27 Apr 2020 11:05
Arricano Real Estate Plc (ARO) Final Results 27-Apr-2020 / 11:00 GMT/BST Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group. The issuer is solely responsible for the content of this announcement. 27 April 2020
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF EU REGULATION 596/2014
Arricano Real Estate plc ("Arricano" or the "Company" or, together with its subsidiaries, the "Group")
Audited Results for the 12 months ended 31 December 2019
Arricano is one of the leading real estate developers and operators of shopping centres in Ukraine. It owns and operates five completed shopping centres comprising over 147 ,900 sqm of gross leasable area and land for a further three sites under development.
Highlights Recurring revenues increased by 18% to USD 37.3 million (2018: USD 31.5 million) Net operating income (excluding revaluation gains) increased by 17% to USD 24.4 million (2018: USD20.9 million) The Company's portfolio was valued independently at USD 289.3 million as at 31 December 2019 (2018: USD 258.5 million) Occupancy was 99.7% as at 31 December 2019 As at 31 December 2019, total bank borrowings were USD 43.4 million (2018: USD 36.3 million) As at 31 December 2019, total borrowings were USD 102.4 million (2018: USD 96.5 million) Net asset value was USD 127.9 million as at 31 December 2019 (2018: USD 94.0 million) Ganna Chubotina appointed CEO
Post year-end COVID-19 pandemic has resulted in the temporary restrictions of customer access to all 5 shopping and entertainment centres in March 2020 excluding hypermarket and pharmacy outlets To offset the expected reduction in rental and ancillary income, the Company has reduced costs across the business The Company at an advanced stage of negotiations with all its lenders to restructure debt servicing schedules.
Ganna Chubotina, Chief Executive Officer of Arricano, commented:
"Arricano delivered a good trading performance in 2019 lifting rental income by 18%. Significant progress was also made in refinancing the loans and accessing new capital for the development of the Lukianivka shopping and entertainment centre whilst achieving the highest tenant occupancy across the existing portfolio of 99.7%.
More recently, COVID-19 has significantly disrupted the economy in Ukraine and globally. Social distancing has been introduced with shopping centres largely closed. Arricano is responding to the challenges caused by COVID-19, working together as a team, to prepare for when businesses are allowed to re-commence."
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Chairman's Statement
2019 was a successful year for Arricano. Our shopping centres were almost fully let with vacancy of just 0.3% and this was achieved alongside an 18% increase in turnover to USD37.3 million reflecting rental uplift. Also during 2019, the Company raised USD40 million of new bank borrowings to refinance the existing loans and support the development of the Lukianivka shopping and entertainment centre in Kyiv and refinance existing loan facilities.
Our commercial strategy led by recently appointed CEO, Ganna Chubotina, is to continue to enhance the benefits of offline commerce, making the Arricano malls, cozy, comfortable places that are genuine social spaces which individuals and families are keen to visit not simply to shop but to enjoy different experiences . The occupancy levels combined with the high visitor numbers in 2019 show the success of this strategy and are further underlined by the multiple retail awards won by the Company and the individual malls.
Amongst the awards achieved, Sun Gallery in Kryvyi Rih and City Mall in Zaporizhzhia won the Ukrainian National Award "Consumer Choice - 2019" for the best shopping malls in the respective cities. City Mall (Zaporizhzhia) won the nomination for "The best shopping mall in a city with a population of less than 1 million" in Retail & Development Business Awards 2019.
During the course of 2019, the Company announced the possible sale of Sun Gallery and City Mall to Dragon Capital Group. However, prior to completing a sale, the management team of Arricano developed upgraded strategies for these centers which it is believed will further increase their value and efficiency and the potential sale was cancelled. The Company is focused on the sustainable development of new projects, historically the business has opened a new mall every 1.5-2 years and this continues to be our target.
The three development sites covering 14 ha. in Lukyanivka (Kyiv), Petrivka (Kyiv), and Rozumovska (Odesa) continue to be progressed. With the capital from the new banking facilities, the highly innovative Lukianivka project has made good progress and subject to COVID-19 is expected to be completed in 2022.
The Company continues to pursue Stockman Interhold S.A. concerning the ownership of Assofit, whish held the Sky Mall shopping centre and in which Company holds a 49.97% shareholding.
In December 2019, the Company confirmed the appointment of Ganna Chubotina as the CEO of Arricano. Ganna was previously the Director of the Company's retail leasing department. Prior to working for Arricano, Ganna worked for JLL Ukraine. She is a highly experienced manager and is working positively across the team as we develop the business and meet the challenges posed by COVID-19.
In line with guidance from the authorities, all 5 shopping and entertainment centres were temporarily semi-closed in March 2020, with only hypermarket and pharmacy outlets open for business. It is uncertain how long the restrictions will be in place and the Company is working collaboratively to reduce costs where appropriate and support tenants as far as possible so that all stakeholders are in a position to re-open once the restrictions are lifted.
On behalf of the Board I would like to thank every employee and stakeholder of Arricano for their contribution in 2019. I would also like to commend everyone for their positive response to the COVID-19 crisis and their willingness to work together to support the business and their colleagues during this unprecedented time.
The outlook for 2020 is now very different to the one we expected to look forward to at the outset of the year. Importantly, we have a strong team and good assets so that once we are through this crisis we expect to be well placed to re-open our malls and welcome visitors back. Financially the response to the crisis has been swift, the Company has reduced expenses appropriately, largely suspended capital investment projects, apart from the Lukianivka development, and is working with tenants to find equitable solutions on rent collection. The Company is continuing discussions with all its lenders to restructure debt servicing schedules.
Overall, the Board believes the Company has the financial flexibility to meet its financial commitments and emerge from this crisis well-placed to regain its position as premier provider of shopping and entertainment experiences.
Urmas Somelar Non-Executive Chairman 27 April 2020
Chief Executive Officer's Report
Introduction
At the end of 2019, the average vacancy in Ukrainian shopping malls was 4.5%. Across Arricano's portfolio of shopping and entertainment centres vacancy was at the same date just 0.3%. Retailers strive to be our partners and these market leading numbers reflect this. Our focus is on collaboration, we believe our business works best when we work together developing solutions and practices which generate returns for our tenants, our visitors and ourselves. We then look to share our retail practices with our industry when asked to do so.
This approach translates into strong financial performance, as shown in these results. Our tenants turnover grew by 20% in 2019, a substantial increase which in turn was a key factor in lifting our turnover by 18% to US$37.3m. The relationship between Arricano and our retail tenants has matured over time and is at the heart of what we do.
Our malls are social spaces. We have arguably led the Ukrainian market in developing the appeal of our malls beyond shopping so that visitors come for social development, consumer experiences and edutainment. The centres are genuine places of interest in their own right which is supported by the fact that the Group recorded 47.2 million visitors to our malls in 2019.
Results
Recurring revenues for the period were up 18% at USD37.3 million (2018:USD 31.5 million). As a result, the Net Operating Income ("NOI") from operating properties excluding revaluation gain was up 17% at USD24.4 million, compared to USD20.9 million in 2018.
Due to appreciation of UAH/USD exchange rate, a loss from revaluation of investment property in total amount of USD 12.2 million was shown in 2019. This was more than offset by currency translation adjustments related to the investment property. As a result, the total fair value of investment property increased by USD 30.8 million to USD289.3 million as at 31 December 2019 (2018: USD258.5 million). The portfolio of assets was externally and independently valued by Expandia LLC, part of the CBRE Affiliate Network. The increase in the value of the portfolio was primarily driven by increased rental income from operating properties.
Profit before tax was USD 8.9 million (2018: USD 46.6 million). The decrease is due to a loss on revaluation of investment property in 2019 as compared to a gain on revaluation of investment property in 2019.
The Market
The market in 2020 is likely to be very different as the world gets through the current crisis and then works to return to a normal trading environment. This will no doubt take time and there will be elements of social interaction which will change permanently. We believe our strategy of working collaboratively with mutual trust and respect will be well suited to navigating through these periods and we are confident our malls will retain their popularity once the current restrictions are lifted.
In 2019, our main task was to continue to develop our shopping malls as social spaces. We have been successfully working towards this goal for a number of years. We use all elements of our malls to increase and improve the customer experience. In executing the plan, we place equal emphasis on the Company culture as we do on achieving our financial targets, motivating our teams through being positive under a 'friendly open culture' has been critical to the success of the business.
A key element of improving the customer experience is through working on the retail mix within each mall. We consistently focus on updating our tenant formats, expanding product categories and opening up new popular brands. With a vacancy rate of virtually zero it requires different and creative techniques to complete renewals and attract new retail operators.
An area of particular focus is promoting fast shopping and offering corner positions to attract new retailers. As an example, in the RayON shopping mall we have formed clusters of similar stores such as fashion retail brands in a specific area so that the consumers are able to visit lots of similar stores quickly. A prospective tenant is typically attracted to operating in these clusters as they tend to boost revenues and particularly so if they occupy a corner position. Our malls are increasingly being organised according to lifestyle with specific areas dedicated to electronics, sports, beauty, entertainment etc. Matching the needs and interests of our visitors and making their visit convenient and safe all contribute to the financial success of the Group and our tenants.
Our online presence has grown substantially. In 2018 our corporate focus was on merging the physical and digital worlds which translated into a phygital strategy that we have continued to build on, so that Arricano had more than 300 thousand regular followers of the Company's digital communications in December 2019. We estimate in 2019 the broader universe of all social media activity by the shopping malls reached nearly 6 million individuals. We are effectively using our social media channels and we are working collaboratively with our tenants to increase their use of social media. As a result, the number of tenants developing their online presence has increased from 72 in 2018 to 85 in 2019.
In terms of the new developments, the Group is progressing projects in Odesa and Lukyanivka, Kyiv. The main focus is on development of the Lukyanivka project; construction is underway, however, the COVID-19 pandemic has slowed development and will result in some delays. Nevertheless our commitment to the project remains unchanged.
Outlook
Arricano is a successful ongoing business. Since 2014 we have been operating in extremely challenging economic and political conditions yet during this period we have expanded the number of malls we operate, attracted millions of visitors to our centres, reduced vacancy to practically zero and significantly increased revenues and profitability. We are market leaders in terms of the way we operate and collaborate with our tenants to create vibrant, socially exciting experiences across our malls whilst offering premium retail experiences. Our next challenge is to get through and beyond the effects of COVID-19 which I feel confident we will and that the Company will emerge in a good position once this crisis has passed.
Ganna Chubotina Chief Executive Officer 27 April 2020
Operating Portfolio
In the following section we have provided an overview of the principal assets in the operating portfolio.
Sun Gallery (Kryvyi Rig)
Sun Gallery, which opened in 2008, is one of the largest shopping malls in Kryvyi Rig. It is located at 30-richchia Peremohy Square, in the Saksahanskyi district in the north-eastern part of Kryvyi Rig. It has easy access by car and has good public transport links. The primary shopping centre catchment area includes almost the whole territory of the Saksahanskyi district and part of the Pokrovskyy district. The secondary area covers the Dovhyntsivskyi district.
The shopping centre is on two levels, spanning a total GLA of approximately 38,000 sqm. During 2019, 12 new agreements were signed, bringing new brands to the Sun Gallery, including brands that were previously unavailable in the region.
Key statistics
* GLA - c. 38,000 sqm (2018: 37,600 sqm)
* Vacancy rate as at 31 December 2019 - 1.2 per cent (2018: 0.2 per cent).
* Average monthly rental rate 2019 - USD 16.7 /sqm (2018: USD 14.6 /sqm)
* Average monthly visitors 2019 - 0.4 million (2018: 0.4 million)
* Bank debt at 31 December 2019 - USD 11.3 million (2018: USD 5.5 million)
* Valuation at 31 December 2019 - USD 34.8 million (2018: USD 30.3 million)
City Mall (Zaporizhzhia)
City Mall, which opened in 2007, is one of the largest shopping centres in Zaporizhzhia with a total GLA of approximately 21,500 sqm on a single level. The shopping centre is located on the Dnipro river approximately 3km from Zaporizhzhia city centre, between two densely populated areas of Zaporizhzhia in the Alexandrovskyy administrative district (1b Zaporizska street), with convenient accessibility by public and private transport.
City Mall comprises a gallery and hypermarket, including a food court, a children's entertainment zone and car parking, which is shared with DIY superstore Epicenter. City Mall's anchor tenants are the hypermarket Auchan, which is the largest in the city, McDonald's and the electronics store Comfy. During 2019, 14 new contracts were signed bringing new brands to the City Mall, including brands that were previously unavailable in the region. Building on the fourth successive year of nil vacancy rates, the tenant portfolio continues to be strengthened, with fashion and electronic stores.
Key statistics
* GLA - c. 21,500 sqm (2018: c. 21,500 sqm)
* Vacancy rate as at 31 December 2019 - 0.0 per cent (2018: 0.0 per cent).
* Average monthly rental rate 2019 - USD 34.4 /sqm (2018: USD 29.1 /sqm)
* Average monthly visitors 2019 - 0.5 million (2018: 0.5 million)
* Bank debt at 31 December 2019 - USD 11.8 million (2018: USD 6.3 million)
* Valuation at 31 December 2019 - USD 33.8 million (2018: USD 30.5 million)
South Gallery (Simferopol)
The site is located in the north of Simferopol, about five minutes' driving distance from one of the city's major crossroads, Moskovska Square. The site is linked to the city centre and residential areas east of the city by one of the main thoroughfares of Simferopol. The primary shopping centre catchment area includes northern parts of the Kyivskyi and Zaliznychnyi districts. The secondary area covers almost the whole city, except for its very southern parts.
South Gallery shopping centre (Phases I and II) is situated on a land plot with a total area of 10.2 ha. Phase I, which opened in 2009, of the shopping centre tenants include Auchan (international hypermarket chain), with a small gallery. Since the completion of Phase II in February 2014 the mall has become a regional destination shopping centre with a total GLA of 33,700 sqm.
During 2019, 54 new lease contracts were signed, including fashion, electronics and other stores.
Key statistics
* GLA - 33,700 sqm (2018: c. 33,400 sqm)
* Vacancy rate as at 31 December 2019 - 0.0 per cent (2018: 0.1 per cent).
* Average monthly rental rate 2019 - USD 26.4 /sqm (2018 USD 21.9 /sqm)
* Average monthly visitors 2019 - 0.8 million (2018: 0.8 million)
* Bank debt at 31 December 2019 - USD Nil (2019: USD Nil)
* Valuation at 31 December 2019 - USD 54.7 million (2018: USD 49.6 million)
RayON (Kyiv)
The RayON shopping centre, which opened to the public in August 2012, is located in the north east of Kyiv along the left bank of the Dnipro river, with satisfactory transportation links.
The shopping centre has a GLA of approximately 23,900 sqm on two levels, with approximately 860 parking spaces. The concept for RayON is a district shopping centre, which focuses on food, clothing and convenience products. The shopping centre is anchored by a Silpo foods supermarket, one of the biggest supermarket chains in Ukraine and a member of the Fozzy group. Electronics supermarket Comfy also operates within the shopping centre.
RayON, which has several restaurants and a children's entertainment zone to complement the retail facilities, is located in the middle of the Desnjanski district, one of the most densely populated areas in Kyiv.
During 2019, 31 new lease contracts were signed, including fashion and electronics stores.
Key statistics
* GLA - c. 23,900 sqm (2018: c. 23,900 sqm)
* Vacancy rate as at 31 December 2019 - 0.03 per cent (2018: 0.35 per cent).
* Average monthly rental rate 2019 - USD 24.2 /sqm (USD 20.1 /sqm)
* Average monthly visitors 2019 - 0.6 million (0.6 million)
* Bank debt at 31 December 2019 - USD 13.8 million (2018: USD 15.6 million)
* Valuation at 31 December 2019 - USD 49.1 million (USD 44.1 million)
Prospect (Kyiv)
SEC Prospect is located directly on the inner ring road of Kyiv on the left bank of the Dnipro river in the Desnianskyi administrative district, with good automobile accessibility and public transport links. The area is recognised as a popular shopping destination, located close to a large open-air market and a bazaar-style shopping centre (SC Darynok).
The SEC consists of a two-storey retail and leisure complex with a GLA of approximately 30,800 sq. m. and parking with 1,350 parking spaces. The centre opened at the end of 2014.
During 2019, 27 new lease contracts were signed.
Key statistics
* GLA - c. 30,800 sqm (2018: c. 30,900 sqm)
* Vacancy rate as at 31 December 2019 - 0.03 per cent (2018: 0.7 per cent).
* Average monthly rental rate 2019 - USD 20.8 /sqm (2018: USD 16.9 /sqm)
* Average monthly visitors 2019 - 1.7 million (2018: 1.7 million)
* Bank debt at 31 December 2019 - USD 6.4 million (2018: USD 8.9 million)
* Valuation at 31 December 2019 - USD 63.9 million (USD 56 million)
Development Properties
Lukianivka (Kyiv)
The Lukianivka development property is located on the right bank of Kyiv in the Shevchenkivskyi administrative district. The land plot has a total area of 4.19 hectares. The Group is constructing its flagship complex in the central business district of Kyiv, with a more upmarket vision in terms of concept and tenant mix. The Lukianivka development property allows for the construction of a multi-functional complex, consisting of shopping and leisure, office and residential centres including, inter alia, a hypermarket, shops and shopping galleries, a leisure and entertainment area, a food court restaurants and a service area. The property will also have two underground parking levels and several office and residential buildings, construction of which will continue after completion of the shopping centre. It is expected that the GLA of the shopping and entertainment centre will be over 50,000 sqm.
The Group obtained the relevant construction permit in June 2013. Construction is underway with initial financing completed in February 2019 and the project remains on track to complete in 2022, subject to the COVID-19.
Rozumovska (Odesa)
The Black Sea port of Odesa is Ukraine's fourth largest city, with over one million inhabitants, and is a popular leisure destination. The Rozumovska development property is located partly on the façade of Rozumovska Street close to its intersection with Balkovska Street, in the Malynovskyi administrative district of Odesa, in close proximity to public transportation links. Rozumovska Street connects directly to the highway to Kyiv.
The Group has signed a lease agreement for the land plot with a total area of 4.5 hectares. The Rozumovska development property is expected to be a three-storey shopping and entertainment centre with a sufficient number of parking spaces to accommodate customer demand. The target GLA is approximately 38,000 sqm, including a hypermarket, shops and shopping galleries, a leisure and entertainment area, a food court restaurants and a service area. The preliminary design concept of the project has been completed and the developer is currently applying for the relevant consents and permits, given current market conditions.
Petrivka (Kyiv)
The Petrivka development property is located on the right bank of the Dnipro river in Kyiv, in the Obolonskyi administrative district. The site on leasehold has an area of 5.4 ha. The Group is currently considering the best use of the site, which could include both creative, leisure, edutainment, IT cluster office, residential and retail use.
Finance Report
The Group's revenue mainly consists of rental income from the portfolio of the completed properties. During the year ended 31 December 2019 the Company's rental income increased by 18% to USD30.4 million (2018: USD25.6million).
Due to appreciation of UAH/USD exchange rate, a loss from revaluation of investment property in total amount of USD 12.2 million was shown in 2019. This was more than offset by currency translation adjustments related to the investment property. As a result, the total fair value of investment property increased by USD 30.8 million to USD289.3 million as at 31 December 2019 (2018: USD258.5 million)
Operating expenses during the period were USD 8.9 million, compared to USD7.4 million in the previous year.
As a result of the above, profit from operating activities was USD12.2 million (2018: USD 63.2 million) reflecting a loss on revaluation of investment property compared to the prior year gain on revaluation of investment property.
Net finance expenses in 2019 reduced significantly to USD3.4 million (2018 USD16.6 million due foreign exchange gain shown through profit and loss account).
The Company's net profit for the year ended 31 December 2019 was USD8 million (2018: USD 38.1 million).
Net Asset Value as at 31 December 2019 was USD127.9 million (2018: USD 94.0 million), resulting in an Adjusted Net Asset Value per Share of USD 1.24 (2018: USD 0.91).
Total assets, as at 31 December 2019, amounted to USD 304.8 million (2018: USD 268.2 million). This increase was mainly related to an increase in value of investment property.
Cash balances as at 31 December 2019 including cash equivalents and current deposits, amounted to USD 6.9 million (2018: USD 4.2 million).
As at 31 December 2019, the Group had USD 102.4 million (2018: USD 96.5 million) of outstanding borrowings. This was primarily a result of increased bank borrowings, which were up by USD 7.1 million to USD 43.4 million as at 31 December 2019 (2018: USD 36.3 million)
Consolidated statement of financial position as at 31 December 2019
* The Group initially applied IFRS 16 at 1 January 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of initially applying IFRS 16 is recognised in retained earnings at the date of initial application. See Notes 3 and 4(m).
Consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2019
* The Group initially applied IFRS 16 at 1 January 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of initially applying IFRS 16 is recognised in retained earnings at the date of initial application. See Notes 3 and 4(m).
Consolidated statement of cash flows for the year ended 31 December 2019
Non-cash movements During the year ended 31 December 2019, no non-cash movement took place. During the year ended 31 December 2018 an acquisition of a land plot held on leasehold of USD 142 thousand occurred through a finance lease.
* The Group initially applied IFRS 16 at 1 January 2019, using the modified retrospective approach. Under this approach, comparative information is not restated. See Notes 3 and 4(m). During 2018 there were finance lease payments of USD 895 thousand recognised as part of financing activity, while in 2019 such payments were treated as cash outflows from operating activity.
Consolidated statement of changes in equity as at and for the year ended 31 December 2019
* The Group initially applied IFRS 16 at 1 January 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of initially applying IFRS 16 is recognised in retained earnings at the date of initial application. See Notes 3 and 4(m). Notes to the consolidated financial statements
1 Background (a) Organisation and operations Arricano Real Estate PLC (Arricano, the Company or the Parent Company) is a public company that was incorporated in Cyprus and is listed on the AIM Market of the London Stock Exchange. The Parent Company's registered address is office 1002, 10th floor, Nicolaou Pentadromos Centre, Thessalonikis Street, 3025 Limassol, Cyprus. Arricano and its subsidiaries are referred to as the Group, and their principal place of business is in Ukraine. The main activities of the Group are investing in the development of new properties in Ukraine and leasing them out. As at 31 December 2019, the Group operated five shopping centres in Kyiv, Simferopol, Zaporizhzhya and Kryvyi Rig with a total leasable area of over 147,900 square meters and is in the process of development of two new investment projects in Kyiv and Odesa, with one more project to be developed. The average number of employees employed by the Group during the year is 94 (2018: 103). (b) Ukrainian business environment The political and economic situation in Ukraine has been subject to significant turbulence in recent years. Consequently, operations in the country involve risks that do not typically exist in other markets. An armed conflict in certain parts of Lugansk and Donetsk regions, which started in spring 2014, has not been resolved and part of the Donetsk and Lugansk regions remains under control of the self-proclaimed republics, and Ukrainian authorities are not currently able to fully enforce Ukrainian laws on this territory. Various events in March 2014 led to the accession of the Republic of Crimea to the Russian Federation, which was not recognised by Ukraine and many other countries. This event resulted in a significant deterioration of the relationship between Ukraine and the Russian Federation. Since the economic crisis in 2014-2015, the Ukrainian economy has recovered considerably, with a slowed down inflation, stable Hryvnia exchange rate, growing GDP and general revival in business activity. In 2019, a new law on currency and currency transactions came into force. The new law abolished a number of restrictions, defined new principles of currency operations, currency regulation and supervision, and resulted in significant liberalisation of foreign currency transactions and capital movements. In particular, the requirement of mandatory sale of foreign currency proceeds on the interbank market was cancelled, while the settlement period for export-import transactions in foreign currency was increased considerably. Also, all restrictions on payment of dividends abroad were lifted. The International Monetary Fund (the "IMF") has continued to support the Ukrainian government under the fourteen-month Stand-By Arrangement approved in December 2018. Other international financial institutions have also provided significant technical support in recent years to help Ukraine restructure its external debt and launch various reforms, including anticorruption, corporate law, land reform and gradual liberalization of the energy sector. In 2019, following the presidential and parliamentary elections a new government was formed which aims to continue reforming the Ukrainian economy, stimulate economic growth and fight corruption. In September 2019, S&P and Fitch upgraded Ukraine's credit rating to B, with a stable outlook, and B, with a positive outlook, respectively, reflecting improved access to fiscal and external financing, macroeconomic stability and declining public indebtedness. Further stabilisation of the economic and political environment depends, to a larger extent, on the continued implementation of structural reforms, cooperation with the IMF and refinancing of public debt falling due in the next years. In addition, the first months of 2020 have seen significant global market turmoil triggered by the outbreak of the coronavirus. Together with other factors, this has resulted in a sharp decrease in the oil price and the stock market indices, as well as a depreciation of the Ukrainian Hryvnia. These developments are further increasing the level of uncertainty in the Ukrainian business environment.
Whilst management believes it is taking appropriate measures to support the sustainability of the Group's business in the current circumstances, a continuation of the current unstable business environment would negatively affect the Group's results and financial position in a manner not currently determinable. These consolidated financial statements reflect management's current assessment of the impact of the Ukrainian business environment on the operations and the financial position of the Group. The future business environment may differ from management's assessment. (c) Cyprus business environment The Cyprus economy has been adversely affected during the last few years by the economic crisis. The negative effects have to some extent been resolved, following the negotiations and the relevant agreements reached with the European Commission, the European Central Bank and the International Monetary Fund (IMF) for financial assistance which was dependent on the formulation and the successful implementation of an Economic Adjustment Program. The agreements also resulted in the restructuring of the two largest (systemic) banks in Cyprus through a "bail in". The Cyprus Government successfully completed earlier than anticipated the Economic Adjustments Program and exited the IMF program on 7 March 2016, after having recovered in the international markets and having only used EUR 7,25 billion of the total EUR 10 billion earmarked in the financial bailout. Under the new Euro area rules, Cyprus will continue to be under surveillance by its lenders with bi-annual post- program visits until it repays 75% of the economic assistance received. Although there are signs of improvement, especially in the macroeconomic environment of the country's economy including growth in GDP and reducing unemployment rates, significant challenges remain that could affect estimates of the Group's cash flows and its assessment of impairment of financial and non- financial assets. The Group's management believes that it is taking all the necessary measures to maintain the viability of the Group and the development of its business in the current business and economic environment and that no adverse impact on the Group's operations is expected. (d) Russian business environment The Group's operations are also carried out 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. Starting in 2014, the United States of America, the European Union and some other countries imposed and gradually expanded economic sanctions against a number of Russian individuals and legal entities. The imposition of the sanctions has led to increased economic uncertainty, including more volatile equity markets, a depreciation of the Russian rouble, a reduction in both local and foreign direct investment inflows and a significant tightening in the availability of credit. As a result, some Russian entities may experience difficulties accessing the international equity and debt markets and may become increasingly dependent on state support for their operations. The longer-term effects of the imposed and possible additional sanctions are difficult to determine. In addition, the first months of 2020 have seen significant global market turmoil triggered by the outbreak of the coronavirus. Together with other factors, this has resulted in a sharp decrease in the oil price and the stock market indices, as well as a depreciation of the Russian Rouble. These developments are further increasing the level of uncertainty in the Russian business environment. 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.
2 Basis of preparation (a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union (EU). This is the first set of the Group's annual financial statements in which IFRS 16 Leases has been applied. Changes to significant accounting policies are described in Note 3. (b) Basis of measurement The consolidated financial statements have been prepared under the historical cost basis except for investment property, which is carried at fair value. (c) Functional and presentation currency The functional currency of Arricano Real Estate PLC is the US dollar (USD). The majority of Group entities are located in either Ukraine or in the Russian Federation and have the Ukrainian Hryvnia (UAH) or Russian Rouble (RUB) as their functional currencies since substantially all transactions and balances of these entities are denominated in the mentioned currencies. The Group entities located in Cyprus, Estonia, Isle of Man and BVI have the US dollar as their functional currency, since substantially all transactions and balances of these entities are denominated in US dollar. For the benefits of principal users, the management chose to present the consolidated financial statements in USD, rounded to the nearest thousand. In translating the consolidated financial statements into USD the Group follows a translation policy in accordance with International Financial Reporting Standard IAS 21 The Effects of Changes in Foreign Exchange Rates and the following rates are used: Historical rates: for the equity accounts except for net profit or loss and other comprehensive income (loss) for the year. Year-end rate: for all assets and liabilities. Rates at the dates of transactions: for the statement of profit or loss and other comprehensive income and for capital transactions.UAH and RUB are not freely convertible currencies outside Ukraine and the Russian Federation, and, accordingly, any conversion of UAH and RUB amounts into USD should not be construed as a representation that UAH and RUB amounts have been, could be, or will be in the future, convertible into USD at the exchange rate shown, or any other exchange rate. The principal USD exchange rates used in the preparation of these consolidated financial statements are as follows. Year-end USD exchange rates as at 31 December are as follows:
Average USD exchange rates for the years ended 31 December are as follows:
As at the date these consolidated financial statements are authorised for issue, 24 April 2020, the exchange rate is UAH 27.01 to USD 1.00 and RUB 75.13 to USD 1.00. (d) Use of judgments, estimates and assumptions The preparation of consolidated financial statements in conformity with IFRSs as adopted by the EU requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses and the disclosure of contingent assets and liabilities. Actual results may differ from these 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 significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements and have significant risk of resulting in a material adjustment within the next financial year are included in the following notes: Note 2(e) - assumptions for going concern basis Note 2(c) - determination of functional currency, Note 4 - valuation of investment property, Note 5 - valuation of loans receivable and investment in Filgate Credit Enterprises Limited, Note 7 - valuation of accounts receivable due from Dniprovska Prystan PrJSC.(e) Going concern As at 31 December 2019, the Group's current liabilities exceeded its current assets by USD 111,394 thousand. This condition indicates the existence of a material uncertainty that may cast significant doubt about the Group's ability to continue as a going concern. At the same time, the Group has positive equity of USD 127,905 thousand as at 31 December 2019, generated net profit of USD 8,025 thousand and positive cash flows from operating activities amounting to USD 22,636 thousand for the year then ended. Management is undertaking the following measures in order to ensure the Group's continuing operation on a going concern basis: The Group has financial support from the ultimate controlling party. Based on representations received in writing from the entities under common control, management believes that the Group will not be required to settle the short- term loans payable, accrued interest, other liabilities and other payables to related parties totally amounting to USD 65,851 thousand as at 31 December 2019 plus any accruing interest thereon at least until 31 December 2020. Subsequent to the year end the lender confirmed waiving the right to demand repayment of the loan until 31 December 2020. In September 2019, the Group has received a waiver from Barleypark Limited, waiving repayment of the loan during eighteen months ending 31 December 2020, amounting to USD 23,609 thousand, which is payable on demand and presented as short-term liability as at 31 December 2019. Subsequent to the reporting date the lender confirmed waiving the right to demand repayment of the loan principal and any interest until 31 December 2020. Management makes all efforts to keep occupancy rates of its shopping centers on current level. Besides, the Group managed to gradually increase its rental rates during the year for existing tenants. In accordance with the forecast for 2020 that is being revised on ongoing basis, taking into account already existing and potential future impact of COVID-19 on the Group's financial performance. The Group plans to earn revenue that together with other measures undertaken by the Group's management, including negotiations with lenders, will give an ability to settle the Group's current liabilities in the normal course of business. Details on impact of COVID-19 on the Group's business activities is described in the Note 23. In addition, the Group's management is at an advanced stage of negotiations on loans restructuring with all financing banks with an aim to revise loan repayment schedules. As a result of loans restructuring, it is expected that scheduled cash outflows on secured bank loans will decrease in 2020.
Management believes that notwithstanding material uncertainty that may cast significant doubt about the Group's ability to continue as a going concern in the foreseeable future exists, the measures that management undertakes, as described above, will allow the Group to maintain positive working capital, generate positive operating cash flows and continue business operations on going concern basis. These consolidated financial statements are prepared on a going concern basis, which contemplates the realisation of assets and the settlement of liabilities in the normal course of business. (f) Measurement of fair values A number of the Group's accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety 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 5 - investment property; and Note 19(f)(iii) - fair values.3 Changes in significant accounting policies IFRS 16 Lease The Group initially applied IFRS 16 Leases from 1 January 2019. The Group applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognized in retained earnings at 1 January 2019. Accordingly, the comparative information presented for 2018 is not restated - i.e. it is presented, as previously reported, under IAS 17 and related interpretations. The details of the changes in accounting policies are disclosed below. Additionally, the disclosure requirements in IFRS 16 have not generally been applied to comparative information. (a) Definition of a lease Previously, the Group determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 Determining whether an Arrangement contains a Lease. The Group now assesses whether a contract is or contains a lease based on the definition of a lease, as explained in Note 4(m). On transition to IFRS 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The Group applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed for whether there is a lease under IFRS 16. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into or changed on or after 1 January 2019. (b) As a lessee As a lessee, the Group leases three land plots under acting shopping malls and three land plots sites under construction, as well as office premises. The Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred significantly all of the risks and rewards incidental to ownership of the underlying asset to the Group. Under IFRS 16, the Group recognises right-of-use assets and lease liabilities for most of these leases - i.e. these leases are on-balance sheet. The Group has used practical expedient in respect of recognition exemption for short-term leases, and thus no additional right-of-use assets representing its rights to use the underlying assets and lease liabilities representing its obligation to make lease payments were recognized. At commencement or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of its relative stand-alone price. However, for leases of properties in which it is a lessee, the Group has elected not to separate non-lease components and account for the lease and associated non-lease components as a single lease component.
(i) Leases classified as operating leases under IAS 17Previously, the Group classified office premises leases as operating leases under IAS 17. The Group used a number of practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17. In particular, the Group: did not recognise right-of-use assets and liabilities for leases for which the lease term ends within 12 months of the date of initial application; did not recognise right-of-use assets and liabilities for leases of low value assets; excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application; and used hindsight when determining the lease term.Following these practical expedients, no right-of-use asset and lease liability was recognised as a result of implementation of IFRS 16.
(ii) Leases classified as finance leases under IAS 17As a lessee, the Group leases three land plots under acting shopping malls and three land plots sites under construction. These leases were classified as finance leases under IAS 17. For these finance leases, the carrying amount of the right-of-use asset and the lease liability at 1 January 2019 were determined at the carrying amount of the lease asset and lease liability under IAS 17 immediately before that date. These leases were classified as finance leases under IAS 17 and IAS 40 requirements. However, those leases include variable payments, which should not be included in calculation of lease liability under IFRS 16. Therefore, management derecognized respective lease asset and liability as at 1 January 2019 following requirements of IFRS 16. The impact of transition is disclosed in Note 3(d). (c) As a lessor The Group leases out its investment property. The Group has classified these leases as operating leases. The Group is not required to make any adjustments on transition to IFRS 16 for leases in which it acts as a lessor. The Group has applied IFRS 15 Revenue from Contracts with Customers to allocate consideration in the contract to each lease and non-lease component. (d) Impact on transition On transition to IFRS 16, the Group derecognized lease liabilities and respective right-of-use asset previously presented as investment property following IAS 17 and IAS 40 requirements, recognizing the difference in retained earnings. As a result, investment property decreased by USD 7,277 thousand and long- term lease liability decreased by USD 7,271 thousand and short-term lease liability decreased by USD 6 thousand on 1 January 2019. Interest expense on these leases in amount of USD 895 thousand was recognised within finance costs in consolidated statement of profit and loss and other comprehensive income for the year ended 31 December 2018. While in 2019 expenses related to those land plots are recognized within operating expense (see Note 17) in consolidated statement of profit and loss and other comprehensive income. Implementation of IFRS 16 had no significant impact on consolidated statement of cash flows and consolidated statement of changes in equity. For the details of accounting policies under IFRS 16 and IAS 17, see Note 4(m).
Amendments to IAS 23 Borrowing Costs The Group has adopted amendments to IAS 23 Borrowing Costs issued by the International Accounting Standards Board as part of Annual Improvements to IFRS Standards 2015-2017 Cycle from 1 January 2019 and applies them to borrowing costs incurred on or after that date. The amendments clarify that the general borrowings pool used to calculate eligible borrowing costs excludes only borrowings that specifically finance qualifying assets that are still under development or construction. Therefore, the Group treats as part of general borrowings any borrowing originally made to develop a qualifying asset when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete. Borrowings that were intended to specifically finance qualifying assets which are now ready for their intended use or sale - or any non-qualifying assets - the Group includes in its general pool. This amendment had no impact on the Groups' consolidated financial statements. A number of other new standards and amendments to the existing standards are effective from 1 January 2019 but they do not have a material effect on the Group's consolidated financial statements, except those described above.
4 Significant accounting policies and transition to new standards Except as disclosed in Notes 3 and 4(m), the accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Basis of consolidation Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. The Group measures goodwill at the acquisition date as: The fair value of the consideration transferred; plus The recognised amount of any non-controlling interests in the acquiree; plus If the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less The net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities that the Group incurs in connection with a business combination, are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. When the acquisition of subsidiaries does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the assets and liabilities acquired based on their relative fair values, and no goodwill or deferred tax is recognised.
(ii) Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance.
Consolidated entities as at 31 December are as follows:
(iii) Interests in equity-accounted investees The Group's interests in equity-accounted investees comprise interests in associates. Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20% and 50% of the voting power of another entity. Interest in associates is accounted for using the equity method and is recognised initially at cost. The cost of the investment includes transaction costs. The consolidated financial statements include the Group's share of the profit or loss and other comprehensive income of equity accounted investees from the date that significant influence commences until the date that significant influence ceases.
When the Group's share of losses exceeds its interest in an equity-accounted investee, the carrying amount of that interest including any long-term investments, is reduced to zero, and the recognition of further losses is discontinued, except to the extent that the Group has an obligation or has made payments on behalf of the investee. The listing of associates as at 31 December is as follows:
On 14 December 2016, the Parent Company acquired a non-controlling interest (49% of corporate rights) of Filgate Credit Enterprises Limited from Weather Empire, the company under common control incorporated in Cyprus, in exchange for loan receivable from Weather Empire Limited as an additional instrument in legal proceedings regarding gaining control over the Sky Mall. As part of the above acquisition, the rights to receive certain loans payable by Filgate Credit Enterprises Limited to entities under common control in amount of USD 215,891 thousand were reassigned to the Group for a nominal amount of USD 1. The fair value of these loans receivable is considered to be nil at the date of reassignment. In addition, a call share option agreement was concluded granting an option to the Parent Company to purchase the remaining 51% of the corporate rights of Filgate Credit Enterprises Limited within 5 years from the effective date. Exercise of the call option depends on certain criteria and occurrence of certain condition, and, as at the date of these consolidated financial statements are authorised for issuance, the call option had not been exercised by the Group. Thus, the rights under the call option agreement were not taken into consideration upon recognition of investment in Filgate Credit Enterprises Limited and determination of the investment's classification.
(iv) Transactions with entities under common control Acquisitions from entities under common control Business combinations arising from transfers of interests in entities that are under the control of the shareholder that controls the Group are accounted for using book value accounting. Any result from the acquisition is recognised directly in equity. Disposals to entities under common control Disposals of interests in subsidiaries to entities that are under the control of the shareholder that controls the Group are accounted for using book value accounting. Any result from the disposal is recognised directly in equity. (v) Loss of control Upon the loss of control, the Group derecognises the carrying amounts of the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or as measured at FVOCI financial asset depending on the level of influence retained. (vi) Transactions eliminated on consolidation Intra-group balances, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing these consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.Foreign currency transactions and operations Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rates as at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured based on historical cost are translated using the exchange rate at the date of the transaction. Foreign currency transactions of Group entities located in Ukraine In preparation of these consolidated financial statements for the retranslation of the operations and balances of Group entities located in Ukraine denominated in foreign currencies, management applied the National Bank of Ukraine's (NBU) official rates. Management believes that application of these rates substantially serves comparability purposes.
(ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to USD at exchange rates at the reporting date. The income and expenses of foreign operations are translated to USD at exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve in equity. However, if the operation is a non-wholly-owned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non-controlling interests. When a foreign operation is disposed of, such that control, significant influence 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. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and presented in the foreign currency translation difference reserve in equity. (b) Financial instruments
(i) Recognition and initial measurementTrade receivables are initially recognised when they are originated. All other financial assets and financial liabilities are initially recognised when the Group becomes a party to the contractual provisions of the instrument. A financial asset (unless it is a trade receivable without a significant financing component) or financial liability is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. A trade receivable without a significant financing component is initially measured at the transaction price.
(ii) DerecognitionThe Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. The Group also derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different, in which case a new financial liability based on the modified terms is recognised at fair value. On derecognition of a financial liability, the difference between the carrying amount extinguished and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognised in profit or loss.
(iii) Classification and subsequent measurement of financial assetsOn initial recognition, a financial asset is classified as measured at: amortised cost; FVOCI - debt investment; FVOCI - equity investment; or FVTPL. Financial assets are not reclassified subsequent to their initial recognition unless the Group changes its business model for managing financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the business model. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: it is held within a business model whose objective is to hold assets to collect contractual cash flows; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL: it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in the investment's fair value in OCI. This election is made on an investment- by-investment basis. The Group's financial assets comprise trade and other receivables, loans receivable and cash and cash equivalents and are classified into the financial assets at amortised cost category. These assets are subsequently measured at amortised cost using the effective interest method. The amortised cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognised in profit or loss. Any gain or loss on derecognition is recognised in profit or loss. Cash and cash equivalents comprise cash balances on the current accounts and call deposits.
(iv) Financial assets - Business model assessment
The Group makes an assessment of the objective of the business model in which a financial asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: the stated policies and objectives for the portfolio and the operation of those policies in practice. These include whether management's strategy focuses on earning contractual interest income, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of any related liabilities or expected cash outflows or realising cash flows through the sale of the assets; how the performance of the portfolio is evaluated and reported to the Group's management; the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; how managers of the business are compensated - e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and the frequency, volume and timing of sales of financial assets in prior periods, the reasons for such sales and expectations about future sales activity.Transfers of financial assets to third parties in transactions that do not qualify for derecognition are not considered sales for this purpose, consistent with the Group's continuing recognition of the assets. Financial assets that are held for trading or are managed and whose performance is evaluated on a fair value basis are measured at FVTPL.
(v) Financial assets - Assessment whether contractual cash flows are solely payments of principal and interestFor the purposes of this assessment, 'principal' is defined as the fair value of the financial asset on initial recognition. 'Interest' is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making this assessment, the Group considers: contingent events that would change the amount or timing of cash flows; terms that may adjust the contractual coupon rate, including variable-rate features; prepayment and extension features; and terms that limit the Group's claim to cash flows from specified assets (e.g. non-recourse features).A prepayment feature is consistent with the solely payments of principal and interest criterion if the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable additional compensation for early termination of the contract. Additionally, for a financial asset acquired at a discount or premium to its contractual par amount, a feature that permits or requires prepayment at an amount that substantially represents the contractual par amount plus accrued (but unpaid) contractual interest (which may also include reasonable additional compensation for early termination) is treated as consistent with this criterion if the fair value of the prepayment feature is insignificant at initial recognition.
(vi) Classification and subsequent measurement of financial liabilitiesFinancial liabilities are classified as measured at amortised cost or FVTPL. A financial liability is classified as at FVTPL if it meets the definition of held-for-trading or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognised in profit or loss (except for the part of the fair value change that is due to changes in the Group's own credit risk, that is recognised in other comprehensive income). Other financial liabilities are subsequently measured at amortised cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognised in profit or loss. Any gain or loss on derecognition is also recognised in profit or loss. The Group measures all of its financial liabilities at amortised cost.
(vii) Modification of financial assets and financial liabilitiesFinancial assetsIf the terms of a financial asset are modified, the Group evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different (referred to as 'substantial modification'), then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value. The Group performs a quantitative and qualitative evaluation of whether the modification is substantial, i.e. whether the cash flows of the original financial asset and the modified or replaced financial asset are substantially different. The Group assesses whether the modification is substantial based on quantitative and qualitative factors in the following order: qualitative factors, quantitative factors, combined effect of qualitative and quantitative factors. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset deemed to have expired. In making this evaluation the Group analogizes to the guidance on the derecognition of financial liabilities. The Group concludes that the modification is substantial as a result of the following qualitative factors: change the currency of the financial asset; change in collateral or other credit enhancement; change of terms of financial asset that lead to non-compliance with SPPI criterion.If the cash flows of the modified asset carried at amortised cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Group recalculates the gross carrying amount of the financial asset and recognises the amount arising from adjusting the gross carrying amount as a modification gain or loss in profit or loss. The gross carrying amount of the financial asset is recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial asset's original effective interest rate. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset. Financial liabilitiesThe Group derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognised in profit or loss. If a modification (or exchange) does not result in the derecognition of the financial liability the Group applies accounting policy consistent with the requirements for adjusting the gross carrying amount of a financial asset when a modification does not result in the derecognition of the financial asset, i.e. the Group recognises any adjustment to the amortised cost of the financial liability arising from such a modification (or exchange) in profit or loss at the date of the modification (or exchange).
Changes in cash flows on existing financial liabilities are not considered as modification, if they result from existing contractual terms, e.g. changes in fixed interest rates initiated by banks due to changes in the central bank key rate, if the loan contract entitles banks to do so and the Group has an option to either accept the revised rate or redeem the loan at par without penalty. The Group treats the modification of an interest rate to a current market rate using the guidance on floating-rate financial instruments. This means that the effective interest rate is adjusted prospectively. The Group performs a quantitative and qualitative evaluation of whether the modification is substantial considering qualitative factors, quantitative factors and combined effect of qualitative and quantitative factors. The Group concludes that the modification is substantial as a result of the following qualitative factors: change the currency of the financial liability; change in collateral or other credit enhancement; inclusion of conversion option; change in the subordination of the financial liability.For the quantitative assessment the terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability.
(viii) OffsettingFinancial assets and liabilities are offset and the net amount presented in the statements of financial position when, and only when, the Group currently has a legally enforceable right to set off and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group currently has a legally enforceable right to set off if that right is not contingent on a future event and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the Group and all counterparties. (c) Capital and reserves Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares are recognised as a deduction from equity, net of any tax effects.
Share premium Share premium reserves include amounts that were created due to the issue of share capital at a value price greater than the nominal.
Non-reciprocal shareholders contribution Non-reciprocal shareholders contribution reserve includes contributions made by the shareholders directly in the reserves. The shareholders do not have any rights to these contributions which are distributable at the discretion of the Board of Directors, subject to the shareholders' approval.
Retained earnings Retained earnings include accumulated profits and losses incurred by the Group.
Other reserves
Other reserves comprise the effect of acquisition and disposal of subsidiaries under common control, change in non-controlling interest in these subsidiaries and the effect of forfeiture of shares.
Foreign currency translation differences Foreign currency translation differences comprise foreign currency differences arising from the translation of the financial statements of foreign operations and foreign exchange gains and losses from monetary items that form part of the net investment in the foreign operation. (d) Investment properties Investment properties are those that are held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in production or supply of goods or services or for administrative purposes. Investment properties principally comprise freehold land, leasehold land and investment properties held for rental income earning or future redevelopment. (i) Initial measurement and recognition Investment properties are measured initially at cost, including related acquisition costs. Cost includes expenditure that is directly attributable to the acquisition of the investment property. The cost of self- constructed investment property includes the cost of materials and direct labour, any other costs directly attributable to bringing the investment property to a working condition for their intended use and capitalised borrowing costs. If the Group uses part of the property for its own use, and part to earn rentals or for capital appreciation, and the portions can be sold or leased out separately, they are accounted for separately. Therefore the part that is rented out is investment property. If the portions cannot be sold or leased out separately, the property is investment property only if the company-occupied portion is insignificant.
(ii) Subsequent measurement Subsequent to initial recognition investment properties are stated at fair value. Any gain or loss arising from a change in fair value is included in profit or loss in the period in which it arises. When the Group begins to redevelop an existing investment property for continued future use as investment property, the property remains an investment property, which is measured at fair value, and is not reclassified to property and equipment during the redevelopment. When the use of a property changes such that it is reclassified as property, plant and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting. Investment properties are derecognised on disposal or when they are permanently withdrawn from use and no future economic benefits are expected from their disposal. The gain or loss on disposal is calculated as the difference between the net disposal proceeds and the carrying amount of the asset and is recognised as gain or loss in profit or loss. It is the Group's policy that an external, independent valuation company, having an appropriate recognised professional qualification and recent experience in the location and category of property being appraised, values the portfolio as at each reporting date.
(iii) Property under development (construction) Property that is being constructed or developed for future use as an investment property and for which it is not possible to reliably determine fair value is accounted for as an investment property that is stated at cost until construction or development is complete, or until it becomes possible to reliably determine its fair value. When construction is performed on land previously classified as an investment property and measured at fair value, such land continues to be accounted at fair value throughout the construction phase. (e) Property and equipment Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and 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 labor, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of property and equipment, and is recognised net within other income/other operating expenses in profit or loss.
(ii) Reclassification to investment property When the use of a property changes from owner-occupied to investment property, the property is re-measured to fair value and reclassified to investment property. Any gain arising on re-measurement 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 other comprehensive income and presented in the revaluation reserve in equity. Any loss is recognised immediately in profit or loss.
(iii) Subsequent costs The cost of replacing part of an item of property and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred.
(iv) Depreciation Items of property and equipment are depreciated from the date that they are installed and are ready for use, or in respect of internally constructed assets, from the date that the asset is completed and ready for use. Depreciation is based on the cost of an asset less its residual value. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. 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. The estimated useful lives for the current and comparative periods are as follows: vehicles and equipment 5 years fixture and fittings 2.5 - 5 yearsDepreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. (f) Intangible assets Recognition and measurement Intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses.
(ii) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred.
(iii) Amortisation Amortisation is calculated over the cost of the asset, or other amount substituted for cost, less its residual value. Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use since this most closely reflects the expected pattern of consumption of future economic benefits embodied in the asset. The estimated useful lives for the current and comparative periods are as follows: software 3-5 yearsAmortisation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. (g) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (h) Assets classified as held for sale Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Such assets, or disposal group, are measured at the lower of their carrying amount and fair value less cost to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets or investment property, which continue to be measured in accordance with the Group's other accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss. Intangible assets and property and equipment once classified as held for sale are not amortised or depreciated. (i) Impairment
(i) Impairment - financial assetsThe Group uses 'expected credit loss' (ECL) model. This impairment model applies to financial assets measured at amortised cost, contract assets, but not to investments in equity instruments.
The financial assets at amortised cost consist of trade and other receivables, cash and cash equivalents and loans receivable. Loss allowances are measured on either of the following bases: 12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument.The Group measures loss allowances at an amount equal to lifetime ECLs, except for bank balances for which credit risk (i.e. the risk of default occurring over the expected life of the financial instrument) has not increased significantly since initial recognition, for which loss allowances are measured as 12-month ECLs. When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group's historical experience and informed credit assessment. The Group assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due. The Group considers a financial asset to be in default when: the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); or the financial asset is more than 90 days past due.The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk. Measurement of ECLs ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). ECLs are discounted at the effective interest rate of the financial asset. Credit-impaired financial assetsAt each reporting date, the Group assesses whether financial assets carried at amortised cost are credit- impaired. A financial asset is 'credit-impaired' when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Presentation of allowance for ECLLoss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets.
(ii) Non-financial assets The carrying amounts of non-financial assets, other than investment property, deferred tax assets and inventory are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset's recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.
For the purpose of impairment testing, assets that cannot be tested individually 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 or cash-generating unit (CGU). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. The Group's corporate assets do not generate separate cash inflows and are utilised by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are 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 or CGU. An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs) and then to reduce the carrying amount of the other assets in the CGU (group of CGUs) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. 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. (j) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost. (k) Revenue Revenue of the Group is mainly represented by rental income recognized in accordance with IFRS 16 Leases. For revenue from services in respect of exploitation of common parts and marketing services the Group has adopted IFRS 15 Revenue from Contracts with Customers. Under IFRS 15, revenue is recognised when a customer obtains control of the goods or services. Determining the timing of the transfer of control - at a point in time or over time - requires judgement. Common parts exploitation servicesCommon parts exploitation services represent reimbursement by tenants of expenses on maintenance of common parts in shopping centres (e.g. utilities, cleaning, insurance, repairs, parking). Revenue is recognised over time as those services are provided. As the Group has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Group's services provided to date, the Group uses practical expedient available in IFRS 15 and recognises revenue in the amount to which the Group has a right to invoice. Invoices for revenue from common parts exploitation services are issued on a monthly basis and are usually payable within 5-15 days.
Under IFRS 15, the total consideration in the service contracts that are partially within the scope of this Standard and partially within the scope of IFRS 16 Leases is allocated to all services based on their stand- alone selling prices. The stand-alone selling price is determined based on contractually stated price that is defined separately for each obligation and reflects market prices for the similar services. Marketing servicesRevenue is recognised over time as those services are provided. As the Group has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Group's services provided to date, the Group uses practical expedient available in IFRS 15 and recognises revenue in the amount to which the Group has a right to invoice. Invoices for marketing services are issued on a monthly basis and are usually payable within 5-15 days. Under IFRS 15, the total consideration in the service contracts is allocated to all services based on their stand-alone selling prices. The stand-alone selling price is determined based on the list prices at which the Group sells the services in separate transactions.
(i) Rental income from investment property Rental income from investment property is recognised in profit or loss on a straight-line basis over the term of the lease. (l) Leases The Group has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17 and IFRIC 4. The details of accounting policies under IAS 17 and IFRIC 4 are disclosed separately. Policy applicable from 1 January 2019At inception of the contract, the Group assessed whether a contract is, or contains a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange of consideration. To assess whether a contract conveys the right to control the use of the identified asset, the Group uses the definition of a lease in IFRS 16 (see Note 3(k)). As a lessee At commencement or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of its relative stand-alone prices. However, for the leases of property the Group has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component. The Group recognizes a right-of-use asset and a lease liability at the lease commencement date. The right- of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently accounted for in accordance with the accounting policy applicable to that asset: If accounted for as investment property, then measured at fair value following policy described in the Note 4(e). If accounted for as property and equipment, then depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Group by the end of the lease term or the cost of the right-of-use asset reflects that the Group will exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those ofproperty and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The Group determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and type of the asset leased. Lease payments included in the measurement of the lease liability comprise the following: fixed payments, including in-substance fixed payments; variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; amounts expected to be payable under a residual value guarantee; and the exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early.The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group's estimate of the amount expected to be payable under a residual value guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease payment. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. The Group presents right-of-use assets that do not meet the definition of investment property in 'property and equipment' and lease liabilities in 'loans and borrowings' in the statement of financial position. The Group has elected not to recognize right-of-use assets and lease liabilities for leases of low-value assets and short-term leases. The Group recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term. In accordance with IFRS 16 variable payments which do not depend on index or rate, for example which do not reflect changes in market rental rates, should not be included in the measurement of lease liability. In respect of municipal or federal land leases where lease payments are based on cadastral value of the land plot and do not change until the next revision of that value or the applicable rates (or both) by the authorities, the Group has determined that, under the current revision mechanism, the land lease payments cannot be considered as either variable that depend on index or rate or in-substance fixed, and therefore these payments are not included in the measurement of the lease liability.
(ii) As a lessorAt inception or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices. When the Group acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease.
To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset. When the Group is an intermediate lessor, it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. If a head lease is a short-term lease to which the Group applies the exemption described above, then it classifies the sub-lease as an operating lease. If an arrangement contains lease and non-lease components, then the Group applies IFRS 15 to allocate the consideration in the contract. The Group recognises lease payments received under operating leases as income on a straight-line basis over the lease term as part of revenue. Policy applicable before 1 January 2019Determining whether an arrangement contains a lease At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. This will be the case if the fulfilment of the arrangement is dependent on the use of a specific asset and the arrangement conveys a right to use the asset. At inception or upon reassessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, then an asset and a liability are recognised at an amount equal to the fair value of the underlying asset. Subsequently the liability is reduced as payments are made and an imputed finance charge on the liability is recognised using the Group's incremental borrowing rate.
(iv) Leased assetsAssets held by the Group under leases that transfer to the Group substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognised in the consolidated statement of financial position.
(v) Lease paymentsPayments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance cost and the reduction of the outstanding liability. The finance cost is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the contingency no longer exists and the lease adjustment is known. (m) Finance income and costs Finance income comprises interest income on funds invested, foreign currency gains, income from derecognition of finance lease liabilities and gains on initial recognition of financial liabilities at fair value. Finance costs comprise interest expense on borrowings and on deferred consideration, foreign exchange losses, costs from recognition of finance lease liabilities. Interest income or expense is recognised using the effective interest method. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method. The 'effective interest rate' is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to: the gross carrying amount of the financial asset; or the amortised cost of the financial liability.In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit-impaired) or to the amortised cost of the liability. However, for financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the amortised cost of the financial asset. If the asset is no longer credit-impaired, then the calculation of interest income reverts to the gross basis. Foreign currency gains and losses arising on loans receivable and borrowings are reported on a net basis as either finance income or finance cost. (n) Income tax expense Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. 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; temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and taxable temporary differences arising on the initial recognition of goodwill.The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, 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 is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. In determining the amount of current and deferred tax the Group takes into account the impact of uncertain tax positions and whether additional taxes, penalties and late-payment interest may be due. The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Group to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact the tax expense in the period that such a determination is made.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, 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 utilised. Future taxable profits are determined based on the reversal of relevant taxable temporary differences. If the amount of taxable temporary differences is insufficient to recognise a deferred tax asset in full, then future taxable profits, adjusted for reversals of existing temporary differences, are considered, based on the 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. (o) Earnings per share The Group presents basic and diluted earnings per share ("EPS") data for its ordinary shares. Basic EPS is calculated by dividing the profit attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. As at 31 December 2019 and 2018, there were no potential dilutive ordinary shares. (p) Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components. Management believes that during the current year and prior year, the Group operated in and was managed as one operating segment, being property investment, with investment properties located in Ukraine and the Republic of Crimea. The Board of Directors, which is considered to be the chief operating decision maker of the Group for IFRS 8 Operating Segments purposes, receives semi-annually management accounts that are prepared in accordance with IFRSs as adopted by the EU and which present aggregated performance of all the Group's investment properties. (q) New standards and interpretations not yet adopted A number of new standards are effective for annual periods beginning after 1 January 2019 and earlier application is permitted; however, the Group has not early adopted the new or amended standards in preparing these consolidated financial statements. The following amended standards and interpretations are not expected to have a significant impact on the Group's consolidated financial statements. Amendments to References to Conceptual Framework in IFRS Standards. Definition of Material (Amendments to IAS 1 and IAS 8). Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)
5 Investment property (a) Movements in investment property Movements in investment property for the years ended 31 December are as follows:
* Derecognition of right-of-use assets during 2019 is a result of IFRS 16 application starting from 1 January 2019 (see Notes 3 and 4(m)). Capitalised borrowing costs related to the construction of Lukianivka shopping and entertainment center to USD 776 thousand (2018: nil), with a capitalisation rate of 10.5% (2018: nil). As at 31 December 2019, in connection with loans and borrowings, the Group pledged as security investment property with a carrying value of USD 171,150 thousand (2018: USD 150,490 thousand) (refer to Note 21 (a)). During the year ended 31 December 2019, 93% of total construction services were purchased from one counterparty (2018: 75%). (b) Determination of fair value The fair value measurement, developed for determination of fair value of the Group's investment property, is categorised within Level 3 category due to significance of unobservable inputs to the entire measurement, except for certain land held on the leasehold which is not associated with completed property and is therefore categorised within Level 2 category. As at 31 December 2019, the fair value of investment property categorised within the Level 2 category is USD 29,600 thousand (2018: USD 29,300 thousand). To assist with the estimation of the fair value of the Group's investment property as at 31 December 2019, which is represented by the shopping centres, management engaged registered independent appraiser Expandia LLC, part of the CBRE Affiliate network, having a recognised professional qualification and recent experience in the location and categories of the projects being valued.
The fair values are based on the estimated rental value of property. A market yield is applied to the estimated rental value to arrive at the gross property valuation. When actual rents differ materially from the estimated rental value, adjustments are made to reflect actual rents. The valuation is prepared in accordance with the practice standards contained in the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors ("RICS") or in accordance with International Valuation Standards published by the International Valuation Standards Council. Valuations reflect, when appropriate, the type of tenants actually in occupation or responsible for meeting lease commitments or likely to be in occupation after letting vacant accommodation, the allocation of maintenance and insurance responsibilities between the Group and the lessee, and the remaining economic life of the property. When rent reviews or lease renewals are pending with anticipated reversionary increases, it is assumed that all notices and, when appropriate, counter-notices, have been served validly and within the appropriate time. Land parcels are valued based on market prices for similar properties. As at 31 December 2019, the estimation of fair value was made using a net present value calculation based on certain assumptions, the most important of which were as follows: monthly weighted average rental rates per shopping centers excluding turnover income, ranging from USD 9 to USD 22 per sq.m., comprising minimum rental rate of USD 3 and maximum rental rate of USD 215 per sq.m., which were based on contractual and market rental rates, adjusted for discounts or fixation of rental rates in Ukrainian hryvnia at a pre-agreed exchange rate, occupancy rates ranging from 98.8% to 100%, and capitalisation rates ranging from 12.3% to 16.0% p.a. which represented key unobservable inputs for determination of fair value; all relevant licenses and permits, to the extent not yet received, will be obtained, in accordance with the timetables as set out in the investment project plans.As at 31 December 2018, the estimation of fair value is made using a net present value calculation based on certain assumptions, the most important of which are as follows: monthly weighted average rental rates per shopping centers excluding turnover income, ranging from USD 8 to USD 20 per sq.m., comprising minimum rental rate of USD 3 and maximum rental rate of USD 189 per sq.m., which are based on contractual and market rental rates, adjusted for discounts or fixation of rental rates in Ukrainian hryvnia at a pre-agreed exchange rate, occupancy rates ranging from 98.8% to 100.0%, and capitalisation rates ranging from 12.3% to 16.0% p.a. which represent key unobservable inputs for determination of fair value. all relevant licenses and permits, to the extent not yet received, will be obtained, in accordance with the timetables as set out in the investment project plans.The reconciliation from the opening balances to the closing balances for Level 3 fair value measurements is presented in Note 5(a). As at 31 December 2019, the fair value of investment property denominated in functional currency amounted to UAH 5,002,525 thousand and RUB 3,386,242 thousand (2018: UAH 5,266,308 thousand and RUB 3,445,742 thousand). The decrease in fair value of investment property results from decreased rental payments invoiced in Ukrainian hryvnia and Russian Rouble due to the decrease in the exchange rates applied to the USD equivalent of rental rates fixed in the rental contracts. Sensitivity at the date of valuation
The valuation model used to assess the fair value of investment property as at 31 December 2019 is particularly sensitive to unobservable inputs in the following areas: If rental rates are 1% less than those used in valuation models, the fair value of investment properties would be USD 2,366 thousand (2018: USD 2,104 thousand) lower. If rental rates are 1% higher, then the fair value of investment properties would USD 2,366 thousand (2018: USD 2,104 thousand) higher.
If the capitalisation rate applied is 1% higher than that used in the valuation models, the fair value of investment properties would be USD 16,759 thousand (2018: USD 14,810 thousand) lower. If the capitalisation rate is 1% less, then the fair value of investment properties would USD 19,557 thousand (2018: USD 17,266 thousand) higher. If the occupancy rate is 1% higher than that used in the valuation model for shopping center "Sun Gallery" and is assumed to be 100% for other shopping centers, the fair value of investment properties would be USD 283 thousand higher (2018: if the occupancy rate is 1% higher than used in the valuation model, the fair value of investment properties would be USD 1,922 thousand higher). If the occupancy rates are 1% less, then the fair value of investment properties would be USD 2,106 thousand (2018: USD 1,922 thousand) lower.
6 Loans receivable Loans receivable as at 31 December are as follows:
Included in loans receivable as at 31 December 2019 is a loan due from Filgate Credit Enterprises Limited amounting to USD 11,109 thousand (2018: USD 10,840 thousand). This loan receivable was fully impaired as at 31 December 2019 and 2018. 7 Trade and other receivables Trade and other receivables as at 31 December are as follows:
As at 31 December 2019, included in other receivables from related parties are receivables from Dniprovska Prystan PrJSC amounting to USD 7,796 thousand (2018: USD 7,796 thousand), which are overdue. In 2012, the court ruled to initiate bankruptcy proceedings against the mentioned related party and, as at 31 December 2019, the decision which would declare Dniprovska Prystan PrJSC insolvent has not yet been made. Full amount of receivable was impaired as at 31 December 2019 and 2018. 8 Assets classified as held for sale (a) Movements in assets classified as held for sale Movements in assets classified as held for sale for the years ended 31 December are as follows:
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Included in other assets classified as held for sale as at 31 December 2019, is a land plot with a carrying amount of USD 1,826 thousand (2018: USD 1,562 thousand), land lease rights for which were intended to be amended by one of the Group's subsidiaries, Comfort Market Luks LLC, in respect of allocation of part of such land plot to a third party in accordance with an investment agreement concluded between the parties.
Based on this investment agreement, Comfort Market Luks LLC acted as an intermediary in construction of a hypermarket with the total estimated area of 11,769 square meters and a parking lot with a total estimated area of 20,650 square meters.
As at 31 December 2019 and 2018, the construction of the hypermarket and a parking lot is finalised and, except for the lease rights for the abovementioned land plot to be allocated to a third party, the owner of the hypermarket, the investment agreement is considered to be fulfilled. Management expects that the lease rights for the land plot under the hypermarket will be transferred to the third party in 2020 subject to completion of formal legal procedures. As at 31 December 2019, advance payment received under this agreement amounts to USD 1,942 thousand (2018: USD 1,661 thousand) and will be settled upon transfer of the lease rights for the land plot.
9 Cash and cash equivalents Cash and cash equivalents as at 31 December are as follows:
As at 31 December 2019, in connection with loans and borrowings, the Group pledged as security bank balances with a carrying value of USD 1,135 thousand (2018: security bank balances and call deposits with a carrying value USD 41 thousand and USD 2,410 thousand, respectively) (Note 21(a)). However, the use of this balance is not restricted. As at 31 December 2019, cash and cash equivalents placed with two bank institutions amounted to USD 5,114 thousand, or 74% of the total balance of cash and cash equivalents (2018: USD 3,335 thousand, or 79%). In accordance with Moody's rating, one of these banks is rated Baa3 and another is non - rated (Taskombank) as at 31 December 2019 (2018: Caa1 and non-rated (AS SEB Pank), respectively).
10 Share capital Share capital as at 31 December is as follows:
All shares rank equally with regard to the Parent Company's residual assets. The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Parent Company.
During the years ended 31 December 2019 and 2018, the Parent Company did not declare any dividends. 11 Earnings per share The calculation of basic earnings per share for the years ended 31 December 2019 and 2018 was based on the profit for the years ended 31 December 2019 and 2018 attributable to ordinary shareholders of USD 8,025 thousand and USD 38,103 thousand, respectively, and weighted average number of ordinary shares outstanding as at 31 December 2019 and 2018 of 103,270,637. The Group has no potential dilutive ordinary shares.
12 Loans and borrowings This Note provides information about the contractual terms of loans. For more information about the Group's exposure to interest rate and foreign currency risk, refer to Note 20.
Terms and debt repayment schedule As at 31 December 2019, the terms and debt repayment schedule of loans and borrowings are as follows:
As at 31 December 2018, the terms and debt repayment schedule of loans and borrowings are as follows:
For a description of assets pledged by the Group in connection with loans and borrowings refer to Note 21(a).
During the year ended 31 December 2019, the Group has not fulfilled an obligation to transfer legal ownership rights over land plot under investment property of LLC "Comfort Market Luks" to a third party in accordance with an investment agreement concluded between the parties (see Note 8). This would be considered as the breach of covenant under the mortgage and loan agreements concluded with the bank regarding a loan with the carrying amount of USD 6,425 thousand as at 31 December 2019. On 27 December 2019 the Group received a letter from the bank confirming agreement to postpone execution of obligations under this covenant until 1 June 2020. On 17 February 2020 the Group signed a supplemental agreement stipulating postponement of this covenant until 1 October 2020. Based on the terms of the loan agreement with a third party, the loan with the carrying amount of USD23,658 thousand as at 31 December 2019 (31 December 2018: USD 22,004) is repayable on demand but not later than the final repayment date of 31 July 2020. In September 2019, the Group obtained a letter from the lender waiving the right to demand repayment of the loan during eighteen months ending 31 December 2020. Subsequent to the reporting date the lender confirmed waiving the right to demand repayment of the loan principal and any interest until 31 December 2020. Loan due to related party in the amount of USD 27,162 thousand (31 December 2018: USD 25,225 thousand) has maturity on 30 June 2020. In addition, there is loan due to related party in the amount of USD 7,700 thousand , which is classified as on demand as at 31 December 2019 (31 December 2018: the loan amounted to USD 12,538 thousand and was classified as short-term with maturity in 2019). In September 2019, the Group obtained a letter from this lender waiving the right to demand repayment of these loans during the eighteen months ending 31 December 2020. Subsequent to the reporting date the lender confirmed waiving the right to demand repayment of these loans until 31 December 2020. Reconciliation of movements of liabilities to cash flows arising from financing activities Movements of liabilities for the year ended 31 December 2019 are as follows:
Movements of liabilities for the year ended 31 December 2018 are as follows:
13 Trade and other payables Trade and other payables as at 31 December are as follows:
As at 31 December 2019, included in payables for construction works are accrued financial charges under construction agreement with third parties amounting to USD 14,096 thousand (31 December 2018: USD 12,998 thousand). In 2017-2018, the constructors claimed the Group to reimburse finance and foreign currency losses incurred by constructors due to untimely fulfillment of obligations by the Group companies under construction agreements, as well as fee for restructuring of accounts payable. As a result of negotiation, interest rate of 10.00% per annum was imposed on charges payable, they were converted to USD and maturity was postponed to 31 December 2025. The Group's exposure to currency and liquidity risk related to trade and other payables is disclosed in Note 20.
14 Advances received Advances from customers as at 31 December are as follows:
Advances from third parties are mainly represented by prepayments from tenants for the period from one to two months.
15 Other liabilities Other liabilities as at 31 December are as follows:
Deferred consideration is represented with payable in respect of the acquisition of Wayfield Limited and its subsidiary Budkhol LLC, and includes principal and accrued interest on deferred consideration in amount of USD 20,000 thousand and USD 10,167 thousand, respectively (2018: USD 20,000 thousand presented as non-current liability and USD 8,217 thousand presented as current liability, respectively). As at 31 December 2019 and 2018, deferred consideration is presented in accordance with its contractual maturity, that is 30 June 2020, and bears 9.75% interest rate per annum. 16 Revenue The revenue is represented as follows:
The major amount of the Group's revenue is represented by rental income from investment properties that falls within the requirements of IFRS 16 Leases and amounts to USD 30,366 thousand for the year ended 31 December 2019 (2018: USD 25,566 thousand). During the year ended 31 December 2019, 13% of the Group's rental income was earned from two tenants (8% and 5%, respectively) (2018: three tenants of 14%, 8% and 6%, respectively). The Group rents out premises in the shopping centres to tenants in accordance with lease agreements predominantly concluded for a period of up to 150 months, save for the hypermarkets and large network retails chains, which enter into long term lease agreements. In accordance with lease agreements, rental rates are usually established in USD and are settled in functional currency using the exchange rates as applicable. However, taking into account the current market conditions, the Group provides temporary discounts to some of its tenants by applying lower exchange rates than those established by the National Bank of Ukraine, in arriving to the rent payment for the particular month. Management believes that these measures will allow the Group to maintain occupancy rates in the shopping centres at a relatively high level during the current deteriorated period in Ukrainian business environment. Management continued to turn gradually the lower exchange rates used into the exchange rates established by the National Bank of Ukraine (NBU). The Group's lease agreements with tenants usually include non-cancellation clause for the period from 3 to 150 months. The Group believes that execution of the option to prolong the lease period upon expiration of non-cancellable period on the terms different to those agreed during the non-cancellable period, is not substantiated. Accordingly, upon calculation of rental income for the period the Group does not take into account rent payments, which are prescribed by the agreements upon expiration of the period during which the agreement cannot be cancelled. All other types of services are derived from contracts with customers and fall within the scope of IFRS 15. There are no contract assets and contract liabilities that arise on the above stated service lines.
Direct operating expenses arising from investment property that generated rental income during the years ended 31 December are as follows:
No direct operating expenses arising from investment property that did not generate rental income during 2019 and 2018 occurred.
17 Operating expenses Operating expenses for the years ended 31 December are as follows:
18 Finance income and finance costs Finance income and finance costs for the years ended 31 December are as follows:
19 Income tax expense (a) Income tax expense Income taxes for the years ended 31 December are as follows:
Corporate profit tax rate for the entities operating under the laws of Ukraine is fixed at 18%. The applicable tax rate for the entities operating under the laws of the Russian Federation is 20%. The applicable tax rates are 12.5% for Cyprus companies, 20% for Estonian companies, and nil tax for companies incorporated in the Isle of Man and British Virgin Islands.
(b) Reconciliation of effective tax rate The difference between the total expected income tax expense for the years ended 31 December computed by applying the Ukrainian statutory income tax rate to profit or loss before tax and the reported tax expense is as follows:
(c) Recognised deferred tax assets and liabilities As at 31 December deferred tax assets and liabilities are attributable to the following items:
(d) Movements in recognised deferred tax assets and liabilities Movements in recognised deferred tax assets and liabilities during the year ended 31 December 2019 are as follows:
Movements in recognised deferred tax assets and liabilities during the year ended 31 December 2018 are as follows:
(e) Unrecognised deferred tax assets Deferred tax assets as at 31 December 2019 have not been recognised in respect of the following items:
Deferred tax assets as at 31 December 2018 have not been recognised in respect of the following items:
During the year ended 31 December 2019 certain Group entities submitted amended CPT declarations that led to increase in tax-loss carry forwards with tax effect of USD 2,465 thousand (2018: certain Group entities submitted amended CPT declarations that led to a decrease in tax loss carryforwards with tax effect of USD 2,793 thousand). In accordance with existing Ukrainian legislation tax losses can be carried forward and utilised indefinitely. Deferred tax assets have not been recognised in respect of those items since it is not probable that future taxable profits will be available against which the Group can utilise the benefits therefrom.
20 Financial risk management (a) Overview The Group has exposure to the following risks from its use of financial instruments: credit risk liquidity risk market riskThis note presents information about the Group's exposure to each of the above risks, the Group's objectives, policies and processes for measuring and managing risk. Further quantitative disclosures are included throughout these consolidated financial statements. (b) Risk management framework The management has overall responsibility for the establishment and oversight of the risk management framework. 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 develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Group's Audit Committee oversees 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. (c) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's financial assets at amortised cost. (i) Trade and other receivables The Group's exposure to credit risks is influenced mainly by the individual characteristics of each customer. However, management also considers the factors that may influence the credit risk of the Group's customers, including the default risk of the industry and country, in which customers operate, as these factors may have an influence on credit risk. Management has established a policy under which each customer is analysed either individually or on collective basis regarding expected credit losses as at reporting date. There are no balances with customers, which are to be assessed individually as at 31 December 2019 (2018: the balance of USD 297 thousand was assessed on individual basis, no expected credit loss was resognised). For other individually insignificant debtors the Group uses an allowance matrix to measure expected credit loss (ECL). Loss rates are calculated using a "roll rate" method based on the probability of a receivable progressing through successive stages of delinquency to write-off. Roll-rates are calculated based on the Group's historical losses. The macro factors have insignificant impact on the historical loss rates due to short-term nature of the Group's receivables. The Group does not require collateral in respect of trade and other receivables.
As at 31 December 2019, the following table provides information about the exposure to credit risk and ECLs for trade and other receivables in respect of individually insignificant customers from collective portfolio:
As at 31 December 2018, the following table provides information about the exposure to credit risk and ECLs for trade receivables in respect of individually insignificant customers from collective portfolio:
Allowance for impairment of financial assets is as follows:
The movement in the allowance for impairment in respect of financial assets during the years ended 31 December was as follows:
(ii) Cash and cash equivalents Impairment on cash and cash equivalents has been measured on a 12-month expected loss basis and reflects the short maturities of the exposures, due to which no impairment allowance has been recognised by the Group. The Group considers that its cash and cash equivalents have low credit risk based on its assessment of the reliability of the banks where cash and cash equivalents are held. (d) Capital management Management defines capital as total equity attributable to equity holders of the parent. The Group has no formal policy for capital management but management seeks to maintain a sufficient capital base for meeting the Group's operational and strategic needs, and to maintain confidence of market participants. The Group strives to achieve this with efficient cash management, and constant monitoring of the Group's investment projects. With these measures the Group aims for steady profits growth. There were no changes in the Group's approach to capital management during the year. (i) Guarantees The Group considers that financial guarantee contracts entered into by the Group to guarantee the indebtedness of related parties to be insurance arrangements, and accounts for them as such. In this respect, the Group treats the guarantee contract as a contingent liability until such time as it becomes probable that the Group will be required to make a payment under the guarantee. (ii) Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. In addition to the credit risk, the Group is exposed to the risk of non-recoverability of VAT receivable, prepayments made and other assets amounting in total to USD 4,439 thousand as at 31 December 2019 (2018: USD 1,574 thousand). (e) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group's approach to managing liquidity is to ensure, as far as possible, that it will 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 Group's reputation.
The following are the contractual maturities of financial liabilities, including interest payments as at 31 December 2019:
The following are the contractual maturities of financial liabilities, including interest payments as at 31 December 2018:
(f) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the 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. (i) Сurrency risk Group entities operating under the laws of UkraineThe Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the Ukrainian hryvnias (UAH), primarily the U.S. Dollar (USD) and Euro (EUR). Interest on borrowings is denominated in the currency of the borrowing. Generally, borrowings are denominated in USD which does not always match the cash flows generated by the underlying operation of the Group, primarily executed in UAH.
Exposure to currency riskThe Group's exposure to foreign currency risk as at 31 December was as follows based on notional amounts: 1
Sensitivity analysis A 10 percent weakening of the Ukrainian hryvnia against the following currencies as at 31 December would have decreased net profit or loss and decreased equity by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant.
A 10 percent strengthening of the Ukrainian hryvnia against these currencies at 31 December would have had the equal but opposite effect on these currencies to the amounts shown above, on the basis that all other variables remain constant. Intra-group borrowingsThe Group entities located in Ukraine are exposed to currency risk on intra-group borrowings, eliminated in these consolidated financial statements, that are denominated in a currency other than the Ukrainian hryvnia (UAH), primarily the U.S. Dollar (USD). These borrowings are treated as part of net investment in a foreign operation with foreign exchange gains and losses recognised in other comprehensive income and presented in the translation reserve in equity. The exposure to foreign currency risk on these borrowings is USD 317,002 thousand and USD 307,129 thousand as at 31 December 2019 and 2018, respectively. The effect of translation of these loans payable by Ukrainian subsidiaries resulted in a foreign exchange gain of USD 46,014 thousand, including tax effect, recognised directly in other comprehensive income for the year ended 31 December 2019 (2018: foreign exchange loss of USD 8,798 thousand). A 10 percent weakening of the Ukrainian hryvnia against the USD would have increase other comprehensive loss for the year ended 31 December 2019 and equity as at 31 December 2019 by USD 25,994 thousand (2018: USD 25,185 thousand). This analysis assumes that all other variables, in particular interest rates, remain constant. A 10 percent strengthening of the Ukrainian hryvnia against these currencies would have had the equal but opposite effect to the amounts mentioned above, on the basis that all other variables remain constant.
Group entities operating under the laws of the Russian FederationThe Group entities, located in the Republic of Crimea and the Russian Federation, are exposed to currency risk on purchases and borrowings that are denominated in a currency other than the Russian Rouble (RUB), primarily the Ukrainian hryvnia (UAH) and U.S. Dollar (USD). Exposure to currency riskThe exposure to foreign currency risk as at 31 December was as follows based on notional amounts: 1
Sensitivity analysis A 10 percent weakening of the Russian Rouble against the following currencies as at 31 December would have increased net profit or loss and increased equity by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant.
A 10 percent strengthening of the Russian Rouble against these currencies at 31 December would have had the equal but opposite effect on these currencies to the amounts shown above, on the basis that all other variables remain constant. (ii) Interest rate risk Changes in interest rates impact primarily loans and borrowings by changing either their fair value (fixed rate debt) or their future cash flows (variable rate debt). Management does not have a formal policy of determining how much of the Group's exposure should be to fixed or variable rates. However, at the time of obtaining new financing management uses its judgment to decide whether a fixed or variable rate would be more favorable to the Group over the expected period until maturity. Refer to Notes 12, 13 and 15 for information about maturity dates and effective interest rates of fixed rate and variable rate financial instruments. Re-pricing for fixed rate financial instruments occurs at maturity of fixed rate financial instruments.
ProfileThe interest rate profile of the Group's interest-bearing financial instruments as at 31 December was as follows:
Fair value sensitivity analysis for fixed rate instrumentsThe Group does not account for any fixed-rate financial instruments as fair value through profit or loss or fair value through other comprehensive income. Therefore a change in interest rates at the reporting date would not have an effect in profit or loss or in equity. Cash flow sensitivity analysis for variable rate instrumentsAn increase of 100 basis points in interest rates at the reporting date would have decreased equity as at 31 December and would have decreased net profit or loss for the years ended 31 December by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.
A decrease of 100 basis points in interest rates at 31 December would have had the equal but opposite effect to the amounts shown above. (iii) Fair values Estimated fair values of the financial assets and liabilities have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to produce the estimated fair values. Accordingly, the estimates are not necessarily indicative of the amounts that could be realised in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values. The estimated fair values of financial assets and liabilities are determined using discounted cash flow and other appropriate valuation methodologies, at year-end, and are not indicative of the fair value of those instruments at the date these consolidated financial statements are prepared or distributed. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Group's entire holdings of a particular financial instrument. Fair value estimates are based on judgments regarding future expected cash flows, current economic conditions, risk characteristics of various financial instruments and other factors. Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities not considered financial instruments. In addition, tax ramifications related to the realisation of the unrealised gains and losses can have an effect on fair value estimates and have not been considered. 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:
Management believes that for all other financial assets and liabilities, not included in the table above, the carrying value approximates the fair value as at 31 December 2019 and 2018. Such fair value was estimated by discounting the expected future cash flows under the market interest rate for similar financial instruments that prevails as at the reporting date. The estimated fair value is categorised within Level 2 of the fair value hierarchy.
21 Commitments and contingencies (a) Pledged assets As at 31 December, in connection with loans and borrowings, the Group pledged the following assets:
As at 31 December 2019, the Group has also pledged the following: Rights on future income of Prisma Alfa LLC under all lease agreements for the period of validity of loan agreement between Prisma Alfa LLC with Raiffeisen Bank Aval. Investments in the following subsidiaries: PrJSC Ukrpangroup, Comfort Market Luks LLC and PrJSC Livoberezhzhiainvest.As at 31 December 2018, the Group has also pledged the following: Future rights on income of Prisma Alfa LLC and Comfort Market Luks LLC under all lease agreements and rights on future income of PrJSC Ukrpangroup under agreement with anchor tenant; Investments in the following subsidiaries: PrJSC Ukrpangroup, Comfort Market Luks LLC and PrJSC Livoberezhzhiainvest.(b) Construction commitments The Group entered into contracts with third parties to construct two shopping centres in Kyiv and a shopping centre in Odesa for the amount of USD 61,549 thousand as at 31 December 2019 (2018: USD 18,285 thousand). (c) Operating lease commitments The Group as lessor The Group entered into lease agreements on its investment property portfolio that consists of five shopping centres. These non-cancellable lease agreements usually have remaining terms up to one hundred fifty months. All agreements include a clause to enable upward revision of the rent rate on an annual basis according to prevailing market conditions. The future minimum lease payments under non-cancellable leases as at 31 December are as follows:
(d) Litigations In the ordinary course of business, the Group is subject to legal actions and complaints.
(i) Legal case in respect of Assofit Holdings LimitedSince November 2010 the Group has been involved in an arbitration dispute with Stockman Interhold S.A. (Stockman), which was the majority shareholder of Assofit Holdings Limited (Assofit), regarding invalidation of the Call Option Agreement dated 25 February 2010. In accordance with this Call Option Agreement, Arricano was granted the option to acquire the shareholding of Stockman being equal to 50.03 per cent in the share capital of Assofit during the period starting from 15 November 2010 up to 15 March 2011. In November 2010, the Company sought to exercise the option granted by the Call Option Agreement, however the buy-out was suspended by legal and arbitration proceedings that were initiated by Stockman in relation to the validity of the termination of the agreement relating to the call option under the Call Option Agreement. In the seventh award delivered on 5 May 2016, the tribunal of the London Court of International Arbitration found that Stockman is in breach of the Call Option Agreement and has taken "steps deliberately to dissipate and misappropriate Assofit's assets". As a result, the tribunal has ordered Stockman to transfer, or procure the transfer of, the Option Shares to Arricano within 30 days of the award. Upon registration of the transfer, Arricano shall pay to Stockman the Option Price minus damages, which when netted out brings the balance to nil. In the event that Stockman does not transfer, or procure the transfer of the Option Shares, Arricano may elect instead to claim damages in lieu of the share transfer. In its latest award, being the eighth award, made on 17 August 2016, the tribunal of the London Court of International Arbitration awarded the costs of approximately USD 0.9 million to be paid by Stockman to Arricano. No receivable was recognised in these consolidated financial statements, as recoverability of the related asset was not certain. In July 2017, the hearing regarding challenges of the fifth, the sixth and the seventh award by Stockman took place. By judgement dated 30 November 2017, the High Court of England and Wales dismissed the claims filed by Stockman challenging the fourth, fifth and seventh awards, and subsequently, on 5 January 2018, dismissed Stockman's application to appeal such judgement. As at the date that these consolidated financial statements are authorised for issuance, a number of related legal cases are under the consideration of the District Court of Nicosia. In September 2014, Assofit Holdings Limited transferred the shares of Prisma Beta LLC to Financial and Investment Solutions BV, a company registered in the Netherlands, despite the fact that an Interim Receiver was appointed in Assofit at that period of time with the responsibility for collecting and safeguarding Assofit's assets. Further in September 2014, Joint-Stock Bank Pivdeniy PJSC, Ukraine, which had an outstanding mortgage loan due from Prisma Beta LLC of USD 32,000 thousand, exercised its right to recover the abovementioned loan by means of reposession of ownership rights to the Sky Mall shopping centre which was pledged to secure this loan in September 2014. As at the date that these consolidated financial statements are authorised for issuance, shares of Prisma Beta LLC and ownership rights for the Sky Mall shopping centre remain alienated. As at 31 December 2019 and 2018, the Group holds 49.97% of nominal voting rights in Assofit without retaining significant influence. In prior years' consolidated financial statements of the Group until 31 December 2013, investment in Assofit was recognised in the statement of financial position as available for-sale financial asset at its carrying amount of USD 20,727 thousand. Due to loss of the legal control over the major operating asset being the Sky Mall shopping centre in September 2014, the investment in Assofit is fully impaired as at 31 December 2019 and 2018. Management is unaware of any other significant actual, pending or threatened claims against the Group. (e) Taxation contingencies (i) UkraineThe Group performs most of its operations in Ukraine and therefore within the jurisdiction of the Ukrainian tax authorities. The Ukrainian tax system can be characterised by numerous taxes and frequently changing legislation which may be applied retroactively, open to wide interpretation and in some cases are conflicting. Instances of inconsistent opinions between local, regional, and national tax authorities and between the Ministry of Finance and other state authorities are not unusual. Tax declarations are subject to review and investigation by a number of authorities that are enacted by law to impose severe fines, penalties and interest charges. A tax year 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. These facts create tax risks substantially more significant than typically found in countries with more developed systems. Management believes that it has adequately provided for tax liabilities based on its interpretation of tax legislation and official pronouncements. However, the interpretations of the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant. (ii) Republic of CrimeaAs a result of the events described in Note 1(b), Ukrainian authorities are not currently able to enforce Ukrainian laws on the territory of the Republic of Crimea. Starting from April 2014, this territory is subject to the transitional provisions of tax rules established by the Russian government to ensure gradual introduction of federal laws into the territory. Although these transitional provisions were thought to put certain relief on the entities registered in the Republic of Crimea, interpretations of these provisions by the tax authorities may be different from the tax payers' view. Effective from 1 January 2015, the Russian government declared that the territory of the Republic of Crimea is subject to general legislation of the Russian Federation. (iii) Russian FederationThe 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 substance-based position in their interpretation and enforcement of tax legislation. 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. 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. (iv) Republic of Cyprus Operations of the Group in Cyprus are mainly limited to provision of intra-group financing, transactions related to Assofit legal case (note 21 (d)(i)) and various management activities. Transactions performed by the Cyprus entities of the Group fall within the jurisdiction of Cyprus tax authorities. The Cyprus tax system can be characterized by numerous taxes, legislation may be applied retrospectively, open to wide interpretation. VAT and income tax declarations are subject to review and investigation by authorities that are enacted by law to impose severe fines, penalties and interest charges. A tax year remains open for review by the Tax department during the six subsequent calendar years, however under certain circumstances a tax year may remain open longer. Additionally, a new transfer pricing legislation was enacted in Cyprus from 30 June 2017, which requires entities to conduct intra-group financing transactions on the arm's length principle (a principle under which transactions are performed at market rates, as would have been performed between unrelated entities). The legislation requires taxpayers to prepare and submit to the tax authorities Transfer pricing study documents justifying margins applied to the intra-group financing. The compliance of margins applied to the arms' length principle could be a subject to scrutiny on the basis of unjustified tax benefit concept. Given the fact that the above rule has been in force for a limited period of time, currently, there is no established practices of its application by the tax authorities, and there can be no assurance that the tax authorities' interpretations of the approaches used by the Group may differ, which could result in accrual of fines and penalty interest on the Group. During the prior years, the Group incurred certain foreign legal expenses, where the VAT accounted for on these expenses was fully claimed. Management believes that the Group properly claimed the VAT accounted for on these expenses, on the basis of the plans to further collect reimbursement of the said expenses, being purely of legal nature, from respective parties in full. Management believes that it has adequately provided for tax liabilities based on its interpretation of tax legislation, official pronouncements and court decisions. 22 Related party transactions (a) Control relationships The Group's largest shareholders are Retail Real Estate OU, Dragon - Ukrainian Properties and Development plc, Deltamax Group OU, Rauno Teder and Jüri Põld. The Group's ultimate controlling party is Estonian individual Hillar Teder. Hillar Teder indirectly controls 55.04% of the voting shares of the Parent Company. Apart from this, the adult son of Hillar Teder, Mr. Rauno Teder, controls 15.82% of the voting shares of the Parent Company as at 31 December 2019 and 2018. As it was announced by the Group on 20 March 2020, Hillar Teder transferred his equity interest in Retail Real Estate OU to Rauno Teder. As a result, Rauno Teder, who already had held 15.92% of the issued voting rights of the Parent Company (7.48% - directly and 8.34% through Deltamax Group OU), will acquire interest of 55.04% in the Parent Company (though RRE), thus increasing his aggregate interest to 70.86% of the Parent Company. (b) Transactions with management and close family members Key management remunerationKey management compensation included in the statement of profit or loss and other comprehensive income for the year ended 31 December 2019 is represented by salary and bonuses of USD 854 thousand (2018: USD 980 thousand).
Director's interestsThe direct and indirect interest of the members of the Board in share capital of the Company as at 31 December 2019 and 31 December 2018 and as at the date of signing of these consolidated financial statements is as follows:
(c) Transactions and balances with entities under common control Outstanding balances with entities under common control as at 31 December are as follows:
None of the balances are secured. The terms and conditions of significant transactions and balances with entities under common control are described in Notes 6, 7, 12, 13, 14 and 15. Loan due to related party in the amount of USD 27,162 thousand (31 December 2018: USD 25,225 thousand) has maturity on 30 June 2020. In addition, there is loan due to related party in the total amount of USD 7,700 thousand, which is classified as on demand as at 31 December 2019 (31 December 2018: the loan amounted to USD 12,538 thousand and was classified as short-term with maturity in 2019). In September 2019, the Group obtained a letter from related party lender waiving the right to demand repayment of two loans during year eighteen months ending 31 December 2020. Subsequent to the reporting date the lender confirmed waiving the right to demand repayment of these loans until 31 December 2020. Expenses incurred and income earned from transactions with entities under common control for the years ended 31 December are as follows:
Prices for related party transactions are determined on an ongoing basis.
23 Subsequent events As it was already disclosed in Note 22(a) of these consolidated financial statements, on 20 March 2020 the Group announced that Hillar Teder transferred his equity interest in Retail Real Estate OU to Rauno Teder. As a result, Rauno Teder, who already had held 15.92% of the issued voting rights of the Parent Company (7.48% - directly and 8.34% through Deltamax Group OU), will acquire interest of 55.04% in the Parent Company (though RRE), thus increasing his aggregate interest to 70.86% of the Parent Company. Subsequent to reporting date, on 20 February 2020 and 12 March 2020, LLC Comfort Market Luks, the Group's entity, received tranches on the existing loan facility with a bank in the amount of USD 8,000 thousand to finance the construction of the Lukianivka shopping and entertainment centre. The tranche facility expires on 25 July 2026 and bears interest of 10.50% per annum, in addition to an initial set up fee of 0.2%. The facility is secured with the same collateral as for the first tranche, no additional assets were pledged. As it was already mentioned in Note 1(b) to these consolidated financial statements, the first months of 2020 have seen significant global market turmoil triggered by the outbreak of the COVID-19. Together with other factors, this has resulted in a sharp decrease in the oil price and the stock market indices, as well as a depreciation of the Ukrainian hryvnia and Russian ruble. Responding to the potentially serious threat the COVID-19 presents to public health, Ukrainian government authorities have taken measures to contain the outbreak, introducing restrictions on the movement of people within Ukraine and the 'lock-down' of cities in regions likely to be affected by the outbreak, suspension of transport links with Ukraine and entry restrictions on visitors pending further developments. Some businesses have also instructed employees to remain at home and curtailed or temporarily suspended business operations. The Ukrainian central and local governments, as part of their efforts to combat the COVID-19 pandemic, temporary restricted customers access to Ukrainian retail shopping centres from 16 March 2019. This decision has resulted in the temporary closure of four out of five of the Group's retail shopping centres: Prospekt (Kyiv), Rayon (Kyiv), City Mall (Zaporizhzhia) and Sun Gallery (Kryvyi Rig). Starting from 28 March 2020 the fifth retail shopping center, South Gallery (Simferopol), was also temporarily closed. However, the hypermarkets, pharmacies and some other stores located within the centres continue to operate. Mentioned above events will have significant impact on the Group's operating activities. Specifically, the Group's management expects decrease of revenue that may result in decrease of fair value of investment property. The Group's management is revising cash flow forecast for 2020 based on their professional judgement, expertise in retail and real estate sectors, and the latest available market information on ongoing basis. At the same time, operating revenue performance for the first quarter 2020 was not affected and the Group demonstrated financial results from operating activity as expected. In addition, the Group's management is on an advanced stage of negotionations on loans restructuring with financing banks with an aim to revise loan repayment schedules. As a result of loans restructuring, it is expected that scheduled cash outflows on secured bank loans will decrease in 2020. While it is too early to evaluate the full economic impact of the temporary closure, it is likely that it will have a negative overall effect on the Company's 2020 performance. Nonetheless, the Company believes that its high quality portfolio of operating assets, market leading tenants, and experienced team will protect the long- term value for the investors.
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| ISIN: | CY0102941610 |
| Category Code: | FR |
| TIDM: | ARO |
| LEI Code: | 213800F8AMPULEKXFX22 |
| OAM Categories: | 1.1. Annual financial and audit reports |
| Sequence No.: | 60490 |
| EQS News ID: | 1030251 |
| End of Announcement | EQS News Service |
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