---|---|---|
| AFIMALL City |
VTB Bank JSC | 21 billion rub |
132.4 283.4 |
0 | 9.5% 3-month LIBOR + 5.02% |
RUR US\$ |
01.04.2018 |
| Krown Investment s LLC |
VTB Bank JSC | 220.0 | 193.0 | 0 | 3-month LIBOR + 7% |
US\$ | 26.01.2018* |
| Investment activity |
Julius Baer & Co. Ltd.,Zurich |
10.0 | 4.7 | 0 | refinancin g rate of the Bank plus 0.75% p.a. |
US\$ | unlimited period |
As of December 31, 2015 our debt portfolio was as follows:
* In January 2015 the loan was refinanced by VTB Bank JSC, please refer to Note 28 to the Consolidated Financial Statement
The total balance of secured Debt financing reached US\$613.9 million as at 31 of December 2015, including US\$613.5 million of Principal Debt and US\$0.4 million of accrued interest with average interest rate 7.05% per annum as at 31.12.2015 (6.88% per annum as at 31.12.2014) (for more details see note 28 to our consolidated financial statements).
As at 31 December 2015, our loans and borrowings were payable as follows:
10 Debt includes all loans and borrowings. For further details please see note 28 to the Financial Statements.
| US\$ thousand | As at 31 December 2015 |
As at 31 December 2014 |
|---|---|---|
| Less than one year | 224,315 | 231,684 |
| Between one and five years | 389,799 | 455,097 |
| Total | 614,114 | 686,781 |
In November 2015, the Company received a notice from VTB Bank on decision of the bank to postpone the applicability of covenants in the loan agreement of Krown Investments Limited ("Krown") for the Ozerkovskaya III project. According to the decision, the Loan-To-Value covenant (previously applicable from Q1 2015 onwards) shall be applicable from Q2 2017, while the Debt Service Coverage Ratio covenant (previously applicable from Q4 2015 onwards), shall be applicable from Q2 2017 onwards (based on Q1 2017 financial results). AFI Development's subsidiary owning and operating AFIMALL City, Bellgate Construction Limited, will provide a guarantee for the full amount of the loan of Krown, and AFIMALL City premises will be mortgaged in a secondary mortgage as additional collateral for the loan by Krown. The decision of the Bank will become legally binding, following the execution of addendum to the loan agreement and related documents.
As of the date of publication of these Financial Statements, the addendum to the loan agreement and the related documents have not yet been signed, as the parties still negotiate some issues in the addenda.
Based on the latest independent valuation as at 31 December 2015, of the Ozerkovskaya III project, Krown, has not met the Loan to Value covenant and the Bank may require a partial repayment of the principal of the loan sufficient to rectify the breach of the covenants, within 90 calendar days from the date of the Bank notification. The DSCR ratio covenant of the Krown loan agreement has not been met either, based on the performance results of Q4 2015.
Krown is, therefore, in breach of both covenants in its loan facility agreement. Based on this, the total amount of the outstanding loan (US\$193 million) was reclassified to current liabilities.
From the current reporting period and onwards AFI Development Plc has appointed Jones Lang LaSalle LLC ("JLL") as the Company independent appraisers. As at 31 December 2015, based on the JLL independent appraisers' report, the value of AFI Development's portfolio
of investment properties stood at US\$933.7 million, while the value of the portfolio of investment property under development stood at US\$ 238.9 million.
Consequently, the total value of the Company's assets, based predominantly on independent valuation as of 31 December 2015, was US\$1.4 billion, compared to US\$2.0 billion as at 31 December 2014.
| Property | Valuation 31/12/2015, US Dollars |
Valuation 31/12/2014, US Dollars |
Change in valuation, % |
Balance sheet value 31/12/2015, US Dollars |
Balance sheet value 31/12/2014, US Dollars |
|
|---|---|---|---|---|---|---|
| Investment property | ||||||
| 1 | H2O11 | 8,925,606 | 12,100,000 | -26% | 9,000,000 | 12,100,000 |
| 2 | Ozerkovskaya Phase III | 199,300,000 | 300,000,000 | -34% | 199,300,000 | 300,000,000 |
| 3 | Berezhkovskaya12 | 11,470,000 | 15,762,000 | -27% | 15,500,000 | 21,300,000 |
| 4 | AFIMALL City | 685,200,000 | 1,000,000,000 | -31% | 685,200,000 | 1,000,000,000 |
| 5 | Paveletskaya I7 | 11,504,114 | 19,338,150 | -41% | 11,600,000 | 19,500,000 |
| 6 | Plaza II | 9,200,000 | 15,200,000 | -39% | 9,200,000 | 15,200,000 |
| 7 | Plaza Ib | 3,400,000 | 5,400,000 | -37% | 3,400,000 | 5,400,000 |
| 8 | Sadovaya - Samotechnaya |
500,000 | 1,916,234 | -74% | 500,000 | 1,916,234 |
| Total | 929,499,720 | 1,369,716,384 | -32% | 933,700,000 | 1,375,416,234 | |
| Investment property under development | ||||||
| 9 | Plaza Ic | 65,500,000 | 87,700,000 | -25% | 65,500,000 | 87,700,000 |
| 10 | Plaza IIa | 1,900,000 | 3,600,000 | -47% | 1,900,000 | 3,600,000 |
| 11 | Plaza IV13 | 65,170,000 | 101,753,623 | -36% | 68,600,000 | 107,109,076 |
| 12 | Paveletskaya Phase II7 | - | 66,840,580 | -100% | - | 67,400,000 |
| 13 | Kossinskaya | 27,800,000 | 53,700,000 | -48% | 27,800,000 | 53,700,000 |
| 14 | Bolshaya Pochtovaya | 71,460,000 | 108,300,000 | -34% | 71,460,000 | 108,300,000 |
| Total | 231,830,000 | 421,894,203 | -45% | 235,260,000 | 427,809,076 | |
| Trading property & Trading property under development | ||||||
| 15 | Odinburg | n/a | n/a | - | 148,452,242 | 133,035,537 |
| 16 | Four Winds Residential | n/a | n/a | - | - | 624,284 |
| 17 | Ozerkovskaya II | n/a | n/a | - | 2,062,354 | 2,355,115 |
| 18 | Paveletskaya Phase II | 55,477,600 | - | n/a | 55,940,000 | - |
| Total | 55,477,600 | - | - | 206,454,596 | 136,014,935 | |
| Inventory of real estate | ||||||
| 19 | Botanic Garden | 18,570,000 | 18,100,000 | 3% | 18,570,000 | 20,111,111 |
| Total | 18,570,000 | 18,100,000 | 3% | 18,570,000 | 20,111,111 | |
| Land Bank Properties | ||||||
| 20 | Ruza | n/a | n/a | n/a | 3,665,000 | 3,665,000 |
| Total | - | - | 0% | 3,665,000 | 3,665,000 | |
| Hotels | ||||||
| 21 | Aquamarine Hotel | n/a | n/a | - | 13,075,377 | 17,343,063 |
| 22 | Plaza Spa Hotel in Kislovodsk14 |
n/a | n/a | - | 11,560,988 | 14,414,050 |
| 23 | Plaza Spa Hotel Zheleznovodsk |
n/a | n/a | - | 9,093,415 | 12,249,094 |
| 24 | Park Plaza hotel in Kislovodsk |
n/a | n/a | - | 3,319,081 | 4,241,520 |
| 25 | Versailles project in Kislovodsk |
n/a | n/a | - | - | - |
| Total | - | - | - | 37,048,861 | 48,247,727 | |
| Grand Total | 1,235,377,320 | 1,809,710,586 | -32% | 1,434,698,457 | 2,011,264,084 |
14 The project portfolio includes 50% owned joint ventures, which are accounted by equity method
11 Valuation figures represent Company's share (99%)
12 Valuation figures represent Company's share (74%)
13 Valuation figures represent Company's share (95%)
| Board of Directors | Lev Leviev - Chairman |
|---|---|
| Moshe Amit | |
| Avraham Noach Novogrocki | |
| Christakis Klerides | |
| Panayiotis Demetriou | |
| Secretary | Fuamari Secretarial Limited |
| Independent Auditors | KPMG Limited |
| Bankers | Joint Stock Company VTB Bank |
| Joint Stock Commercial Savings Bank of the Russian Federation (SBERBANK) |
|
| Raiffeisen Bank International AG | |
| Registered Office | Spyrou Araouzou 165, |
| Lordos Waterfront Building, | |
| 3035 Limassol, | |
| Cyprus |
The Board of Directors of AFI Development Plc (the "Company") presents to the members its annual report together with the audited consolidated financial statements of the Company for the year ended 31 December 2015.
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.
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 Africa Israel Investments Ltd.
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 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. 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 2015, the Company's portfolio consisted of 8 investment properties, 6 investment properties under development, 2 trading properties under construction, 1 property as inventory of real estate and 4 hotel projects. The portfolio comprises commercial projects focused on offices, shopping centres, hotels, mixed-use properties and residential projects in prime locations in Moscow.
The Group's results are set out in the consolidated income statement on page 87. The loss of the Group for the year before taxation amounted to US\$557,188 thousand (2014: US\$323,343 thousand). The loss after taxation attributable to the Group's shareholders amounted to US\$464,087 thousand (2014: US\$281,020 thousand).
The Board of Directors does not recommend the payment of a dividend and the loss for the year is transferred to retained earnings.
The most significant risks faced by the Group and the steps taken to manage these risks are described in note 33 of the consolidated financial statements.
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.
There were no changes to the share capital of the Company during the year. As at the year end the share capital of the company comprised:
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.
The Group operates five 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 and Triumvirate I S.a r.I branch operating investment properties and Bastet Estates Ltd branch acting as sale agents for residential properties.
The members of the Board of Directors as at 31 December 2015 and at the date of this report are shown on page 1. The directors' date of appointment and 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. Directors Mr Mark Groysman and Mr John Robert Camber Porter whose term expired, did not offer themselves for re-election at the AGM on 21 October 2015 There were no significant changes in the assignment of responsibilities of the Board of Directors during the year.
Events which took place after the reporting date and which have a bearing on the understanding of the financial statements are described in note 41 of the consolidated financial statements.
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, 17 March 2016
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 2015, the names of which are listed below, confirm that, to the best of our knowledge:
The Directors of the Company as at the date of this announcement are as set out below:
| The Board of Directors | |
|---|---|
| Executive director | |
| Lev Leviev – Chairman | … |
| Non-executive director | |
| Avraham Noach Novogrocki | |
| Non-executive independent directors |
Moshe Amit .............................................................
| Christakis Klerides | |
|---|---|
| Panayiotis Demetriou | |
| Company officers | |
| Chief executive officer | |
| Mark Groysman | |
| Chief financial officer | |
| Natalia Pirogova | |
17 March 2016
For the year ended 31 December 2015:
| 2015 | 2014 | ||
|---|---|---|---|
| Note | US\$ '000 | US\$ '000 | |
| Revenue | 7 | 93,726 | 144,088 |
| Other income | 8 | 3,125 | 3,507 |
| Operating expenses | 9 | (40,505) | (62,510) |
| Carrying value of trading properties sold | 22 | (609) | (1,632) |
| Administrative expenses | 10 | (10,640) | (22,303) |
| Other expenses | 11 | (1,649) | (6,773) |
| Total expenses | (53,403) | (93,218) | |
| Share of the after tax loss of joint ventures | 17 | (1,321) | (4,451) |
| Gross Profit | 42,127 | 49,926 | |
| Profit on disposal of investment in subsidiaries | - | 114 | |
| Decrease in fair value of properties | 15,16 | (434,364) | (85,884) |
| Impairment loss on properties | 20,23 | (12,651) | (8,892) |
| Net valuation loss on properties | (447,015) | (94,776) | |
| Results from operating activities | (404,888) | (44,736) | |
| Finance income | 4,496 | 7,026 | |
| Finance costs | (156,796) | (285,633) | |
| Net finance costs | 12 | (152,300) | (278,607) |
| Loss before tax | (557,188) | (323,343) | |
| Tax benefit | 13 | 90,509 | 36,048 |
| Loss for the year | (466,679) | (287,295) | |
| Loss attributable to: | |||
| Owners of the Company | (464,087) | (281,020) | |
| Non-controlling interests | (2,592) | (6,275) | |
| (466,679) | (287,295) | ||
| Earnings per share | |||
| Basic and diluted earnings per share (cent) | 14 | (44.30) | (26.82) |
For the year ended 31 December 2015:
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Loss for the year | (466,679) | (287,295) |
| Other comprehensive income | ||
| Items that are or may be reclassified subsequently to profit or | ||
| loss | ||
| Realised translation difference on disposal of subsidiaries | ||
| transferred to income statement | (275) | (130) |
| Foreign currency translation differences for foreign operations | (23,907) | (164,659) |
| Other comprehensive income for the year | (24,182) | (164,789) |
| Total comprehensive income for the year | (490,861) | (452,084) |
| Total comprehensive income attributable to: | ||
| Owners of the Company | (488,158) | (445,446) |
| Non-controlling interests | (2,703) | (6,638) |
| (490,861) | (452,084) | |
| Attributable to the owners of the Company | Non controlling interests |
Total | ||||||
|---|---|---|---|---|---|---|---|---|
| Share Capital US\$ '000 |
Share Premium US\$ '000 |
Capital reserve US\$ '000 |
Translation Reserve US\$ '000 |
Retained Earnings US\$ '000 |
Total US\$ '000 |
US\$ '000 | US\$ '000 | |
| Balance at 1 January 2015 | 1,048 | 1,763,409 | - | (314,880) | (158,982) | 1,290,595 | (8,817) | 1,281,778 |
| Total comprehensive income for the period |
||||||||
| Loss for the period Other comprehensive income |
- - |
- - |
- - |
- (24,071) |
(464,087) - |
(464,087) (24,071) |
(2,592) (111) |
(466,679) (24,182) |
| Total comprehensive income for the period |
- | - | - | (24,071) | (464,087) | (488,158) | (2,703) | (490,861) |
| Transactions with owners of the Company Contributions and distributions |
||||||||
| Share option expense | - | - | - | - | 2,283 | 2,283 | - | 2,283 |
| Changes in ownership interest Acquisition of non-controlling |
||||||||
| interests (note 36) | - | - | (9,201) | - | - | (9,201) | 7,601 | (1,600) |
| Balance at 31 December 2015 | 1,048 | 1,763,409 | (9,201) | (338,951) | (620,786) | 795,519 | (3,919) | 791,600 |
| Balance at 1 January 2014 | 1,048 | 1,763,409 | - | (150,454) | 117,655 | 1,731,658 | (2,179) | 1,729,479 |
| Total comprehensive income for the period |
||||||||
| Loss for the period Other comprehensive income |
- - |
- - |
- - |
- (164,426) |
(281,020) - |
(281,020) (164,426) |
(6,275) (363) |
(287,295) (164,789) |
| Total comprehensive income for the period |
- | - | - | (164,426) | (281,020) | (445,446) | (6,638) | (452,084) |
| Transactions with owners of the Company Contributions and distributions |
||||||||
| Share option expense | - | - | - | - | 4,383 | 4,383 | - | 4,383 |
| Balance at 31 December 2014 | 1,048 | 1,763,409 | - | (314,880) | (158,982) | 1,290,595 | (8,817) | 1,281,778 |
| Note | 2015 US\$ '000 |
2014 US\$ '000 |
|
|---|---|---|---|
| Assets | |||
| Investment property | 15 | 933,700 | 1,375,416 |
| Investment property under development | 16 | 238,925 | 431,474 |
| Property, plant and equipment | 18 | 26,280 | 35,101 |
| Long-term loans receivable | 19 | 14,316 | 18,071 |
| Inventory of real estate | 20 | 18,570 | 20,111 |
| VAT recoverable | 21 | 33 | 42 |
| Non-current assets | 1,231,824 | 1,880,215 | |
| Trading properties | 22 | 2,062 | 2,979 |
| Trading properties under construction | 23 | 204,392 | 133,036 |
| Other investments | 24 | 15,921 | 6,499 |
| Inventory | 477 | 615 | |
| Short-term loans receivable | 19 | 101 | 1 |
| Trade and other receivables | 25 | 29,017 | 38,961 |
| Current tax assets | 13 | 1,622 | 1,307 |
| Cash and cash equivalents | 26 | 26,545 | 86,756 |
| Current assets | 280,137 | 270,154 | |
| Total assets | 1,511,961 | 2,150,369 | |
| Equity | |||
| Share capital | 27 | 1,048 | 1,048 |
| Share premium | 27 | 1,763,409 | 1,763,409 |
| Translation reserve | 27 | (338,951) | (314,880) |
| Capital reserve | 27 | (9,201) | - |
| Accumulated losses | 27 | (620,786) | (158,982) |
| Equity attributable to owners of the Company | 795,519 | 1,290,595 | |
| Non-controlling interests | 35 | (3,919) | (8,817) |
| Total equity | 791,600 | 1,281,778 | |
| Liabilities | |||
| Long-term loans and borrowings | 28 | 389,799 | 455,097 |
| Deferred tax liabilities | 29 | 25,567 | 102,621 |
| Deferred income | 32 | 8,543 | 12,966 |
| Non-current liabilities | 423,909 | 570,684 | |
| Short-term loans and borrowings | 28 | 224,315 | 231,684 |
| Trade and other payables | 30 | 18,163 | 28,216 |
| Advances from customers | 31 | 53,974 | 38,007 |
| Current liabilities | 296,452 | 297,907 | |
| Total liabilities | 720,361 | 868,591 | |
| Total equity and liabilities | 1,511,961 | 2,150,369 |
The consolidated financial statements were approved by the Board of Directors on 17 March 2016.
........................ ............................... Chairman Director
Lev Leviev Christakis Klerides
For the year ended 31 December 2015
| 2015 | 2014 | ||
|---|---|---|---|
| Note | US\$'000 | US\$'000 | |
| Cash flows from operating activities | |||
| Loss for the year | (466,679) | (287,295) | |
| Adjustments for: | |||
| Depreciation | 18 | 963 | 1,595 |
| Net finance costs | 12 | 151,904 | 278,143 |
| Share option expense | 2,283 | 4,383 | |
| Decrease in fair value of properties | 15,16 | 434,364 | 85,884 |
| Impairment losses on properties | 20,23 | 12,651 | 8,892 |
| Share of loss in joint ventures | 17 | 1,321 | 4,451 |
| Profit on disposal of investment in subsidiaries | - | - | (114) |
| Profit on sale of property, plant and equipment | (16) | (42) | |
| Tax benefit | 13 | (90,509) | (36,048) |
| 46,282 | 59,849 | ||
| Change in trade and other receivables | (1,420) | 24,300 | |
| Change in inventory | (3) | (323) | |
| Change in trading properties and trading properties under | |||
| construction | (35,497) | (51,073) | |
| Change in advances and amounts payable to builders of | |||
| trading properties under construction | (3,552) | (6,213) | |
| Changes in advances from customers | 29,455 | 54,744 | |
| Change in trade and other payables | (1,264) | (16,003) | |
| Change in VAT recoverable | 2,947 | (201) | |
| Change in deferred income | (1,753) | 164 | |
| Cash generated from operating activities | 35,195 | 65,244 | |
| Taxes paid | (821) | (750) | |
| Net cash from operating activities | 34,374 | 64,494 | |
| Cash flows from investing activities | |||
| Net cash inflow from the disposal of subsidiaries | - | 1,400 | |
| Proceeds from sale of other investments | 15,239 | 2,150 | |
| Proceeds from sale of property, plant and equipment | 17 | 141 | |
| Interest received | 4,122 | 5,941 | |
| Change in advances and amounts payable to builders | (2,879) | (24,502) | |
| Payments for construction of investment property under | |||
| development | 16 | (10,906) | (54,813) |
| Payments for the acquisition/renovation of investment | 15 | (2,013) | (43,800) |
| property | |||
| Change in VAT recoverable | 2,617 | 3,472 | |
| Acquisition of property, plant and equipment | 18 | (56) | (593) |
| Dividends received from joint ventures | 17 | 3,250 | - |
| Acquisition of other investments | 24 | (24,147) | (1,916) |
|---|---|---|---|
| Taxes paid on disposal of investment property | - | (4,005) | |
| Payments for loan receivable | (154) | (591) | |
| Proceeds from repayment of loans receivable | 95 | 576 | |
| Net cash used in investing activities | (14,815) | (116,540) | |
| Cash flows from financing activities | |||
| Acquisition of non-controlling interests | 36 | (1,600) | - |
| Proceeds from loans and borrowings | 28 | 10,000 | 36,986 |
| Repayment of loans and borrowings | (43,318) | (26,000) | |
| Interest paid | (45,085) | (53,169) | |
| Net cash used in financing activities | (80,003) | (42,183) | |
| Effect of exchange rate fluctuations | 233 | (12,345) | |
| Net decrease in cash and cash equivalents | (60,211) | (106,574) | |
| Cash and cash equivalents at 1 January | 86,756 | 193,330 | |
| Cash and cash equivalents at 31 December | 26 | 26,545 | 86,756 |
For the year ended 31 December 2015
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. The Company is a 64.88% (31/12/2014: 64.88%) subsidiary of Africa Israel Investments Ltd ("Africa-Israel"), which is listed in the Tel Aviv Stock Exchange ("TASE"). 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 of the Company as at and for the year ended 31 December 2015 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 and joint ventures as presented in note 34 "Group Entities".
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 17 March 2016.
These consolidated financial statements have been prepared on the historical cost basis as modified, up to 31 December 2003, by the provisions of IAS 29 "Reporting in Hyperinflationary Economies" which provides for the restatement of non-monetary assets
and liabilities to account for the inflation. The historical cost basis is also modified in regard to investment property, investment property under development and other investments which are presented at fair value, and trading properties under developments and inventory of real estate which are presented at the lower of cost or net realisable value.
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.
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.
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:
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the year ending 31 December 2015 is included in the following notes:
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 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.
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:
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 under development
Note 24 other investments
The Group applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2015. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.
Those which were relevant to the Group are disclosed below. Although these new standards and amendments applied for the first time in 2015, they did not have a material impact on the annual consolidated financial statements of the Group.
Except for the changes explained in Note 4, the Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements.
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.
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.
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 in the former subsidiary is measured at fair value when control is lost.
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.
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.
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.
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.
| As of: | Exchange rate Russian Roubles for US\$1 |
% Change |
|---|---|---|
| 31 December 2015 | 72.8827 | 29.5 |
| 31 December 2014 | 56.2584 | 71.9 |
| Average rate during: | ||
| Year ended 31 December 2015 | 60.9579 | 58.7 |
| Year ended 31 December 2014 | 38.4217 | 20.6 |
The table below shows the exchange rates of Russian Roubles which is the functional currency of the Russian subsidiaries of the Group:
Financial Instruments
The Group classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss and loans and receivables.
The Group classifies non-derivative financial liabilities into the other financial liabilities category.
The Group initially recognises loans and receivables on the date when they are originated. All other financial assets and financial liabilities are initially recognised on the trade date when the entity becomes a party to the contractual provisions of the instrument.
The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognised financial assets that is created or retained by the Group is recognised as a separate asset or liability.
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to offset the amounts and intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously.
Financial assets at fair value through profit or loss
A financial asset is classified as at fair value through profit or loss if it is classified as held for trading or is designated as such on initial recognition. Directly attributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein, including any interest or dividend income, are recognised in profit or loss.
For the purpose of the statement of cash flows, cash and cash equivalents comprise cash at bank, cash in hand and deposits on demand.
Loans and receivables
These assets are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortised cost using the effective interest method.
Non-derivative financial liabilities are initially measured at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these liabilities are measured at amortised cost using the effective interest method.
Incremental costs directly attributable to the issue of ordinary shares, net of any tax effects, are recognised as a deduction from equity.
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.
When the Group begins to redevelop an existing property for continued use as investment property, the property remains an investment property, which is measured based on fair value model, and is not reclassified as property plant and equipment during the redevelopment.
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 that 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.
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.
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 is capitalised only if it is probable that the future economic benefits associated with the expenditure will flow to the Group.
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 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 equityaccounted 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 equityaccounted investee as a whole.
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 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.
Land for future development of trading properties is classified as "Inventory of real estate" as non-current asset when it is not expected to develop and sell the properties within the Group's normal operating cycle. It is presented at the lower of cost and net realisable value.
Income received in advance is classified under non-current and current liabilities as deferred income and comprise rental income received for future periods and amounts received in advance for the sale of trading properties, for which recognition of revenue has not yet commenced.
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:
For an investment in an equity security, objective evidence of impairment includes a significant or prolonged decline in its fair value below its 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.
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.
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.
Non-current assets, or disposal groups comprising assets and liabilities, are classified as heldfor 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.
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.
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.
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 from sale of trading properties is recognised in profit or loss when the significant risks and rewards of ownership have been transferred to the buyer.
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.
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 comprises of accommodation, treatments and other services offered at the hotels operated by the group and sales of food and beverages and are recognised upon offering of the service and the acceptance by the client.
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 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 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 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.
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:
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.
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.
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.
As from 1 January 2015, the Group adopted all changes to International Financial Reporting Standards (IFRSs) as adopted by the EU which are relevant to its operations.
The following Standards, Amendments to Standards and Interpretations have been issued but are not yet effective for annual periods beginning on 1 January 2015. Those which may be relevant to the Company are set out below. The Company does not plan to adopt these Standards early.
The Board of Directors expects that the adoption of the above financial reporting standards in future periods will not have a significant effect on the financial statements of the Company except of:
The adoption of IFRSs 9,15 and 16 which could affect the consolidated financial statements.
The extent of the impact has not been determined.
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.
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.
| Development projects | Asset management | Hotel Operation Other - land bank |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Commercial projects | Residential projects | Total | ||||||||||
| 2015 US\$'000 |
2014 US\$'000 |
2015 US\$'000 |
2014 US\$'000 |
2015 USS'000 |
2014 US\$'000 |
2015 US\$'000 |
2014 USS'000 |
2015 US\$'000 |
2014 US\$'000 |
2015 US\$'000 |
2014 US\$'000 |
|
| External revenues | 117 | 815 | 2,512 | 76,753 | 117,348 | 11,346 | 15,288 | 4,812 | 8,823 | 93,726 | 144,088 | |
| Inter-segment revenue | 381 | 1,168 | 4 | 15 | 410 | 1,549 | 430 | |||||
| Segment revenue | 381 | 118 | 1,983 | 2,516 | 76,753 | 117,348 | 11,346 | 15,303 | 4,812 | 9,233 | 95,275 | 144,518 |
| Segment (loss) profit before tax Interest income Interest expense Depreciation Share of loss of joint- ventures Other material non-cash items: |
(13, 566) (15) |
(134, 143) 1,278 (44) |
(11,820) (59) (36) |
(6,656) 70 (60) (49) |
(437,794) 3 (45, 796) (111) |
(96, 759) 313 (56, 428) (269) ۰ |
6,216 721 (122) (731) (1,321) |
8,627 762 (153) (1, 149) (4, 451) |
(98, 919) 3,014 (186) (85) |
(82, 425) 4,603 (4, 153) (128) ۰ |
(555, 883) 3,739 (46, 178) (963) (1,321) |
(311.356) 7,026 (60, 838) (1, 595) (4, 451) |
| Impairment loss on properties Decrease in fair value of properties |
(9, 444) | ۰ (129, 467) |
(12, 651) | (8,892) ٠ |
(327, 104) | 123,278 | ۰ | (97, 816) | ٠ (79, 695) |
(12, 651) (434, 364) |
(8,892) (85, 884) |
|
| Segment assets Capital expenditure Segment liabilities |
66,070 1,634 6,639 |
208,923 16,240 4,607 |
242,781 36,440 52,223 |
175,444 65,340 38,348 |
925,227 7,020 643,756 |
1,362,157 20,698 808,615 |
20,970 $\blacksquare$ |
27,471 | 191,627 4,520 5,415 |
250,735 49,637 1,323 |
1,446,675 49,614 708,033 |
2,024,730 151,915 852,893 |
Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items.
| 2015 | 2014 | |
|---|---|---|
| US\$'000 | US\$'000 | |
| Revenues | ||
| Total revenue for reportable segments | 95,275 | 144,518 |
| Elimination of inter-segment revenue | (1,549) | (430) |
| Consolidated revenue | 93,726 | 144,088 |
| Profit before tax | ||
| Total profit before tax for reportable segments | (555,883) | (311,356) |
| Unallocated amounts: | ||
| Other profit or loss | 16 | (7,650) |
| Share of the after tax loss of joint ventures | (1,321) | (4,451) |
| Profit on disposal of investment in subsidiaries | - | 114 |
| Consolidated loss before tax | (557,188) | (323,343) |
| Assets | ||
| Total assets for reportable segments | 1,446,675 | 2,024,730 |
| Other unallocated amounts | 65,286 | 125,639 |
| Consolidated total assets | 1,511,961 | 2,150,369 |
| Liabilities | ||
| Total liabilities for reportable segments | 708,033 | 852,893 |
| Other unallocated amounts | 12,328 | 15,698 |
| Consolidated total liabilities | 720,361 | 868,591 |
| Reportable segment totals US\$'000 |
Adjustments US\$'000 |
Consolidated totals US\$'000 |
|
|---|---|---|---|
| Other material items 2015 | |||
| Interest income | 3,739 | - | 3,739 |
| Interest expense | 46,178 | (395) | 45,783 |
| Capital expenditure | 49,614 | - | 49,614 |
| Depreciation | 963 | - | 963 |
| Decrease in fair value of properties | 434,364 | - | 434,364 |
| Impairment loss on properties | 12,651 | - | 12,651 |
| Reportable segment totals |
Adjustments | Consolidated totals |
|
|---|---|---|---|
| US\$'000 | US\$'000 | US\$'000 | |
| Other material items 2014 | |||
| Interest income | 7,026 | - | 7,026 |
| Interest expense | 60,838 | (5,198) | 55,640 |
| Capital expenditure | 151,915 | - | 151,915 |
| Depreciation | 1,595 | - | 1,595 |
| Decrease in fair value of properties | 85,884 | - | 85,884 |
| Impairment loss on properties | 8,892 | - | 8,892 |
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.
There was no concentration of revenue from any single customer in any of the segments.
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Investment property rental income | 81,561 | 126,152 |
| Sales of trading properties (note 22) | 674 | 2,411 |
| Hotel operation income | 11,346 | 15,287 |
| Construction consulting/management fees | 145 | 238 |
| 93,726 | 144,088 |
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Other income consists of: | ||
| Penalties charged to tenants | 345 | 1,219 |
| Reimbursement of depositary fees | 750 | 1,500 |
| Profit on sale of property, plant and equipment | 16 | 42 |
| Sundries | 2,014 | 746 |
| 3,125 | 3,507 |
| 2015 | 2014 | ||
|---|---|---|---|
| US\$ '000 | US\$ '000 | ||
| Maintenance, utility and security expenses | 13,743 | 24,140 | |
| Agency and brokerage fees | 701 | 825 | |
| Advertising expenses | 3,672 | 4,462 | |
| Salaries and wages | 10,724 | 17,553 | |
| Consultancy fees | 499 | 994 | |
| Depreciation | 849 | 1,412 | |
| Insurance | 622 | 717 | |
| Rent | 1,566 | 2,408 | |
| Property and other taxes | 7,863 | 9,899 | |
| Other operating expenses | 266 | 100 | |
| 40,505 | 62,510 |
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Consultancy fees | 894 | 1,835 |
| Legal fees | 475 | 1,273 |
| Auditors' remuneration | 695 | 784 |
| Valuation expenses | 124 | 161 |
| Directors' remuneration | 1,472 | 2,024 |
| Salaries and wages | 6 | 16 |
| Depreciation | 114 | 183 |
| Insurance | 193 | 247 |
| Provision for Doubtful Debts | (99) | 4,568 |
| Share option expense | 2,283 | 4,383 |
| Donations | 2,811 | 4,834 |
| Other administrative expense | 1,672 | 1,995 |
| 10,640 | 22,303 |
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Prior years' VAT non recoverable (note 21) | 125 | 600 |
| Legal claim | - | 1,453 |
| Sundries | 1,524 | 4,720 |
| 1,649 | 6,773 |
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Interest income | 3,739 | 7,026 |
| Net change in fair value of financial assets | 408 | - |
| Translation reserve reclassified upon disposal of subsidiaries | 275 | - |
| Loans payable written off | 74 | - |
| Finance income | 4,496 | 7,026 |
| Interest expense on loans and borrowings | (45,783) | (55,640) |
| Net change in fair value of financial assets | - | (3,263) |
| Other finance costs | (396) | (1,936) |
| Foreign exchange loss | (110,617) | (224,794) |
| Finance costs | (156,796) | (285,633) |
| Net finance costs | (152,300) | (278,607) |
The net foreign exchange loss recognised during 2015 is a result of the strengthening of the US Dollar to the Russian Rouble by 30%, during 2015. The recognised loss 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 2015 the Group did not capitalise any amount (2014 Nil) of financing costs to the projects that are in construction phase.
Loans payable written off during 2015 represent short term loans and borrowings of a Group's subsidiary, which were written off, during the first quarter of 2015 based on the understanding that neither legal nor implied obligations are no longer valid regarding these liabilities.
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Current tax expense | ||
| Current year | 753 | 508 |
| Adjustment for prior years | - | 107 |
| 753 | 615 | |
| Deferred tax benefit | ||
| Origination and reversal of temporary differences | (91,262) | (36,663) |
| Total tax benefit | (90,509) | (36,048) |
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 are subject to 20% corporate rate.
| 2015 | 2014 | |||
|---|---|---|---|---|
| % | US\$ '000 | % | US\$ '000 | |
| Loss for the year after tax | (466,679) | (287,295) | ||
| Total tax benefit | (90,509) | (36,048) | ||
| Loss before tax | (557,188) | (323,343) | ||
| Tax using the Company's domestic tax rate | (12.5) | (69,463) | (12.5) | (40,418) |
| Effect of tax rates in foreign jurisdictions | (7.6) | (42,580) | (8.6) | (27,691) |
| Tax exempt income | (4.9) | (27,544) | (4.1) | (13,235) |
| Non-deductible expenses | 6.5 | 36,012 | 5.9 | 18,968 |
| Change in estimates related to prior years | - | - | - | 107 |
| Current year losses for which no deferred tax asset | ||||
| recognised | 2.3 | 13,066 | 8.1 | 26,221 |
| (16.2) | (90,509) | (11.2) | (36,048) |
The current tax assets of US\$1,622 thousand as at 31 December 2015 (2014: asset US\$1,307 thousand), represents the net amount of income tax overpayment in respect of current and prior periods.
| 14. EARNINGS PER SHARE | |
|---|---|
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Basic earnings per share | ||
| Loss attributable to ordinary shareholders | (464,087) | (281,020) |
| Shares in | Shares in | |
| Weighted average number of ordinary shares | thousands | thousands |
| Weighted average number of shares | 1,047,694 | 1,047,694 |
| Earnings per share (cent) | (44.30) | (26.82) |
Diluted earnings per share are not presented as the assumed conversion of the employee share options outstanding would have an anti-dilutive effect i.e. increase in earnings per share.
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Balance 1 January | 1,375,416 | 1,609,800 |
| Reclassification to trading properties (note 22) | - | (432) |
| Renovations/additional cost | 2,013 | 6,814 |
| Fair value adjustment | (332,361) | 110,782 |
| Effect of movement in foreign exchange rates | (111,368) | (351,548) |
| Balance 31 December | 933,700 | 1,375,416 |
Reconciliation of carrying amount
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 2015. The cumulative adjustments, for all projects, are shown in "Fair value adjustment" in the table above.
The decrease due to the effect of the foreign exchange rates is a result of the strengthening of the US Dollar to the Russian Rouble by 30%, during 2015 (2014: strengthening 72%).
The main reason for the fair value loss are the changes in the valuation assumptions to reflect a higher long-term vacancy rate (both in the retail and the office segments) and lower rental rates per square metre. At the AFIMALL, the long term vacancy was increased from 3% to 8.3% due to general increase in the retail market vacancy rate. The increasing switch of retail rents to roubles in most shopping centres has also undermined market rents. In addition, there is a divergence between the existing and new leases, with significant discounts having to be offered to lease currently vacant space, compared with higher deals that can be agreed with incumbents. All these factors influenced negatively the Estimated Rental Value "ERV" of the Mall. In the office segment, the process of switching rents from US dollars to roubles has been less evident, however this has had a depressing effect on market rental levels. ERVs have been reduced across the board, vacancy rates have been increased and for existing vacant space the lease-up period has been extended.
Fair value hierarchy
| Inter-relationship between | ||
|---|---|---|
| key unobservable inputs | ||
| Significant unobservable | and fair value | |
| Valuation technique | inputs | 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-\$640, class A \$500, | if: | |
| class B \$200-\$280, Retail | ||
| \$150-\$6,149 |
The estimated fair value would increase/(decrease)
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 16 below.
The fair value measurement for investment property of US\$933,700 thousand (2014: US\$1,375,416 thousand) has been categorised as a level 3 fair value based on the inputs to the valuation technique used.
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.
The following table shows the valuation technique used in measuring the fair value of investment property, as well as the significant unobservable inputs used.
Investment properties at fair value are categorised in the following:
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Retail properties | 685,200 | 1,000,000 |
| Office space properties | 248,500 | 375,416 |
| 933,700 | 1,375,416 |
Presented below is the effect on the fair value of the main investment property project, of an increase/(decrease) in the below inputs at the reporting date. This analysis assumes that all other variables remain constant.
| Capitalisation Rates Increase of 1 % Rate used in fair Decrease of 1% value calculation as at 31/12/2015 10% Fair value (US\$ '000) 645,900 685,200 733,200 |
||||
|---|---|---|---|---|
| sq.m value calculation as at 31/12/2015 US\$1,103 sq.m |
Average rental rates per | Decrease of 5% | Rate used in fair | Increase of 5% |
| Fair value (US\$ '000) 649,400 685,200 721,000 |
||||
| Decrease of 10% Increase of 10% |
||||
| 613,600 685,200 756,800 |
||||
| Occupancy rates Decrease of 2% Rate used in fair Increase of 2% value calculation as at 31/12/2015 91.7% |
||||
| Fair value (US\$ '000) 671,000 685,200 699,400 |
| 2015 | 2014 | |
|---|---|---|
| Reconciliation of carrying amount | US\$ '000 | US\$ '000 |
| Balance 1 January | 431,474 | 635,266 |
| Construction costs | 10,906 | 83,820 |
| Transfer to trading properties under construction (note 23) | (69,300) | - |
| Disposal | - | (1,400) |
| Fair value adjustment | (102,003) | (196,666) |
| Effect of movements in foreign exchange rates | (32,152) | (89,546) |
| Balance 31 December | 238,925 | 431,474 |
On 30 September 2015 the Group transferred "Paveletskaya Phase II" project to trading properties under construction. The transfer was performed following the change in use evidenced by the commencement of development with a view to sale. The amount of US\$69,300 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 30 June 2015 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 2015. The cumulative adjustments, for all projects, are shown in line "Fair value adjustment" in the table above. The main reasons for the fair value adjustments, are described in note 15 above.
The decrease due to the effect of the foreign exchange rates is a result of the strengthening of the US Dollar to the Russian Rouble by 30%, during 2015 (2014: strengthening 72%).
The fair value measurement for investment property under development of US\$238,925 thousand (2014: US\$431,474 thousand) has been categorised as a level 3 fair value based on the inputs to the valuation technique used.
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.
The valuation technique used in measuring the fair value of investment property under development, the significant unobservable inputs used, as well as the inter-relationship between key unobservable inputs and fair value measurement are discussed in note 15 above. In addition, the following inputs for investment property under development.
| Geographical location |
Fair value |
Discount rate |
Rate of return for representative |
|---|---|---|---|
| year | |||
| US\$ '000 | % | % | |
| Russia | 238,925 | 19-29 | 9.5-13 |
The Group's joint ventures comprise the following:
50% interest in Nouana Limited and Craespon Management Ltd with their subsidiary Sanatorium Plaza LLC, owner of a hotel in Kislovodsk.
During last year, 2014, the Group's joint ventures incurred significant losses, as a result the Group's share of loss has exceeded its interest in these joint ventures. Therefore the Group discontinued recognising its share of further losses. The Group will resume recognising its share of future profits from the joint ventures only after its share of the future profits equals the share of losses not recognised.
The following table summarises the financial information of the joint ventures as included in their own financial statement, adjusted for fair value adjustments at acquisition. The table also reconciles the summarised financial information to the Group's interest in joint ventures:
| 2015 US\$ '000 |
2014 US\$ '000 |
|
|---|---|---|
| Percentage ownership interest | 50% | 50% |
| Non-Current assets | 15,326 | 18,365 |
| Current assets (including cash and cash equivalents – | ||
| 2015:\$7,498 thousand, 2014: \$10,818 thousand) | 8,210 | 11,622 |
| Non-Current liabilities (including non-current financial liabilities | ||
| excluding trade and other payables and provisions-2015:\$35,014 | ||
| thousand, 2014: \$37,234 thousand) | (36,450) | (39,010) |
| Current liabilities (including current financial liabilities | ||
| excluding trade and other payables and provisions- 2015:\$98 | ||
| thousand, 2014:\$NIL) | (1,440) | (1,843) |
| Net liabilities (100%) | (14,354) | (10,866) |
| Group's share of net liabilities (50%) | (7,177) | (5,433) |
|---|---|---|
| Fair value adjustments at acquisition | 3,916 | 5,072 |
| Interest in joint ventures | (3,261) | (361) |
| Restriction of share of loss | 3,261 | 361 |
| Carrying amount of interest in joint ventures | - | - |
| Revenue | 23,836 | 39,126 |
| Depreciation | (173) | (295) |
| Interest expense | (2,844) | (3,840) |
| Income tax expense | (2,002) | (1,558) |
| Loss and total comprehensive income (100%) | (2,642) | (8,903) |
| Group's share of profit and total comprehensive income (50%) | (1,321) | (4,451) |
| Dividends received by the Group | 3,250 | - |
| Buildings | |||||
|---|---|---|---|---|---|
| under | Land & | Office | Motor | ||
| construction | Buildings | Equipment | Vehicles | Total | |
| US\$ '000 | US\$ '000 | US\$ '000 US\$ '000 | US\$ '000 | ||
| Cost | |||||
| Balance at 1 January 2015 | 4,242 | 32,144 | 2,568 | 1,124 | 40,078 |
| Additions | - | 33 | 23 | - | 56 |
| Transfer from trading properties (note 22) | - | 212 | - | - | 212 |
| Disposals | - | (226) | (1) | (33) | (260) |
| Effect of movement in foreign exchange | (923) | (7,611) | (603) | (251) | (9,388) |
| rates | |||||
| Balance at 31 December 2015 | 3,319 | 24,552 | 1,987 | 840 | 30,698 |
| Accumulated depreciation | |||||
| Balance at 1 January 2015 | - | 2,031 | 2,092 | 854 | 4,977 |
| Charge for the year | - | 712 | 162 | 89 | 963 |
| Disposals | - | (226) | - | (33) | (259) |
| Effect of movement in foreign exchange | - | (545) | (514) | (204) | (1,263) |
| rates | |||||
| Balance at 31 December 2015 | - | 1,972 | 1,740 | 706 | 4,418 |
| Carrying amount | |||||
| At 31 December 2015 | 3,319 | 22,580 | 247 | 134 | 26,280 |
| Cost | |||||
| Balance at 1 January 2014 | 14,400 | 56,709 | 3,847 | 1,710 | 76,666 |
| Additions | - | 83 | 240 | 270 | 593 |
| Disposals | - | (439) | (177) | (76) | (692) |
| Effect of movement in foreign exchange | (10,158) | (24,209) | (1,342) | (780) | (36,489) |
|---|---|---|---|---|---|
| rates | |||||
| Balance at 31 December 2014 | 4,242 | 32,144 | 2,568 | 1,124 | 40,078 |
| Accumulated depreciation | |||||
| Balance at 1 January 2014 | - | 2,617 | 2,908 | 1,406 | 6,931 |
| Charge for the year | - | 1,114 | 354 | 127 | 1,595 |
| Disposals | - | (355) | (170) | (69) | (594) |
| Effect of movement in foreign exchange | - | (1,345) | (1,000) | (610) | (2,955) |
| rates | |||||
| Balance at 31 December 2014 | - | 2,031 | 2,092 | 854 | 4,977 |
| Carrying amount | |||||
| At 31 December 2014 | 4,242 | 30,113 | 476 | 270 | 35,101 |
The Group has preliminary agreed to dispose "Aquamarine Hotel" which is part of the Land & Buildings above, after the year end. More information in note 41 "Subsequent events".
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Long-term loans | ||
| Loans to joint ventures (note 40) | 14,246 | 17,962 |
| Loans to non-related companies | 70 | 109 |
| 14,316 | 18,071 | |
| Short-term loans | ||
| Loans to joint ventures (note 40) | 98 | - |
| Loans to non-related companies | 3 | 1 |
| 101 | 1 |
Terms and conditions of outstanding loans were as follows:
| Currency | Nominal interest rate |
Year of maturity |
2015 US\$ '000 |
2014 US\$ '000 |
|
|---|---|---|---|---|---|
| Unsecured loans to joint ventures | USD RUR RUR |
11.5% 14% 2.35% |
2020 2016 2016 |
9,942 4,304 98 |
12,134 5,828 - |
| Unsecured loans to non-related companies |
RUR | - | 2016 | 49 | 89 |
| RUR | 8.8% | 2016 | 15 | 20 |
|---|---|---|---|---|
| RUR | 2.5% | 2020 | 6 | - |
| on | ||||
| RUR | 0.1-5.5% | demand | 3 | 1 |
| 14,417 | 18,072 | |||
Loans receivable with a maturity within 2016 are classified as long term as it is expected that the repayment terms of such loans will be extended.
Represents the rights to the project "Botanic Gardens" which is presented at net realisable value as calculated by independent appraisers at the yearend.
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 11). 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 25.
Trading properties comprise unsold apartment and parking spaces. During the year the Group has sold a number of the remaining apartments and parking places and their cost was transferred to profit or loss.
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Balance 1 January | 133,036 | 127,213 |
| Transfer from investment property under development (note 16) | 69,300 | - |
| Construction costs | 33,670 | 35,874 |
| Impairment loss | (13,400) | - |
| Effect of movements in exchange rates | (18,214) | (30,051) |
| Balance 31 December | 204,392 | 133,036 |
Trading properties under construction comprise "Odinburg" and "Paveletskaya Phase II" projects which involve primarily the construction of residential properties. For further details on the transfer of the "Pavaletskaya Phase II" project refer to note 16.
The properties were tested for impairment at year end either based on internal valuation, Odinburg, or external independent appraises valuation, Pavaletskaya Phase II. The effect of US\$13,400 thousand decrease in fair value of the properties, was recognised in the profit or loss as an impairment loss, to present the properties at their lower of cost or net realisable value.
The increase in other investments is due to the investment in a US\$20 million portfolio of marketable securities using partly own funds and partly a loan from Bank Julius Baer & Co Ltd. These are carried at fair value and any changes during the year are recognised in the profit or loss as finance income or expenses. For further details of the loan refer to note 28.
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Advances to builders | 18,383 | 20,200 |
| Amounts receivable from related parties (note 40) | 337 | 387 |
| Trade receivables net | 3,381 | 6,014 |
| Other receivables | 3,037 | 3,540 |
|---|---|---|
| VAT recoverable (note 21) | 858 | 7,141 |
| Tax receivable | 3,021 | 1,679 |
| 29,017 | 38,961 |
Trade receivables are presented net of an accumulated provision for doubtful debts of US\$11,402 thousand (2014: US\$12,753 thousand).
Cash and cash equivalents consist of:
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Cash at banks | 26,374 | 86,504 |
| Cash in hands | 171 | 252 |
| 26,545 | 86,756 |
| 2015 | 2014 | |
|---|---|---|
| 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 | 524 | 524 |
| 523,847,027 B ordinary shares of US\$0.001 each | 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 2015.
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 result of a bonus issue.
The Company has established an employee share option plan operated by the Board of Directors, which is responsible for granting options and administrating the employee share option plan. Eligible are employees and directors, excluding independent directors, of the Company. The employees share option plan is discretionary and options will be granted only when the Board so determines at an exercise price derived from the closing middle market price preceding the date of grant. No payment will 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.
As of 31 December 2015 the following options were outstanding.
3% of the issued share capital, were granted with an exercise price equal to US\$0.5667, vesting one-third on the second anniversary of the date of grant, a further one-third on the third anniversary and the remaining one-third, on the fourth anniversary of the date of grant provided that the participants remain in employment until the vesting date. The vesting is not subject to any performance conditions. Their contractual life is five years from the date of grant. 20,953,882 options have vested till 31 December 2015.
If a participant ceases to be employed his options will normally lapse subject to certain exceptions. In the event of a takeover, reorganisation or winding up vested options may be exercised or exchanged for new equivalent options where appropriate. Shares/GDRs issued under the plan will rank equally with all other shares at the time of issue. The Board of Directors may 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.
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.
The amount at each reporting date is available for distribution. No dividends were proposed, declared or paid during the year ended 31 December 2015.
Represents the effect of the acquisition of the 10% non-controlling interests in Bioka Investments Ltd and its subsidiary Nordservice LLC previously held at 90%. For further details refer to note 36.
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Non-current liabilities | ||
| Secured bank loans | 389,799 | 455,097 |
| Current liabilities | ||
| Secured bank loans | 224,076 | 231,297 |
| Unsecured loans from other non-related companies | 239 | 387 |
| 224,315 | 231,684 | |
The outstanding loans on 31 December 2015 comprise of three loans as follows:
A secured loan from VTB Bank JSC ("the Bank") signed on 22 June 2012 by one of the Group's subsidiary, Bellgate Construction Ltd ("Bellgate"). This new loan facility agreement offered a credit line totalling RUR 21 billion, which was drawn down in 5 tranches, each with a designated purpose: the majority of the funds were designated to refinance existing loans previously issued by the Bank. The remaining funds were designated for the refinancing of construction costs related to the AFIMALL City parking and for the financing of the outstanding payments constituting part of the consideration for the acquisition of the parking.
The Company has discretion over the currency of each tranche, which can be drawn down either in US dollars or in Russian roubles. The loan facility has differentiated interest rates which are currency dependent: 9.5% for loans drawn down in Russian roubles and 3 months LIBOR plus 5.02% for loans drawn down in US dollars.
The interest on the loans is payable on a quarterly basis, throughout the term of the credit line. Bellgate has undertaken to make equal quarterly payments of US\$6.5 million from 2014 to 2016, on account of the principal of the loans, while it has been agreed that the remainder of the loan will mature in April 2018.
The terms of the loan facility agreement are substantially similar to those of the loan facility agreement entered into in February 2012 with the Bank in relation to the financing of the acquisition of the AFIMALL City parking. However, certain conditions of the new loan facility will differ from the aforementioned loan, including the following:
The loan facility agreement contains other generally acceptable terms, such as the borrower undertaking to maintain the aggregate value of the pledged assets, securing the loan facility, providing the lender with periodic reporting and similar common conditions.
On 17 August 2013 Bellgate Constructions Limited signed an addendum to the current Loan Facility Agreement with the Bank. According to the new terms under the above mentioned addendum the applicable interest rate to the US Dollar denominated loan facility has been decreased from 3-month LIBOR plus 6.7% p.a. to 3-month LIBOR plus 5.02% p.a. The change was effective upon the registration date of the mortgage agreements, on 3 September 2013.
As of 31 December 2015 Bellgate is in compliance with the covenants of this loan.
On 25 January 2013 Krown Investments LLC ("Krown"), a 100% subsidiary, acquired a new secured loan from VTB Bank JSC ("the Bank") for refinancing the repayment of borrowings due to related parties. This loan agreement offers a credit line of US\$220 million, which was drawn down during the first quarter of 2013. The agreed interest is three-month LIBOR plus 5.7% p.a., payable every quarter. The loan repayment date is in 731 days from the date of signing the loan agreement. Securities provided to the Bank are on the 100% of the shares of Krown and on properties/buildings of Aquamarine Phase III. A decrease in the market value of the pledged buildings by more than 15% will enable the bank to demand repayment of the loan before the
agreed maturity date. In case of disposal of the pledged building, at least 70% of sale proceeds should be directed to the Bank for the repayment of the loan.
An amount of US\$15 million was repaid during 2013 out of the proceeds from sale of Building 1 of the Ozerkovskaya (Aquamarine) phase III.
In January 2015, prior to maturity, the subsidiary signed an addendum to the loan facility agreement with the Bank, extending the term of the loan to 26 January 2018 and the loan was reclassified to non-current liabilities. In addition to extending the term of the loan, the new addendum amended the payment schedule, interest rate conditions and introduced new covenants. The payment schedule anticipates repayments of the principal starting from the 4th quarter of 2015, while the new covenants included a "Debt Service Coverage Ratio" of 1.2 also applicable as from the 4th quarter of 2015 and a "Loan to Value ratio" of 65% applicable from January 2015. In line with the addendum, on 26th January 2015 Krown paid US\$10 million to the Bank, being a partial repayment of the outstanding loan amount, thus reducing the total to US\$195 million. Approximately 90% of the principal is to be paid at maturity.
Based on an independent valuation of the Ozerkovskaya III project as of 30 June 2015, there was a risk that the borrower, Krown, may not meet the Loan to Value covenant and the bank may require a partial repayment of the principal of the loan sufficient to rectify the breach of the covenants, within 90 calendar days from the date of the bank notification.
In November 2015, the Company received a notice from VTB Bank on decision of the Bank to postpone the applicability of covenants in the loan agreement of Krown Investments Limited ("Krown") for the Ozerkovskaya III project. According to the decision, the Loan to Value ratio covenant (previously applicable from Q1 2015 onwards) shall be applicable from Q2 2017, while the Debt Service Coverage Ratio covenant (previously applicable from Q4 2015 onwards), shall be applicable from Q2 2017 onwards (based on Q1 2017 financial results). In exchange to the waiver AFI Development's subsidiary, owning and operating AFIMALL City, Bellgate Construction Limited, will provide a new guarantee for the full amount of the loan of Krown (in addition to the existing guarantee of AFI Development Plc), and AFIMALL City premises will be mortgaged in a secondary mortgage as additional collateral for the loan by Krown. The decision of the Bank will become legally binding, following the execution of addendum to the loan agreement and related documents.
As of the date of publication of these Financial Statements, the addendum to the loan agreement and the related documents have not yet been signed, as the parties still negotiate issues in the addenda.
Based on the latest independent valuation as at 31 December 2015, of the Ozerkovskaya III project, Krown, has not met the Loan to Value covenant and the Bank may require a partial repayment of the principal of the loan sufficient to rectify the breach of the covenants, within 90 calendar days from the date of the Bank notification. The DSCR ratio covenant of the Krown loan agreement has not been met either, based on the performance results of Q4 2015.
Krown is, therefore, in breach of both covenants in its loan facility agreement. Based on this, the total amount of the outstanding loan (US\$193 million) was reclassified to current liabilities.
During the period, a subsidiary of the Group, AFID Finance S.A., obtained a short-term loan facility from Bank Julius Baer & Co Ltd, for an amount of US\$10 million. The loan was used for the acquisition of marketable securities through an investment account with the same bank. The interest rate is equal to the bank refinancing rate plus 0.75% p.a. and the loan is repayable on demand. The loan is guaranteed with the portfolio of assets managed by the bank.
| Currency | Nominal | Year of | 2015 | 2014 | |
|---|---|---|---|---|---|
| interest rate | maturity | US\$ '000 | US\$ '000 | ||
| Secured loan from VTB Bank to Bellgate | RUR | 9.5% | 2018 | 132,413 | 184,711 |
| Secured loan from VTB Bank to Bellgate | USD | 3m USD LIBOR+ 5.02% |
2018 | 283,386 | 296,386 |
| Secured loan from VTB Bank to Krown | USD | 3m USD LIBOR+ 7% |
2018 | 193,376 | 205,297 |
| Secured loan from Julius to AFID Finance | USD | Bank refinancing rate+0.75% |
on demand | 4,700 | - |
| on demand | |||||
| Other | RUR | 3-12% | 239 | 387 | |
| 614,114 | 686,781 |
Terms and conditions of outstanding loans were as follows:
The loans and borrowings are payable as follows:
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 US\$ '000 | ||
| Less than one year | 224,315 | 231,684 |
| Between one and five years | 389,799 | 455,097 |
| More than five years | - | - |
| 614,114 | 686,781 |
Deferred tax (assets) and liabilities are attributable to the following:
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Investment property | 100,109 | 157,429 |
| Investment property under development | 47 | 25,065 |
| Property, plant and equipment | 571 | (1,028) |
| Inventory of real estate | 1,115 | - |
| Trading properties | (1,203) | 1,507 |
| Trading properties under construction | 9,359 | (420) |
| Trade and other receivables | (6,326) | (5,204) |
| Trade and other payables | 1,020 | (372) |
| Loans and borrowings | (13) | (5) |
| Other items | (21) | (21) |
| Tax losses carried forward | (79,091) | (74,330) |
| Deferred tax liability | 25,567 | 102,621 |
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Trade payables | 7,815 | 8,654 |
| Payables to related parties (note 40) | 657 | 2,264 |
| Amount payable to builders | 3,297 | 7,626 |
| VAT and other taxes payable | 4,613 | 7,373 |
| Other payables | 1,781 | 2,299 |
| 18,163 | 28,216 |
The above are payable within one year and bear no interest.
Include an amount of US\$27 thousand (31/12/14: US\$1,465 thousand) payable to Danya Cebus Rus LLC, related party of the Group, for contracts signed in relation to the construction of Group's projects.
Represent advances received from customers for the sale of residential properties at "Odinburg" project. During the period the Group has sold 251 properties and received additional down payments from customers.
Represents rental income received in advance, which corresponds to periods after the reporting date.
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 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Other | ||||||||||
| Loans Receivable |
Trade and other receivables |
investments. Including derivatives |
Cash and cash quivalents |
Other financial liabilities |
Total | Level 1 | Level 2 | Level 3 | Total | |
| 31 December 2015 Financial assets measured at fair value |
US\$'000 US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | |
| Investment in listed debt securities | $\overline{\phantom{0}}$ | 15,901 | $\overline{\phantom{0}}$ | ٠ | 15,901 | 15,901 | ٠ | ٠ | 15,901 | |
| Financial assets not measured at fair value | ||||||||||
| Loans receivable | 14,417 | $\overline{\phantom{0}}$ | $\overline{\phantom{a}}$ | ٠ | 14,417 | |||||
| Trade and other receivables | ٠ | 6.755 | ۰ | ٠ | 6.755 | |||||
| Cash and cash equivalents | $\overline{\phantom{a}}$ | $\blacksquare$ | 26,545 | ٠ | 26,545 | |||||
| 14.417 | 6.755 | ۰ | 26,545 | ۰ | 47,717 | |||||
| Financial liabilities not measured at fair value | ||||||||||
| Interest bearing loans and borrowings | - | ٠ | $\overline{\phantom{a}}$ | - | (614, 114) | (614, 114) | ٠ | (583, 635) | $\sim$ | (583, 635) |
| Trade and other payables | ۰ | $\blacksquare$ | ٠ | н. | (13,550) | (13, 550) | ||||
| $\overline{\phantom{0}}$ | $\overline{\phantom{0}}$ | (627, 664) | (627, 664) |
| Carrying amount | Fair value | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Loans Receivable |
Trade and other receivables |
Other investments. Including derivatives |
Cash and cash quivalents |
Other financial liabilities |
Total | Level 1 | Level 2 | Level 3 | Total | |
| 31 December 2015 Financial assets measured at fair value |
US\$'000 US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | |
| Investment in listed debt securities | $\sim$ | 6.499 | $\overline{\phantom{a}}$ | $\overline{\phantom{0}}$ | 6.499 | 6.499 | $\overline{a}$ | 6,499 | ||
| Financial assets not measured at fair value | ||||||||||
| Loans receivable | 18,072 | $\overline{\phantom{0}}$ | ۰ | 18,072 | ||||||
| Trade and other receivables | $\overline{\phantom{a}}$ | 9,941 | $\overline{\phantom{a}}$ | ۰ | $\overline{\phantom{a}}$ | 9,941 | ||||
| Cash and cash equivalents | $\sim$ | 86.756 | $\overline{\phantom{a}}$ | 86,756 | ||||||
| 18,072 | 9.941 | $\sim$ | 86,756 | ٠ | 114.769 | |||||
| Financial liabilities not measured at fair value | ||||||||||
| Interest bearing loans and borrowings | $\overline{\phantom{0}}$ | $\overline{\phantom{a}}$ | $\overline{\phantom{0}}$ | ٠ | (686, 781) | (686, 781) | $\blacksquare$ | (636, 469) | $\overline{\phantom{0}}$ | (636, 469) |
| Trade and other payables | ٠ | . | $\overline{\phantom{a}}$ | $\overline{\phantom{a}}$ | (20, 843) | (20, 843) | ||||
| ۰ | $\overline{\phantom{a}}$ | (707.624) | (707, 624) |
The Group has exposure to the following risks arising from financial instruments:
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 Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.
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 represents the maximum credit exposure.
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, where possible rental contracts are made with customers with an appropriate credit history.
At 31 December 2015, the ageing of trade and other receivable that were not impaired was as follows:
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Neither past due nor impaired | 1,802 | 3,005 |
| Past due 1-30 days | 2,020 | 1,190 |
| Past due 31-90 days | 2,873 | 2,529 |
| Past due 91-120 days | 18,442 | 23,416 |
| 25,137 | 30,140 |
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.
The movement in the allowance for impairment in respect of trade and other receivables during the year was as follows:
| Individual | Collective | |
|---|---|---|
| impairments | impairments | |
| US\$ '000 | US\$ '000 | |
| Balance at 1 January 2014 | 99 | 12,559 |
| Impairment loss recognised | (26) | 4,595 |
| Exchange difference effect | (19) | (4,455) |
| Balance at 31 December 2014 | 54 | 12,699 |
| Impairment loss recognised | 99 | - |
| Exchange difference effect | (141) | (1,309) |
| Balance at 31 December 2015 | 12 | 11,390 |
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.
The Group held cash and cash equivalents of US\$26,545 thousand at 31 December 2015 (2014: US\$86,756. 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.
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.
The Company's policy is to provide financial guarantees only to wholly-owned subsidiaries in exceptional cases. In negotiations with lending banks the Company is aiming to avoid recourse to AFI Development on loans taken by subsidiaries. As at 31 December 2015, there were two outstanding guarantees: one of AFI Development Plc for the amount of US\$1 million in favour of VTB Bank under a loan facility agreement of Bellgate Construction Limited and another one of AFI Development Plc for the amount of the current loan balance in favour of
VTB Bank JSC under a loan facility agreement of Krown Investments LLC (project Aquamarine III).
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 2015:
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 2015 | Carrying | Contractual | 6 months |
6-12 | 1-2 | 2-5 |
|---|---|---|---|---|---|---|
| Amount US\$'000 |
Cash flow US\$'000 |
or less US\$'000 |
months US\$'000 |
years US\$'000 |
years US\$'000 |
|
| Secured bank loans | 613,875 | (703,977) | (42,696) | (37,766) | (47,463) | (576,052 |
| ) | ||||||
| Unsecured loans | 239 | (239) | (239) | - | - | - |
| Trade and other | 13,550 | (13,550) | (13,550) | - | - | - |
| payables |
| 31 December 2014 | Carrying | Contractual | 6 months |
6-12 | 1-2 | 2-5 |
|---|---|---|---|---|---|---|
| Amount US\$'000 |
Cash flow US\$'000 |
or less US\$'000 |
months US\$'000 |
years US\$'000 |
years US\$'000 |
|
| Secured bank | 686,394 | (785,535) | (235,311) | (28,991) | (56,541) | (464,692) |
| loans | ||||||
| Unsecured loans | 387 | (401) | - | (401) | - | |
| Trade and other | 20,843 | (20,843) | (20,843) | - | - | |
| payables |
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group'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 return.
The Group is exposed to currency risk to the extent that there is a mismatch between the currencies in which sales, purchases of material and construction services and borrowings are denominated and the respective functional currencies of Group companies. The functional currencies of Group companies are primarily the Russian Roubles and US Dollars. The currencies in which these transactions are primarily denominated are Russian Roubles and US Dollars.
The following shows the magnitude of changes in respect of a number of major factors influencing the Group's profit before taxes. The assessment has been made on the year-end figures.
A 10% strengthening of the United States Dollar against the following currencies at 31 December 2015 would have increased/(decreased) equity and profit for the year by the amounts shown below.
This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2014.
| Profit for | ||
|---|---|---|
| Equity | the year | |
| US\$ '000 | US\$ '000 | |
| 31 December 2015 | ||
| Russian Roubles | (3,019) | (38,040) |
| Ukrainian Hryvnia | (2,846) | - |
| Euro | - | 21 |
| 31 December 2014 | ||
| Russian Roubles | (6,588) | (45,125) |
| Ukrainian Hryvnia | (3,492) | - |
| Euro | - | (118) |
A 10% weakening of the United States Dollar against the above currencies at 31 December 2015 would have the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.
At the reporting date the interest rate profile of the Group's interest-bearing financial instruments is as follows:
| Carrying amount | ||||
|---|---|---|---|---|
| 2015 | 2014 | |||
| US\$ '000 | US\$ '000 | |||
| Fixed rate instruments | ||||
| Financial assets | 47,195 | 69,482 | ||
| Financial liabilities | (132,652) | (185,098) | ||
| (85,457) | (115,616) | |||
| Variable rate instruments |
| Financial assets | - | - |
|---|---|---|
| Financial liabilities | (481,462) | (501,683) |
| (481,462) | (501,683) |
An increase of 100 basis points in interest rates at the reporting date would have increased/ (decreased) equity and profit for the year by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2014.
| Profit for | ||
|---|---|---|
| Equity | the year | |
| US\$ '000 | US\$ '000 | |
| 31 December 2015 | ||
| Variable rate instruments | - | (4,815) |
| 31 December 2014 | ||
| Variable rate instruments | - | (5,014) |
A decrease of 100 basis points in interest rates at the reporting date would have the equal but opposite effect on the above instruments to the amounts shown above, on the basis that all other variables remain constant.
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group'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 Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group's reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity.
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 Group standards for the management of operational risk in the following areas:
requirements for appropriate segregation of duties, including the independent authorisation of transactions
Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the Group.
The Board's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.
There were no changes in the Group's approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.
The Company is committed to delivering the highest standards in boardroom practice and financial transparency through:
A full programme of investor relations activity ensures appropriate contact with institutional and private shareholders, with regular meetings, presentations and disclosure of important information. Great care is taken to provide suitably detailed information on the Group's
activities and results to enable various stakeholders to understand the performance and prospects of the Group.
The Group's operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and financial markets of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation.
The conflict in Ukraine and related events has increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States of America, Japan, Canada, Australia and others, as well as retaliatory sanctions imposed by the Russian government, has resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Rubble, a reduction in both local and foreign direct investment inflows and a significant tightening in the availability of credit. In particular, some Russian entities may be experiencing difficulties in accessing international equity and debt markets and may become increasingly dependent on Russian state banks to finance their operations. The longer term effects of recently implemented sanctions, as well as the threat of additional future sanctions, are difficult to determine.
Continuation of the above-mentioned events, and/or an increase in the severity thereof, could have an adverse effect on various facets of the Group's activities and/or data appearing in the financial statements, among others, as follows:
The Company is monitoring the economic developments in Russia, in general, and in the real estate market, in particular. It is noted that due to the uncertainty prevailing in light of the events described above, the Company is reviewing the development plans and timetables of a number of its projects. Due to the inability to predict the duration or the manner of the future development of political and economic events, the Company is not able, at this stage, to estimate the future impact of these matters on the Group.
The consolidated financial statements reflect management's assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management's assessment.
The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities.
Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. A tax year generally remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive and substancebased position in their interpretation and enforcement of tax legislation.
These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the tax authorities and courts, especially due to reform of the supreme courts that are resolving tax disputes, could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant.
In addition, a number of new laws introducing changes to the Russian tax legislation have been recently adopted. In particular, starting from 1 January 2015 changes aimed at regulating tax consequences of transactions with foreign companies and their activities were introduced, such as concept of beneficial ownership of income, etc. These changes may potentially impact the Group's tax position and create additional tax risks going forward. This legislation is still evolving and the impact of legislative changes should be considered based on the actual circumstances.
| Ultimate controlling party: | Lev Leviev | Israel | ||
|---|---|---|---|---|
| Ultimate holding company: Africa Israel Investments Limited | Israel | |||
| Holding company: | Africa Israel Investments Limited | Israel | ||
| Significant Subsidiaries | Ownership interest % | Country of incorporation | ||
| 2015 | 2014 | |||
| 1. | OOO AFI RUS | 100 | 100 | Russian Federation |
| 2. | OOO Avtostoyanka Tverskaya Zastava 100 | 100 | Russian Federation | |
| 3. | OOO Krown Investments | 100 | 100 | Russian Federation |
| 4. | OAO Moskovskiy Kartonazhno-poligraphiche | |||
| skiy Kombinat (MKPK) | 99.17 | 99.17 | Russian Federation | |
| 5. | Bellgate Constructions Limited | 100 | 100 | Cyprus |
| 6. | OOO Regionalnoe AgroProizvodstvennoe | |||
| Objedinenie (RAPO) | 100 | 100 | Russian Federation | |
| 7. | OOO Aristeya | 100 | 100 | Russian Federation |
| 8. | Scotson Limited | 100 | 100 | Cyprus |
| 9. | ZAO Nedra Publishing | 93.86 | 93.86 | Russian Federation |
| 10. OOO Titon | 100 | 100 | Russian Federation | |
| 11. ZAO MTOK | 99.71 | 99.71 | Russian Federation | |
| 12. Triumvirate I S.a r.I | 100 | 100 | Russian Federation | |
| 13. OOO Nordservice | 100 | 90 | Russian Federation | |
| 14. OOO Plaza SPA | 100 | 100 | Russian Federation | |
| 15. OOO Semprex | 100 | 100 | Russian Federation | |
| 16. OOO Zheldoruslugi | 95 | 95 | Russian Federation | |
| 17. OOO Bizar | 74 | 74 | Russian Federation | |
| 18. AFI D Finance SA | 100 | 100 | British Virgin Islands |
There were no individually significant subsidiaries which have material NCI.
In August 2015, the Group acquired an additional 10% interest in Bioka Investments Limited and its Russian subsidiary Nordservice LLC for US\$1,600 thousand, increasing its ownership from 90% to 100%. The Group recognised:
a decrease in the negative NCI of US\$7,601 thousand;
a decrease in equity of US\$9,201 thousand which is presented as a negative capital reserve.
The carrying amount of Bioka Investment's and its subsidiary's net liabilities in the Group's financial statements on the date of acquisition was US\$32,116 thousand.
The following table summarises the effect of changes in the Company's ownership interest in Bioka Investments and Nordservice LLC.
| US\$'000 | |
|---|---|
| Company's ownership interest at 1 January | (32,582) |
| Effect of increase in Company's ownership interest | (7,601) |
| Company's ownership interest at 31 December 2015 | (40,183) |
Non-cancellable operating lease rentals are payable as follows:
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Less than a year | 4,764 | 6,688 |
| Between one and five years | 22,017 | 26,327 |
| More than five years | 32,747 | 40,213 |
| 59,528 | 73,228 | |
| Amount recognised as an expense during the year | 1,567 | 2,298 |
The ownership of land in the Russian Federation is rare and especially within Moscow region, in which all of the property with only a few exceptions, is owned by the City of Moscow. The majority of land is occupied by private entities pursuant to lease agreements between occupants, of the building located on the land, and the City of Moscow. The Group has several long-term operating leases for land. These leases are entered into with the intention and right to develop the land and carry out construction. Typically they run for an initial period of one to five years which is the period of development and upon completion of development the developer has the right to renew for a long term period of usually up to 49 years. Under both leases the lessee is required to make periodic lease payments, generally on a quarterly basis to the City of Moscow.
There is also the option of long term land lease prior to commencement of construction which the developer can acquire with a lump sum payment that is determined from time to time by
the City of Moscow and is based on the size of the land, its location and the proximity to amenities. The Group has two such land rights and they run for period of 49 years.
The Group leases out investment property under operating leases, see note 15. The future minimum lease payments under non-cancellable leases are as follows:
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Less than a year | 85,343 | 122,501 |
| Between one and five years | 127,608 | 169,227 |
| More than five years | 25,412 | 51,603 |
| 238,363 | 343,331 | |
| Amount recognised as income during the year | 81,338 | 122,226 |
Up to 31 December 2015 the Group has entered into a number of contracts for the construction of investment or trading properties:
| Project name | Commitment | ||
|---|---|---|---|
| 2015 | 2014 | ||
| US\$ '000 | US\$ '000 | ||
| Odinburg | 33,645 | 16,081 | |
| Kossinskaya | 244 | 1,560 | |
| TVZ Plaza IC | 730 | 2,600 | |
| Botanic Garden | 5,060 | 7,243 | |
| Pavaletskaya II | 32,200 | 4,311 | |
| TVZ Plaza IV | 89 | 140 | |
| TVZ Plaza II | 384 | 1,080 | |
| Bolshaya Pochtovaya | 1,538 | 474 | |
| 73,890 | 33,489 |
There were not any contingent liabilities as at 31 December 2015.
Outstanding balances with related parties:
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Assets | ||
| Amounts receivable from joint ventures | 10 | 20 |
| Amounts receivable from ultimate holding company | 203 | 203 |
| Amounts receivable from other related companies | 124 | 164 |
| Long term loans receivable from joint ventures | 14,246 | 17,962 |
| Short term loans receivable from joint ventures | 98 | - |
| Liabilities | ||
| Amounts payable to joint ventures | 6 | 131 |
| Amounts payable to ultimate holding company | 492 | 433 |
| Amounts payable to other related companies | 159 | 1,700 |
| Deferred income from related company | 125 | 156 |
All outstanding balances with these parties are priced at an arm's length basis and are to be settled in cash. None of the balances is secured.
Transactions with the key management personnel:
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Key management personnel compensation comprised: | ||
| Short-term employee benefits | 2,798 | 5,311 |
| Share option scheme expense | 2,283 | 4,383 |
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. The person is a member of the key management personnel of the entity or its parent (includes the immediate, intermediate or ultimate parent). Key management is not limited to directors; other members of the management team also may be key management.
Other related party transactions:
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Revenue | ||
| Joint venture – consulting services | 145 | 238 |
| Joint venture – interest income | 1,422 | 1,920 |
| Related company – rental income | 802 | 1,519 |
| Expenses | ||
| Ultimate holding company – administrative expenses | 330 | 766 |
| Joint venture – operating expenses | 59 | 177 |
Other related party transactions. Construction services capitalised:
| 2015 US\$ '000 |
2014 US\$ '000 |
|
|---|---|---|
| Related company – construction services | 954 | 13,728 |
Subsequent to 31 December 2015 there were no events that took place which have a bearing on the understanding of these financial statements except of the following:
In March 2016 the Company's subsidiary, Semprex LLC, entered into a preliminary agreement on the disposal of the Aquamarine Hotel and 25 underground parking places located at the Ozerkovskaya II project for total consideration of US\$27.5 million. The potential buyer is currently performing due diligence of the project, at the end of which the parties agreed to negotiate the final sale-purchase agreement. The Company expects the net cash flow from the transaction, should it be completed, to be circa US\$5 million, following partial repayment of the loan facility of Bellgate Constructions Limited ("Bellgate") (as stipulated by the mortgage agreement of the Aquamarine Hotel premises for the Bellgate's loan).
We, the members of the Board of Directors and the Company officials responsible for the drafting of the separate financial statements of AFI Development Plc (the 'Company') for the year ended 31 December 2015, the names of which are listed below, confirm that, to the best of our knowledge:
a) The separate financial statements on pages 155 to 177:
(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 separate financial statements taken as a whole,
b) the adoption of a going concern basis for the preparation of the separate financial statements continues to be appropriate based on the foregoing and having reviewed the forecast financial position of the Company.
The Directors of the Company as at the date of this announcement are as set out below:
| Executive directors | |
|---|---|
| Lev Leviev – Chairman | … |
| Non-executive director | |
| Avraham Noach Novogrocki | |
| Non-executive independent directors | |
| Moshe Amit |
| Christakis Klerides | |
|---|---|
| Panayiotis Demetriou | |
| Company officers | |
| Chief executive officer | |
| Mark Groysman | |
| Chief financial officer | |
| Natalia Pirogova |
17 March 2016
For the year ended 31 December 2015
| 2015 | 2014 | ||
|---|---|---|---|
| Note | US\$ '000 | US\$ '000 | |
| Revenue | 4 | 3,250 | - |
| Other income | 849 | 1,502 | |
| Other expenses | - | (16) | |
| Administrative expenses | 5 | (9,654) | (15,775) |
| (Impairment)/reversal of impairment of investment | |||
| in subsidiaries | 7 | (502,445) | 18,100 |
| Loss on disposal of investment in subsidiaries | 7 | (236) | (652) |
| (512,335) | 1,657 | ||
| Results from operating activities | (508,236) | 3,159 | |
| Finance income | 742 | 1,246 | |
| Finance costs | (7,480) | (5,401) | |
| Net finance costs | 6 | (6,738) | (4,155) |
| Loss for the year | (514,974) | (996) | |
| Other comprehensive income | - | - | |
| Total comprehensive income for the year | (514,974) | (996) |
Share capital Share premium Retained earnings Total US\$ '000 US\$ '000 US\$ '000 US\$ '000 Balance at 1 January 2014 1,048 1,763,409 89,852 1,854,309 Total comprehensive income for the year - - (996) (996) Transactions with owners of the Company Contributions and distributions Share option expense - - 4,383 4,383 Balance at 31 December 2014 1,048 1,763,409 93,239 1,857,696 Balance at 1 January 2015 1,048 1,763,409 93,239 1,857,696 Total comprehensive income for the year - - (514,974) (514,974) Transactions with owners of the Company Contributions and distributions Share option expense - - 2,283 2,283 Balance at 31 December 2015 1,048 1,763,409 (419,452) 1,345,005
For the year ended 31 December 2015
As at 31 December 2015
| Note | 2015 US\$ '000 |
2014 US\$ '000 |
|
|---|---|---|---|
| Assets | |||
| Investment in subsidiaries | 7 | 1,313,453 | 1,686,863 |
| Loans receivable | 8 | - | 217,839 |
| Total non-current assets | 1,313,453 | 1,904,702 | |
| Trade and other receivables | 9 | 210,635 | 8,767 |
| Refundable tax | 2,215 | 2,215 | |
| Cash and cash equivalents | 10 | 6,905 | 39,127 |
| Total current assets | 219,755 | 50,109 | |
| Total assets | 1,533,208 | 1,954,811 | |
| Equity | |||
| Share capital | 1,048 | 1,048 | |
| Share premium | 1,763,409 | 1,763,409 | |
| Retained earnings | (419,452) | 93,239 | |
| Total equity | 11 | 1,345,005 | 1,857,696 |
| Liabilities | |||
| Loans and borrowings | 12 | 86,975 | 94,084 |
| Total non-current liabilities | 86,975 | 94,084 | |
| Short-term loans and borrowings | 12 | 97,390 | - |
| Trade and other payables | 13 | 3,838 | 3,031 |
| Total current liabilities | 101,228 | 3,031 | |
| Total liabilities | 188,203 | 97,115 | |
| Total equity and liabilities | 1,533,208 | 1,954,811 |
The financial statements were approved by the Board of Directors on 17 March 2016.
Lev Leviev
Chairman
Christakis Klerides
Director
| Note | 2015 US\$ '000 |
2014 US\$ '000 |
|
|---|---|---|---|
| Cash flows from operating activities | |||
| Loss for the year | (514,974) | (996) | |
| Adjustments for: | |||
| Unrealised exchange loss | 6 | 36 | 93 |
| Write off of receivables | - | 16 | |
| Loss on disposal of investments in subsidiaries | 7 | 236 | 652 |
| Charge/(reversal) of impairment of investment in subsidiaries | 7 | 502,445 | (18,100) |
| Dividend income | 4 | (3,250) | - |
| Interest income | 6 | (742) | (1,246) |
| Interest expense | 6 | 7,390 | 5,311 |
| Share option expense | 5 | 2,283 | 4,383 |
| (6,576) | (9,887) | ||
| Change in trade and other receivables | (5,367) | 141 | |
| Change in trade and other payables | 807 | 1,458 | |
| Net cash used in operating activities | (11,136) | (8,288) | |
| Cash flows from investing activities | |||
| Proceeds received from the sale of subsidiaries | 7 | - | 748 |
| Additional contribution of capital to existing subsidiaries | 7 | (18,592) | (1,826) |
| Payment for acquisition of investments in subsidiaries | 7 | - | (12) |
| Dividends received | 4 | 3,250 | - |
| Interest received | 6 | 986 | 1,972 |
| Net cash (used in)/from investing activities | (14,356) | 882 | |
| Cash flows from financing activities | |||
| Repayment of loans and borrowings | 12 | (3,979) | (8,500) |
| Proceeds from loans and borrowings | 12 | 2,000 | 13,300 |
| Interest paid | 12 | (4,761) | (1,500) |
| Net cash (used in)/from financing activities | (6,740) | 3,300 | |
| Effect of exchange rate fluctuations on cash held | 10 | (6) | |
| Net decrease in cash and cash equivalents | (32,222) | (4,112) | |
| Cash and cash equivalents at 1 January | 39,127 | 43,239 | |
| Cash and cash equivalents at 31 December | 10 | 6,905 | 39,127 |
| The cash and cash equivalents consists of: | |||
| Cash at banks | 6,905 | 39,127 |
For the year ended 31 December 2015
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. The Company is a 64.88% (31/12/2014: 64.88%) subsidiary of Africa Israel Investments Ltd ("Africa-Israel"), which is listed in the Tel Aviv Stock Exchange ("TASE"). 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.
The principal activity of the Company is the holding of investments in subsidiaries and jointly controlled entities.
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and the requirements of the Cyprus Companies Law, Cap.113.
Users of these parent's separate financial statements should read them together with the Group's consolidated financial statements as at and for the year ended 31 December 2015 in order to obtain a proper understanding of the financial position, the financial performance and the cash flows of the Company and the Group.
The financial statements have been prepared under the historical cost convention, except in the case of investments, which are stated at cost less provision for impairment in value and receivables which are stated after the provision for impairment.
As from 1 January 2015, the Company adopted all changes to International Financial Reporting Standards (IFRSs) which are relevant to its operations. This adoption did not have a material effect on the separate financial statements of the Company.
The following Standards, Amendments to Standards and Interpretations have been issued but are not yet effective for annual periods beginning on 1 January 2015. Those which may be relevant to the Company are set out below. The Company does not plan to adopt these Standards early.
IFRS 14 ''Regulatory Deferral Accounts'' (effective for annual periods beginning on or after 1 January 2016).
The Board of Directors expects that the adoption of the above financial reporting standards in future periods will not have a significant effect on the financial statements of the Company.
The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may deviate from such estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
In particular, information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described below:
Significant judgement is required in determining the provision for income taxes. There are transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax provisions in the period in which such determination is made.
The Company periodically evaluates the recoverability of investments in subsidiaries whenever indicators of impairment are present. Indicators of impairment include such items as declines in revenues, earnings or cash flows or material adverse changes in the economic or political stability of a particular country, which may indicate that the carrying amount of an asset is not recoverable. If facts and circumstances indicate that investment in subsidiaries may be impaired, the estimated future undiscounted cash flows associated with these subsidiaries would be compared to their carrying amounts to determine if a write-down to fair value is necessary.
These financial statements are presented in United States Dollars, which is the Company's functional currency. All financial information presented in United States Dollars has been rounded to the nearest thousand, except when otherwise indicated.
The accounting policies set out below have been applied consistently to all periods presented in these financial statements and in stating the financial position of the Company.
Investments in subsidiary companies are stated at cost less provision for impairment in value, which is recognised as an expense in the period in which the impairment is identified.
Finance income comprises interest income on bank deposits. Interest income is recognised as it accrues in profit or loss, using the effective interest method.
Finance costs comprise interest expense on borrowings. Borrowing costs are recognised in profit or loss using the effective interest method.
Foreign currency gains and losses are 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.
(i) Items included in the Company's financial statements are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The financial statements are presented in United States Dollars,
rounded to the nearest thousand, which is the Company's functional and presentation currency.
(ii) Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.
Dividend income is recognised in profit or loss when the right to receive payment is established i.e. dividends are declared and approved by the investee companies.
Tax liabilities and assets for the current and prior periods are measured at the amount expected to be paid to or recovered from the taxation authorities, using the tax rates and laws that have been enacted, or substantively enacted, by the reporting date. Current tax includes any adjustments to tax payable in respect of previous periods.
Dividend distribution to the Company's shareholders is recognised in the Company's financial statements in the year in which they are approved by the Company's shareholders.
Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument.
Loans originated by the Company by providing money directly to the borrower are categorised as loans and are carried at amortised cost. This is defined as the fair value of cash consideration given to originate those loans as is determined by reference to market prices at origination date. All loans are recognised when cash is advanced to the borrower.
An allowance for loan impairment is established if there is objective evidence that the Company will not be able to collect all amounts due according to the original contractual terms of loans. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows including amounts recoverable from guarantees and collateral, discounted at the original effective interest rate of loans.
For the purpose of the statement of cash flows, cash and cash equivalents comprise cash at bank.
Borrowings are recorded initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any differences between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method.
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when:
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss.
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the statement of financial position.
Non-current assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets classified as held for sale are presented separately in the statement of financial position and are to be measured at the lower of the asset's previous carrying amount and fair value less costs to sell.
Ordinary shares are classified as equity. The difference between the fair value of the consideration received by the Company and the nominal value of the share capital being issued is taken to the share premium account.
Non-current liabilities represent amounts that are due more than twelve months from the reporting date.
Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year.
| 2015 | 2014 |
|---|---|
| US\$ '000 | US\$ '000 |
| Dividend income 3,250 |
- |
During the year the Company received dividends from its subsidiary AFI Development Hotels Limited which were recognised as income upon declaration and approval.
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Consultancy and brokerage fees | 758 | 2,056 |
| Donations | 2,796 | 4,828 |
| Legal fees | 343 | 1,078 |
| Share option expense | 2,283 | 4,383 |
| Directors' remuneration | 1,472 | 2,024 |
| Auditors' remuneration | 463 | 439 |
| Valuation expenses | 123 | 148 |
| Insurance | 151 | 182 |
| Other administrative expenses | 1,265 | 637 |
| 9,654 | 15,775 |
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Bank interest income | 742 | 1,246 |
| Finance income | 742 | 1,246 |
| Interest expense on loans and borrowings | (7,390) | (5,312) |
| Other finance costs | (22) | (20) |
| Net foreign exchange loss | (68) | (69) |
| Finance costs | (7,480) | (5,401) |
| Net finance costs | (6,738) | (4,155) |
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Balance at 1 January | 1,686,863 | 1,666,326 |
| Additional investment in existing subsidiaries | 129,271 | 3,826 |
| Disposal of investment in subsidiaries | (236) | (1,389) |
| (Impairment)/reversal of impairment | (502,445) | 18,100 |
| Balance at 31 December | 1,313,453 | 1,686,863 |
During the year, the company transferred 30% holding in its subsidiary Tverskaya Zastava LLC to the indirect subsidiary Bugis Finance Ltd, recognising a loss on disposal of \$216 thousand.
At 31 December 2015 the Company recognised an impairment loss of \$502,445 thousand due to a significant decrease in the fair value of the properties held by its subsidiaries as at that date. Refer to the Russian Business Environment section in this note for further details of the unfavourable conditions which contributed to the drop in fair value of the subsidiaries' projects.
On 18 December 2014 the Company has restored in its books its investment in Bioka Trading Ltd and its Russian subsidiary Nordservice LLC since the subsidiary has managed to obtain the necessary permits for the development of its project "Botanic Garden". The value of the investment was restored to US\$20,100 thousand following the revaluation of the project on 31 December 2014 by independent appraisers. A reversal of impairment loss amounting to US\$18,100 thousand was recognised in profit or loss for the year and an amount of US\$2,000 thousand representing additional costs paid by the Company in previous year were transferred to the cost of the investment.
During 2014 the Company disposed its 100% share in Keyiri Trade & Invest Limited with its Russian subsidiary Favorit LLC, holding rights to the St Petersburg project, of a book value of US\$1,400 thousand. The consideration of the disposal was \$748 thousand with a resulting loss on disposal amounting to US\$652 thousand recognised in profit or loss. The agreement also provided for the full repayment of a receivable from Keyiri Trade & Invest Limited.
The Company also incorporated during 2014 six new subsidiaries at a total cost of US\$9 thousand.
The details of the subsidiaries are as follows:
| Investment | Country of | Principal | 2015 | 2014 |
|---|---|---|---|---|
| incorporation | activities | US\$ '000 | US\$ '000 | |
| Investment in | Holding of | |||
| Cypriot companies | Cyprus | investments/Financing | 229,166 | 624,296 |
| Investment in | ||||
| Russian companies | Russian | Real estate | 218,042 | 211,879 |
| Federation | development | |||
| Investment in BVI | ||||
| companies | BVI | Financing | 866,245 | 850,688 |
| 1,313,453 | 1,686,863 |
The real estate projects of the Company's subsidiaries are primarily located in the Russian Federation. Consequently, the Russian subsidiaries are exposed to the economic and financial markets of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation.
The conflict in Ukraine and related events has increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States of America, Japan, Canada, Australia and others, as well as retaliatory sanctions imposed by the Russian government, has resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Rubble, a reduction in both local and foreign direct investment inflows and a significant tightening in the availability of credit. In particular, some Russian entities may be experiencing difficulties in accessing international equity and debt markets and may become increasingly dependent on Russian state banks to finance their operations. The longer term effects of recently implemented sanctions, as well as the threat of additional future sanctions, are difficult to determine.
Continuation of the above-mentioned events, and/or an increase in the severity thereof, could have an adverse effect on various facets of the Company's subsidiaries' activities and/or data appearing in the financial statements, among others, as follows:
An unfavourable impact on the revenues due to a decline in the demand in the commercial sector and residential sector;
The Company is monitoring the economic developments in Russia, in general, and in the real estate market, in particular. It is noted that due to the uncertainty prevailing in light of the events described above, the Company is reviewing the development plans and timetables of a number of its projects. Due to the inability to predict the duration or the manner of the future development of political and economic events, the Company is not able, at this stage, to estimate the future impact of these matters on its Russian subsidiaries.
The consolidated financial statements reflect management's assessment of the impact of the Russian business environment on the operations and the financial position of the Company and the value of its investments in subsidiaries. The future business environment may differ from management's assessment.
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Loans to subsidiaries (Note 14) | - | 217,839 |
| Less current portion | - | - |
| Non-current portion | - | 217,839 |
| The loans are repayable as follows: | ||
| Between one and five years | - | 217,839 |
During the year the above loans receivable were partly assigned to the Company's subsidiaries AFI D Finance S.A. and Larue Ltd and partly waived and capitalised in investments in subsidiaries.
The loans to subsidiaries were unsecured and repayable on demand. As of 1 January 2014 they were interest free.
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Receivables from related parties (Note 14) | 210,359 | 8,291 |
| Other receivables | 276 | 476 |
| 210,635 | 8,767 |
The increase in the receivables from related parties is due to the consideration receivable for the loans assigned to the Company's subsidiaries (note 8).
The fair values of trade and other receivables due within one year approximate to their carrying amounts as presented above.
The exposure of the Company to credit risk and impairment losses in relation to trade and other receivables is reported in note 15 of the financial statements.
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Cash and cash equivalents consists of: | ||
| Cash at banks | 6,905 | 39,127 |
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Share capital | ||
| 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 | 524 | 524 |
| 523,847,027 B ordinary shares of US\$0.001 each | ||
| 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 2015.
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 result of a bonus issue.
The Company has established an employee share option plan operated by the Board of Directors, which is responsible for granting options and administrating the employee share option plan. Eligible are employees and directors, excluding independent directors, of the Company. The employees share option plan is discretionary and options will be granted only when the Board so determines at an exercise price derived from the closing middle market price preceding the date of grant. No payment will 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.
As of 31 December 2015 the following options were outstanding.
If a participant ceases to be employed his options will normally lapse subject to certain exceptions. In the event of a takeover, reorganisation or winding up vested options may be exercised or exchanged for new equivalent options where appropriate. Shares/GDRs issued under the plan will rank equally with all other shares at the time of issue. The Board of Directors may 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.
The amount at each reporting date is available for distribution. No dividends were proposed, declared or paid during the year ended 31 December 2015 (2014: Nil).
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Long term liabilities | ||
| Loans from related parties (Note 14) | 86,975 | 94,084 |
| Short term liabilities | ||
| Loans from related parties (Note 14) | 97,390 | - |
| Maturity of non current borrowings: | ||
| Within one year | 97,390 | - |
| Between one and five years | 86,975 | 94,084 |
| 184,365 | 94,084 |
During the year, the Company signed a loan assignment agreement with its subsidiaries Avtostoyanka Tverskaya Zastava LLC (borrower) and Krown Investments Ltd (lender) whereby the Company took over the responsibility to repay the loan facility provided by Krown.
The loans from the Company's subsidiaries bear interest of 6% per annum and CBR * 0,8 and are repayable by 31 December 2016 and 31 December 2020 respectively.
The exposure of the Company to interest rate risk in relation to financial instruments is reported in note 15 of the financial statements.
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Payables to related parties (Note 14) | 3,625 | 2,786 |
| Other payables | 213 | 245 |
| 3,838 | 3,031 |
The transactions with related parties are as follows:
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Key management personnel compensation comprised: | ||
| Short-term employee benefits | 1,200 | 1,800 |
| Share option scheme expense | 2,283 | 4,383 |
| (ii) Other related party transactions | ||
| 2015 | 2014 | |
| US\$ '000 | US\$ '000 | |
| Interest expense charged from subsidiary | (7,390) | (5,312) |
| Consulting fees charged from holding company | (330) | (766) |
| Management fees charged from subsidiaries | (723) | (1,582) |
| Other administrative expenses charged by related company | (11) | - |
| The balances with related parties are as follows: | ||
| (iii) Receivables from related parties (Note 9) | ||
| 2015 | 2014 | |
| US\$ '000 | US\$ '000 | |
| Receivables from subsidiaries | 210,359 | 8,291 |
| (iv) Loans to related parties (Note 8) | ||
| 2015 | 2014 | |
| US\$ '000 | US\$ '000 | |
| Loans to subsidiaries | - | 217,839 |
During the year the above loans receivable were partly assigned to the Company's subsidiaries AFI D Finance S.A. and Larue Ltd and partly waived and capitalised in investments in subsidiaries.
The loans to subsidiaries were unsecured and repayable on demand. As of 1 January 2014 they were interest free.
| 2015 | 2014 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Payables to subsidiaries | 3,135 | 2,356 |
| Payables to holding company | 490 | 430 |
| 3,625 | 2,786 | |
| (vi) Loan from related party (Note 12) | ||
| 2015 | 2014 | |
| US\$ '000 | US\$ '000 | |
| Loan from subsidiary | 184,365 | 94,084 |
During the year the Company took over the responsibility to repay the loan to its wholly owned subsidiary Krown Investments LLC by way of assignment. It bears interest rate of CBR * 0,8 and is repayable by 31 December 2020.
During 2014 the Company obtained a long-term unsecured loan from its subsidiary AFI D Finance S.A. The loan is denominated in US\$, bears interest of 6% p.a. and is repayable by 31 December 2016.
The Company is exposed to the following risks from its use of financial instruments:
The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework.
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 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.
Credit risk arises when a failure by counter parties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date. The Company has no significant concentration of credit risk. Cash balances are held with high credit quality financial institutions and the Company has policies to limit the amount of credit exposure to any financial institution.
The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified.
Credit risk arises from cash and cash equivalents. Cash transactions are limited to high-creditquality financial institutions. The utilisation of credit limits is regularly monitored.
The Company's policy is to provide financial guarantees only to wholly-owned subsidiaries in exceptional cases. In negotiations with lending banks the Company is aiming to avoid recourse to AFI Development on loans taken by subsidiaries. As at 31 December 2015, there were two outstanding guarantees: one of AFI Development Plc for the amount of US\$1 million in favour of VTB Bank under a loan facility agreement of Bellgate Construction Limited and another one of AFI Development Plc for the amount of US\$193 million in favour of VTB Bank JSC under a loan facility agreement of Krown Investments LLC (project Aquamarine III).
Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The Company has procedures with the object of minimising such losses such as maintaining sufficient cash and other highly liquid current assets and by having available an adequate amount of committed credit facilities.
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.
Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest rate risk. The Company's management monitors the interest rate fluctuations on a continuous basis and acts accordingly.
Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. Currency risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Company's measurement currency. The Company is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the Euro and the Russian Rouble. The Company's management monitors the exchange rate fluctuations on a continuous basis and acts accordingly.
The Company manages its capital to ensure that it will be able to continue as a going concern while increasing the return to shareholders through the strive to improve the debt equity ratio. The Company's overall strategy remains unchanged from last year.
The fair values of the Company's financial assets and liabilities approximate their carrying amounts at the reporting date.
The Company had no contingent liabilities as at 31 December 2015.
Subsequent to 31 December 2015 there were no events that took place which have a bearing on the understanding of these financial statements except of the following:
In March 2016 the Company's subsidiary, Semprex LLC, entered into a preliminary agreement on the disposal of the Aquamarine Hotel and 25 underground parking places located at the Ozerkovskaya II project for total consideration of US\$27.5 million. The potential buyer is currently performing due diligence of the project, at the end of which the parties agreed to negotiate the final sale-purchase agreement.
We have audited the accompanying consolidated financial statements of AFI Development Plc and its subsidiaries (The "Group"), and the separate financial statements of AFI Development Plc ("the Company"), which comprise the consolidated and the separate statement of financial position as at 31 December 2015, and the consolidated and the separate statements of income statement, comprehensive income and changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.
The Board of Directors is responsible for the preparation of consolidated and separate financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union (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 and separate financial statements that are free from material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these consolidated and separate financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated and the separate financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation of consolidated and separate financial statements that give a true and fair view 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 entity's internal controls. An
audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the consolidated and separate financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the 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 2015, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU and the requirements of the Cyprus Companies Law, Cap. 113.
Pursuant to the additional requirements of the Auditors and Statutory Audits of Annual and Consolidated Accounts Laws of 2009 as amended from time to time, we report the following:
This report, including the opinion, has been prepared for and only for the Company's members as a body in accordance with Section 34 of the Auditors and Statutory Audits of Annual and Consolidated Accounts Laws of 2009 as amended from time to time 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.
Under the United Kingdom Listing Authority (the 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 provisions of the UK Corporate Governance code specified for our review. We have no exceptions to report arising from our review.
Maria H. Zavrou, FCCA
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
17 March 2016
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