Kimberly Enterprises N.V. Consolidated Financial Statements … Enterprise… · ·...

Kimberly Enterprises N.V.

Consolidated Financial Statements

As at and for the year ended

31 December 2012

(Prepared in accordance with International Financial Reporting Standards as adopted by the EU)


Consolidated Financial Statements

As at 31 December 2012 List of contents Page Independent auditors’ report on consolidated financial statements

3-4

Consolidated financial statement

• Consolidated statement of financial position

5

• Consolidated income statement

6

• Consolidated statement of comprehensive income

7

• Consolidated statement of changes in equity

8

• Consolidated statement of cash flows

9-10

• Notes to the consolidated financial statements

11-76

Independent aU"UMY<

To the shareholders of Kimberly Enterprises N.V.

on consolidated financial statements

We have audited the accompanying consolidated financial statements of KimberJy Enterprises N.V. (hereinafter referred to as "the Group"), which comprise the consolidated statement of financial position as at 31 December 2012, the consolidated income statement, the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the BU, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material

of matter

Without qualifying our opinion, we draw attention to Note 4.b to the consolidated financial statements which describes the Group's financial position as at 31 December 2012, including that the Group had EUR 6 million bank loans which were in breach of repayment terms of that date and is not able to meet its obligations to its employees and service providers as these fall due.

As also described in Note 4.b, as at 31 December 2012 a subsidiary was in breach of lease payments obligations tota/jng EUR 6.4 million relating to the lease of Marina Dorcol in Belgrade, Serbia. After the reporting date the Company breached its lease payment obligation with additional amount of EUR 1.4 million.

The appropriateness of the going concern assumption on which the consolidated financial statements are prepared is dependent on the continued support of the financing banks, parent company and the group ability to generate sufficient cash from its operations to meet its obligations. These conditions, along with other matters regarding the group's interest bearing loans from bank and other payabJes described in Note 4.b and Note 16, indicate the existence of a material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern.

21 March 2013

Istvan Partner

Kimberly Enterprises N.V. Consolidated statement of financial position

31 December 3] December

___ .;::.20,::..1:2::: ___ _ 2011 ,"-----Note Thousands Euro

---- --. --.-,----~;,.;;..:..~-....;...----

ASSETS Cash and cash equivalents Restricted bank deposits and cash in escrow Trade receivables Prepayments and other assets Loans to related parties Current tax assets Inventories of housing units and land Assets in disposal held for sale

Current assets

Investment property Inventories of land Property and equipment Deferred tax assets

Noo-tllrrent a."ets Total assets

LIABILITIES

5 6 .., i

8 9

III 35

H 10 12 13

Interest~bearing loans from banks 16 Current portion of finance lease liability 17 Loans and amounts due to related parties and joint venture partners J 8 Trade payables Other pay abies 19 Provisions 20 Current tax liabilities Liabilities in disposal held for sale 35

Current liabilities

Finance lease liability 17 Deferred tax liabilities ! 3

Non·current liabilities Total liabilities

EQUITY Share capital Share premium Capital reserve Accumulated losses Accumulated translation adjustment

Equity attributable to owners of the Compao)' Non-controlling interests

Total equity

21 21

296 261

iO 636

6,337 111

22,066 4,229

33,946

21.000 1,417

14 1,980

24,411

58,357

6,000

11,332 2i,381

1,019 3,361 1,213

313 1,793

52,412 ,

18,858 202

19,060 71,472

878 39.298

(J40)

(54,077)

1.505

(12.736) (379)

(13,115)

58,357

959 68

209 589

6,184 106

31,011 4,153

43,279

21,100

40 1,977

23,117

66,396

12,594 5,951

24,663 t,262 3,531 1,581

200 1,505

51,287

21,685 217

21,902 73,189

878 39.298

(340)

(47,68B) U34

(6,618) (175)

(6,793)

66,396

21 Mareh lOll Oate of approval afthe

financial statements

The notes on pages 11-76 arc an integraj part of these consolidated financial statements.

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Kimberly Enterprises N.V. Consolidated income statement

For the year ended 31 December

2012 2011

Note Thousands Euro

Revenues 22 2,594 4,131 Change in fair value of investment property 11 1,617 (1,379) Write down of inventory 23 (498) (1,958) Cost of sales 24 (2,866) (5,103)

Gross profit (loss)

847 (4,309)

Other incomes (losses) 25 2,064 (88) Selling, general and administrative expenses 26 (1,769) (2,226)

Results from operating activities

1,142 (6,623)

Net foreign exchange losses

(939) (517) Finance income

295 284

Finance costs

(7,175) (6,395) Net finance costs 27 (7,819) (6,628)

Loss before tax

(6,677) (13,251)

Tax benefit 28 26 384

Loss for the year

(6,651) (12,867)

Loss attributable to: Owners of the Company

(6,389) (12,754) Non-controlling interests

(262) (113)

Loss for the year

(6,651) (12,867)

Loss per share: Basic loss per share (Euro) 29 (0.076) (0.147)

Diluted loss per share (Euro) 29 (0.076) (0.147)

The notes on pages 11-76 are an integral part of these consolidated financial statements.

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Kimberly Enterprises N.V. Consolidated statement of comprehensive income


2012 2011

Thousands Euro

Loss for the year

(6,651) (12,867)

Other comprehensive income: Foreign currency translation differences for foreign operations

329 607 Total comprehensive loss for the year

(6,322) (12,260)

Total comprehensive loss attributable to:

Owners of the Company

(6,118) (12,149) Non-controlling interests

(204) (111)

Total comprehensive loss for the year

(6,322) (12,260)


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Kimberly Enterprises N.V. Consolidated statement of changes in equity

Attributable to owners of the Company

Share capital

Share premium

Capital reserve

Translation reserve

Accumulated losses Total

Non-controlling

interests Total equity

Thousands Euro

Balance at 1 January 2011 878 39,298 (340) 629 (34,934) 5,531 (64) 5,467 Total comprehensive loss for the year - - - 605 (12,754) (12,149) (111) (12,260) Balance at 31 December 2011 878 39,298 (340) 1,234 (47,688) (6,618) (175) (6,793)

Balance at 1 January 2012 878 39,298 (340) 1,234 (47,688) (6,618) (175) (6,793) Total comprehensive loss for the year - - - 271 (6,389) (6,118) (204) (6,322) Balance at 31 December 2012 878 39,298 (340) 1,505 (54,077) (12,736) (379) (13,115)


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Kimberly Enterprises N.V. Consolidated statement of cash flows


2012 2011

Note Thousands Euro

Cash flows from operating activities Loss for the year

(6,651) (12,867) Adjustments for:

- Depreciation 12 35 19 - Net finance costs 27 7,819 6,628 - Tax benefit 28 (26) (384) - Other (incomes) losses 25 (2,064) 88 - Change in fair value of investment property 11 (1,617) 1,379 - Write down of inventories 23 498 1,958

(2,006) (3,179)

Change in: - Inventories of housing units and land

1,962 3,576

- Net assets and liabilities in disposal held for sale 35 212 (13) - Trade receivables

199 (76)

- Provisions 20 (272) (518) - Other prepayments and other assets

(52) 122

- Trade payables

(308) (9) - Other payables

82 773

Cash generated from (used in) operating activities

(183) 676 Interest received

227 99

Interest paid

(232) (237) Income taxes (paid) received

21 (215)

Net cash from (used in) operating activities

(167) 323


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Kimberly Enterprises N.V. Consolidated statement of cash flows (continued)


2012 2011

Note Thousands Euro

Cash flows from investing activities Acquisition of property and equipment 12 (9) (6)

Proceeds from sale of property and equipment 12 - 14 Disposal of subsidiary 34.d (2) - Short term loans granted to related parties

(144) (384)

Short term loans repaid by related parties

6 136 Change in restricted bank deposits and cash in escrow

(190) 1,188

Net cash from (used in) investing activities

(339) 948

Cash flows from financing activities Interest-bearing loans received from banks

- 54 Interest-bearing loans repaid to banks

(1,283) (2,501)

Loans received from related parties and other

1,459 2,450 Loans repaid to related parties and other

(345) (1,155)

Net cash used in financing activities

(169) (1,152)

Net increase (decrease) in cash and cash equivalents

(675) 119 Cash and cash equivalents at 1 January

959 880

Effect of exchange rate fluctuations on cash held

12 (40) Cash and cash equivalents at 31 December 5 296 959


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Notes to the consolidated financial statements

For the year ended 31 December 2012

NOTE 1 - REPORTING ENTITY

Kimberly Enterprises N.V. (the "Company") is a Company domiciled in The Netherlands. The Company owns subsidiary companies and has jointly controlled entities mainly in Eastern Europe which purchase, develop, hold and sell real estate assets. The Company has been listed on the Alternative Investment Market ("AIM") of the London Stock Exchange, United Kingdom since 15 December 2005. The consolidated financial statements of the Company as at and for the year ended 31 December 2012 comprise the Company and its subsidiaries and the Group's interests in associates and jointly controlled entities (collectively, the “Group”). At the Annual General Meeting of the Company held on 7 March 2012 it was approved to change the name of the Company from Engel East Europe N.V. to Kimberly Enterprises N.V. Copies of these consolidated financial statements of the Group are available on the Company’s website (www.kimberly-enterprises.com) and upon request from the Company’s registered office at Keizersgracht 616, 1017 ER Amsterdam, The Netherlands.

NOTE 2 - BASIS OF PREPARATION

a. Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU (“EU IFRS”). The consolidated financial statements were authorized for issue by the Board of Directors on 21 March 2013. These consolidated financial statements have been prepared by the Company. These consolidated financial statements are not intended for statutory filing purposes. The Company is required to file consolidated financial statements prepared in accordance with The Netherlands Civil Code. At the date of preparing these financial statements the Company had not yet filed consolidated financial statements for the years ended 31 December 2011 and 31 December 2012 in accordance with The Netherlands Civil Code.

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NOTE 2 - BASIS OF PREPARATION (continued) b. Going concern

The consolidated financial statements have been prepared on a going concern basis, which assumes that the Group will be able to rise funding to meet its obligations to the banks, its employees and service providers as disclosed in Note 4.b. The financial position of the Group continued to be weak during the reporting period, the Group is in breach of:

• Interest bearing loans from banks totaling EUR 6,000 thousands – see Note 16. • The requirement to pay lease payments totaling EUR 6.4 million (relating to the lease of the

Marina Dorcol project in Belgrade, Serbia). After the reporting date the Company breached is requirements to pay an additional amount of EUR 1.4 million – see Note 17.

Management considers it is unlikely that some of the projects will generate sufficient cash inflows to repay their obligations when they fall due. Management believes that the above financial position of the Group indicates the existence of material uncertainties which cast significant doubt on the Company’s ability to continue as a going concern. The notes to the consolidated financial statements (in particular see Notes 4.b, 16 and 17) disclose all the key risk factors, assumptions made and uncertainties of which the management of the Company aware that are relevant to the Company’s ability to continue as a going concern, including significant conditions and events. Should the going concern assumption not be appropriate, adjustments would have to be made to reflect a situation where the assets may need to be realized other than in the normal course of business and at amounts which could differ significantly from the amounts stated in the consolidated financial statements.

c. Basis of measurements

The consolidated financial statements have been prepared on the historical cost basis except for the following material item in the statements of financial position:

• Investment property which is measured at fair value.

d. Functional and presentation currency

These consolidated financial statements are presented in Euro (EUR), which is the Company's functional currency. All financial information presented in Euro has been rounded to the nearest thousands, except where otherwise indicated. The functional currency of each subsidiary and jointly controlled entity is the local currency in the specific country in which it is located.

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For the year ended 31 December 2012 NOTE 2 - BASIS OF PREPARATION (continued)

e. Use of estimates and judgments

The preparation of the 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. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about accounting estimates in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in Note 37.

f. Operating cycle

The Group is involved in projects some of which may take 5-6 years to complete. The cost of inventory and loans which finance residential development projects are presented as current assets and liabilities (see Note 3.f).

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently during the periods presented in these consolidated financial statements and have been applied consistently by all Group entities.

a. Basis of consolidation

1. 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. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. The Group measures goodwill at the acquisition date as:

• the fair value of the consideration transferred; plus • the recognized amount of any non-controlling interests in the acquire; plus • if the business combination is achieved in stages, the fair value of the pre-existing equity interest

in the acquire; less • the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities

assumed. When the excess is negative, a bargain purchase gain is recognized immediately 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 measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.

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NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)

a. Basis of consolidation (continued)

2. Subsidiaries

Subsidiaries are entities controlled by the Group. 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 the subsidiaries have been changed when necessary to align them with the policies adopted by the Group. 3. Associates

Associates are those entities in which the Group has significant influence, but not 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. Other investments in associates are accounted for using the equity method (equity accounted investees) and are recognized initially at cost. The Group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group’s share of the profit and loss and other comprehensive income, after adjustments to align the accounting policies with those of the Group, 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 nil, 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. 4. Jointly controlled entities

Entities which are jointly controlled with another party or parties through the establishment of a contractual agreement (“joint ventures”) are accounted for using the proportional consolidation method of accounting. In any period where there is a change of economic interest or a change in estimate of economic interest, then the corresponding adjustment is recognized in the income statement. The financial statements of joint ventures are included in the consolidated financial statements from the date that joint control commences until the date that joint control ceases. Where necessary, adjustments are made to the financial statements of subsidiaries, associates and joint ventures to bring the accounting policies used into line with those used by the Group in the consolidated financial statements.

5. Transactions eliminated on consolidation

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

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a. Basis of consolidation (continued) 6. Loss of control On the loss of control, the Group derecognizes 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 recognized 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 an available-for-sale financial asset depending on the level of influence retained.

b. Foreign currency

1. 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 rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the end of the year. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated 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 in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of available-for-sale equity investments, a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognized in other comprehensive income.

2. Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to euro at exchange rates at the reporting date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to euro at exchange rates at the dates of the transactions. Foreign currency differences are recognized in other comprehensive income, and presented in the foreign currency translation reserve (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 a part of its investment in an associate that includes a foreign operation while retaining significant influence, the relevant proportion of the cumulative amount is reclassified to profit or loss.

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For the year ended 31 December 2012 NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)

b. Foreign currency (continued) 2. Foreign operations (continued) 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 recognized in other comprehensive income, and presented in the translation reserve in equity. The functional currencies of the Group entities are: Hungarian Forint ("HUF"), Czech Crown ("CZK"), Polish Zloty ("PLN"), Canadian Dollar ("CAD"), Romanian Lei ("RON"), New Israeli Shekel (NIS) and Serbian Dinar ("CSD").

c. Financial instruments

1. Non-derivative financial assets

The Group initially recognizes loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Group classifies non-derivative financial assets into the following categories: cash and cash equivalents, restricted bank deposits, cash in escrow and loans and receivables.

Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. Restricted bank deposits and cash in escrow Restricted bank deposits comprise of deposits in banks that are pledged to secure banking facilities for the Group and to which the Group does not have access. Cash in escrow represents cash paid into an escrow account for security of future interest bank payments.

Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise cash and cash equivalents and trade and other receivables.

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c. Financial instruments (continued) 2. Non-derivative financial liabilities

The Group initially recognizes debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

The Group derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Group classifies non-derivative financial liabilities into the following categories: loans and borrowing, bank overdrafts, and trade and other payables. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method. Trade payables Trade payables are not interest bearing and are recognized initially at fair value, subsequent to which they are stated at amortized cost.

Interest-bearing loans from banks Interest-bearing loans from banks are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the income statement over the period of the borrowings on an effective interest basis.

3. Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity, net of any tax effects.

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d. Property and equipment

1. Recognition and measurement

Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the following:

• the cost of materials and direct labor; • any other costs directly attributable to bringing the assets to a working condition for their

intended use, the costs of dismantling and removing the items and restoring the site on which they are located;

• capitalized borrowing costs. Cost also may include transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Purchased software that is integral to the functionality of the related equipment is capitalized 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. Any gain or loss on disposal of an item of property and equipment (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognized in profit or loss. 2. Depreciation

Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each component of an item of property, plant 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:

• Furniture, office equipment and other assets 3-15 years

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

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e. Investment property Investment property is property 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 the production or supply of goods or services or for administrative purposes. Investment property is measured at cost on initial recognition and subsequently at fair value with any change therein recognized in profit or loss. 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 capitalized borrowing costs. Any gain or loss on disposal of an investment property (calculated as the difference between the net proceeds from disposal and the carrying amount if the item) is recognized in profit and loss. When an investment property that was previously classified as property, plants and equipment is sold, any related amount included in the revaluation reserve is transferred to retain earnings. An external, independent valuation companies, having appropriate recognized professional qualifications and recent experience in the location and category of property being valued, value the Group’s investment properties. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably. In the absence of current prices in an active market, the valuations are prepared by considering the aggregate of the estimated cash flows expected to be received from renting out the property. A market yield is applied to the estimated rental value to arrive the gross property valuation. When actual rents differ materiality from the estimated rental value, adjustments are being made to reflect actual rents. Any gain or loss arising from a change in fair value is recognized in the profit or loss in the period in which it arises. Rental income from investment property is accounted for as described in Note 3.l.

f. Inventories of housing units

Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the first-in first-out principle, and includes direct materials, direct labor costs, subcontracting costs and those direct overheads which have been incurred in bringing the inventories to their present condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset (see Note 3.m). The Group is involved in projects some of which may take several years to complete. The cost of inventory and loans which finance residential development projects are presented as current assets and liabilities, unless they are not expected to be realized within the operating cycle of 5-6 years and then they are classified as non-current.

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g. Impairment

The carrying amounts of the Group’s assets, other than inventories (see Note 3.f), investment property (see Note 3.e) and deferred tax assets (see Note 3.n) are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill, that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognized in the income statement. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Calculation of recoverable amount The recoverable amount of the Group's receivables carried at amortized cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. The recoverable amount of other assets is the greater of their fair value less costs to sell and value in use. 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 specified to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Reversal of impairment An impairment loss in respect of a receivable carried at amortized cost is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. Such reversal is recognized in the income statement. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed when there is an indication that the impairment loss may no longer exist and 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 amortization, if no impairment loss had been recognized.

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h. Assets held for sale or distribution

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale or distribution rather than through continuing use, are classified as held for sale or distribution. Immediately before classification as held for sale or distribution, the assets, or components of a disposal group, are remeasured in accordance with the Group’s accounting policies. Thereafter generally the assets, or disposal group, are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets and investment property, which continue to be measured in accordance with the Group’s accounting policies. Impairment losses on initial classification as held for sale or distribution and subsequent gains and losses on remeasurement are recognized in profit or loss. Gains are not recognized in excess of any cumulative impairment loss. Once classified as held for sale or distribution, intangible assets and property and equipment are no longer amortized or depreciated, and any equity-accounted investee is no longer equity accounted.

i. Employee benefits Short-term employee benefit Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

j. Provisions and warranties

A provision is recognized 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 recognized as finance cost. Provision for warranty costs are recognized at the date of sale of housing units, at the Company's best estimate of the expenditure required to settle the Group’s liability. Such estimates take into consideration warranties given to the Group by subcontractors.

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k. Leased assets

1. Operating leases

The Group's leases of assets in which substantially all the risks and rewards of ownership are retained by the other party, the lessor, are classified as operating leases. Payments, including prepayments, made under operating leases (net of any incentives received from the lessor) are added to inventory where these costs will be recovered in future sales.

2. Finance leases

The Group's leases of assets in which the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in current and non-current borrowings. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Investment properties held under finance leases are carried at their fair value.

l. Revenue

Revenue from the sale of housing units is recognized when the risks and rewards of ownership have been transferred to the buyer provided that the Group has no further substantial acts to complete under the contract. Rental income from investment property is recognized in the income statement on a straight- line basis over the term of the lease. Lease incentives granted are recognized as an integral part of the total rental income. Other revenues, including project management fees, are recognized in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided, and are measured at the fair value of the consideration received or receivable for goods and services provided in the normal course of business, net of VAT and other sales related taxes. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, associated costs or continuing management involvement with the assets.

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m. Finance income and finance costs Finance income comprises interest income on funds invested. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions and impairment losses recognized on financial assets. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Capitalization of borrowing costs may continue until the assets are substantially ready for their intended use. If the resulting carrying amount exceeds its recoverable amount, an impairment loss is recognized. The capitalization rate is arrived at by reference to the actual rate payable on borrowings for development purposes or, with regard to that part of the development cost financed out of general funds, to the average rate. Borrowing costs that are not directly attributable to the acquisition or construction of a qualifying asset are recognized in profit or loss using the effective interest method.

n. Tax

Tax expense comprises current and deferred tax. Current tax and deferred tax is recognized in profit or loss except to the extent that these relate to a business combination, or items recognized directly in equity or in other comprehensive income. 1. Current tax

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. Current tax payable also includes any tax liability arising from the declaration of dividends. 2. Deferred tax

Deferred tax is recognized 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 recognized 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 investment property that is measured at fair value, the presumption that the carrying amount of the investment property will be recovered through sale has not been rebutted. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

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n. Tax (continued) 2. Deferred tax (continued) Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, 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 realized simultaneously. A deferred tax asset is recognized 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 utilized. 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 realized. 3. Tax exposures In determining the amount of current and deferred tax the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Company believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment in estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Company to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made.

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

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. All operating segments’ operating results are reviewed regularly by the Group’s CEO to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available. Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets (primarily the Company’s headquarters), head office expenses, and tax assets and liabilities. Segment capital expenditure is the total cost incurred during the year to acquire property, plant and equipment, and intangible assets other than goodwill.

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NOTE 4 - FINANCIAL RISK MANAGEMENT

Overview

The Group has exposure to the following risks from its use of financial instruments:

• Credit risk • Liquidity risk • Market risk

This 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, and the Group’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. The Group’s risk management policies are established to identify and analyses 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 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.

a. Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers. There are no significant concentrations of credit risk. The Group exposure to credit risk in most of the countries of activity is minimized by the requirement for customers to pay most of the amount due on purchased housing units prior to handover. The Group limits its exposure to credit risk arising from bank deposits by transacting only with reputable bank counterparties that have a credit rating higher than that of the Group. Additionally, the Group reduces its exposure to credit risk by depositing its financial funds in different and independent bank institutions. The carrying amount of financial assets represents the maximum credit exposure of the Group at the reporting date.

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NOTE 4 - FINANCIAL RISK MANAGEMENT (continued)

b. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. 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 Group relies on external funding to finance its current and future development projects. Future acquisitions of investment properties and land designated for residential projects and the ability of the Group to expand its operations is partly dependant on its ability to obtain future bank financing. The Group intends to repay its existing bank loans from its operating activity (mainly sales of housing units and undeveloped plots). Despite the tightening of the availability of credit, the Group has so far been able to secure additional project funding when needed largely because the Group’s bank financing is project-specific and generally secured by the physical assets of the relevant project company. However, there is no assurance that banks will provide funding for new projects or prolong overdue loans. At 31 December 2012 the Group has current liabilities totaling EUR 52,412 thousands, which exceeds its current assets amounting to EUR 33,946 thousands and a negative equity which amounts to EUR 13,115 thousands. As of 31 December 2012, the financial condition of the Company remains weak and it is not able to meet its obligations to its employees and service providers as they fall due. The Group is in breach of: • Interest bearing loans from banks - totaling EUR 6,000 thousands – see Note 16. • The requirement to pay lease payments totaling EUR 6.4 million (relating to the lease of the Marina

Dorcol project in Belgrade, Serbia). After the reporting date the Company breached is requirements to pay an additional amount of EUR 1.4 million – see Note 17.

1. Interest bearing loans from banks

In respect of breached projects loans totaling EUR 5,879 thousands (see Note 16) the management considers it is unlikely that the projects will generate sufficient cash inflows to repay all obligations which fall due within one year. The Group is discussing possible solutions with the financing banks, including extension of the loans, as well as potential sales of the projects. Whilst in the past financing banks have agreed to prolong existing loan facilities, there is no assurance that these banks will be prepared to extend existing loan facilities beyond currently committed maturity dates. In the event that a bank is not willing to extend a project loan, it has the option to call in its security. In most cases these loans are secured by the underlying project company's assets only. Loans granted by the financing banks to the projects are non-recourse loans, except for: • ENMAN B.V., a jointly controlled entity, has provided guarantees for interest payments and costs

overruns, to the bank which finances the project Ingatlan in Budapest, Hungary, the amount of the loans as of the reporting period is EUR 6,099 thousands (the Company’s share is EUR 1,525 thousands). After the reporting period following the appeal of one of the jointly controlled entity’s creditors, a bankruptcy procedure started, see also Note 39.a.

In all other cases, the exposure is limited to the value of the specific securities pledged in each project.

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NOTE 4 - FINANCIAL RISK MANAGEMENT (continued)

b. Liquidity risk (continued) 1. Interest bearing loans from banks (continued) Arces International B.V., a jointly controlled entity, has an exposure as per the bank loans which financed the project in Gyor Hungary in the amount of EUR 12,648 thousands (the Company’s share is EUR 6,324 thousands). The bank claims that the loans were additionally guaranteed by Arces International B.V. The company has disputed the validity of this guarantee with the bank. As well there is legal dispute between the Company and Heitman regarding the responsibility of this guarantee, however, no official legal claim has been filed by any of the parties. A relative provision was booked in the financial statements according to the management best estimation. Management considers it is unlikely that some of the projects will generate sufficient cash inflows to repay all obligations when they fall due. Management believes that the above mentioned conditions indicate the existence of material uncertainties which cast significant doubt on the Company’s ability to continue as a going concern.

2. Lease agreement

Since January 2011, the Group has been in breach of the requirement to pay the monthly lease payments. As of 31 December 2012 the total breach was EUR 6.4 million. The consolidated subsidiary, Marina Dorcol d.o.o. is exposed to the following sanctions: • Termination of the lease contracts which will cause the loss of the right to use of land; • In the case of termination the final result of termination would be restitution of the amounts paid by

Marina Dorcol d.o.o (95% interest subsidiary) based on the agreements with the municipality, decreased for the amount of compensation for usage of such land for the period of duration of lease and for compensation of damages which occurred for the municipality, if any.

Should any party commence bankruptcy procedure against Marina Dorcol, the Company would lose control of Marina Dorcol and would be exposed to uncertainty with respect to compensation from the bankruptcy estate, since the Company will be in the “last row of creditors". In case that the Serbian municipality will wish to terminate the lease contract, it has to give to the Company a written notice. The Company will have 90 days to remedy the breach in order to avoid the agreement termination. However, the management of the Company estimates, inter alia, based on its legal advisor that it is not likely the Serbian municipality will act to terminate the agreement between the parties and that bankruptcy procedure against Marina Dorcol will commence.

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For the year ended 31 December 2012 NOTE 4 - FINANCIAL RISK MANAGEMENT (continued)

b. Liquidity risk (continued)

In order to manage its financial situation the Company has requested Engel Resources and Development Ltd., the parent company of the Company's immediate parent company, Engel General Developers Ltd., ("ERD") to provide additional financial assistance to fund the Company’s immediate liabilities. During the reporting period ERD provided several bridge loans in the total amount of approximately EUR 1.1 million. After the reporting period the Company received additional loans from ERD in the total amount of EUR 0.3 million (see Note 33(3) regarding the related guarantees granted to ERD). During the reporting period the Company received several bridge loans from GBES in the total amount of EUR 80 thousands. The management is also examining other solutions to fund the Company’s immediate liabilities and to resolve its financial situation. Should the going concern assumption not be appropriate, adjustments would have to be made to reflect a situation where the assets may need to be realized other than in the normal course of business and at amounts which could differ significantly from the amounts stated in the consolidated financial statements.

c. Market risk Market risk is the risk that changes in market prices, (such as foreign exchange rates and interest rates) 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 local economic parameters, while optimizing the return.

Currency and inflation risk The Group presents its financial statements in Euro. However, the Group’s operations are based locally in a number of different countries including Hungary, Romania, the Czech Republic, Serbia and Poland, and therefore the Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of Group entities, primarily the Euro. The Group’s financial results could, therefore, be adversely affected by fluctuations in the exchange rates between Euro and local currencies. The Group mitigates its foreign exchange risk by financing development projects through financial liabilities that are denominated in the currency of the country the project is located in and in which revenues from the projects will be generated. Following the loans granted by Engel Resources and Development Ltd. (see Note 33) the Group is exposed to the changes in arising from changes in the retail prices index in Israel and the change in the exchange rates of the New Israeli Shekel. The Group is exposed also to the changes in future lease payments arising from changes in the retail prices index in Belgrade, Serbia, related to its finance lease of investment property in Belgrade, Serbia. The Group does not currently engage in hedging or use any other financial arrangement to minimize currency exchange and the inflation risks or the translation risk related to foreign operations.

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For the year ended 31 December 2012 NOTE 4 - FINANCIAL RISK MANAGEMENT (continued)

c. Market risk (continued) Interest rate risk The Group’s interest rate risk arises mainly from short-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group does not currently engage in hedging or use any other financial arrangement to minimize the exposure to these risks.

d. Capital management

The Group’s objectives when managing capital are to safeguard the group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stockholders and to maintain an optimal capital structure to reduce the cost of capital. Due to current financial position of the Group, the aim of the management is to enable the Group to continue and to operate as a going concern. Currently no specific target of return on capital was determined. There are no externally imposed capital requirements on the Company. There were no changes in the Group’s approach to capital management during the year. 31 December 2012 2011 Thousands Euro Total liabilities 71,472 73,189 Less: cash and cash equivalents (296) (959) Less: restricted bank deposits and cash in escrow (261) (68) Net debt 70,915 72,162 Total deficient (13,115) (6,793) Net debt to deficient ratio at 31 December (5.41) (10.62)

NOTE 5 - CASH AND CASH EQUIVALENTS

31 December 2012 2011 Thousands Euro

Bank balances 295 952 Petty cash 1 7 Total 296 959 The balance as of 31 December 2012 includes an amount of EUR 134 thousands (2011: EUR 166 thousands) which is related to the project Safranka in the Czech Republic. The balance is available only for use in this project and cannot be used for any other purpose prior to the repayment of the bank loan which finances this project, after the reporting period the above balance was released and free for any use following the full repayment of the bank loan, see also Note 16(5).

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For the year ended 31 December 2012 NOTE 6 - RESTRICTED BANK DEPOSITS AND CASH IN ESCROW

31 December 2012 2011 Thousands Euro Restricted bank deposits: In Hungarian Forint - 53 In Czech Crown 28 - Total restricted bank deposits 28 53 Cash in escrow: In Euro 233 10 In Hungarian Forint - 5 Total cash in escrow 233 15 Total 261 68

Restricted bank deposits - the Group pledged all restricted bank deposits to secure credit facilities granted to the Group by the banks. Cash in escrow in Euro - the balance as of 31 December 2012 includes an amount of EUR 223 thousands represents cash which has a lien issued against by one of the project’s previous contractors, see also Note 32.e.

NOTE 7 - TRADE RECEIVABLES

31 December 2012 2011 Thousands Euro

Denominated in: In Hungarian Forint - 50 In Czech Crown 10 159 Total 10 209 The balances as of 31 December 2011 represent mainly receivables from customers for the sale of housing units.

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For the year ended 31 December 2012 NOTE 8 - PREPAYMENTS AND OTHER ASSETS

31 December 2012 2011 Thousands Euro Advances to suppliers 405 196 VAT recoverable 217 359 Prepaid expenses 1 25 Other 13 9 Total 636 589

NOTE 9 - LOANS TO RELATED PARTIES 31 December Interest rate 2012 2011 Currency % Thousands Euro

Fixed rate loan EUR 15% 1,263 1,304 Fixed rate loan EUR 8% 1,749 1,588 Non -interest bearing loans CAD - 2,958 2,938

Floating rate loans

EUR Mainly:

3m Euribor+1% 423 388 6,393 6,218 Impairment (a) (56) (34) Total 6,337 6,184 No repayment date has been set. Repayment is expected from the proceeds of the sale of the related projects financed by the loans. (a) Impairment - represents loans granted by the Company to jointly controlled entities and the Management of the Company estimates that these loans are not recoverable.

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For the year ended 31 December 2012 NOTE 10 - INVENTORIES OF HOUSING UNITS AND LAND

31 December 2012 2011 Current assets Thousands Euro Completed housing units for sale and housing units under construction 4,592 9,777 Land designated for residential projects and for sale 21,420 28,551 26,012 38,328 Write-down of inventory (a) (3,946) (7,317) Total current assets 22,066 31,011 Non-current assets (b) Land designated for residential projects and for sale 1,684 - Write-down of inventory (a) (267) - Total non-current assets 1,417 - (a) Write-down of inventory - mainly represents the adjustment of the inventories to its net realizable value when estimated lower than cost. For determining the net realizable value, the Company used the services of an external independent valuator or its estimations for the project future results (see also Notes 23 and 37). (b) Non-current asset – the management does not predict that the asset located in Romania will be sold at the normal operating cycle, thus the asset was classified as non-current inventory during the reporting period. The group intention is to develop or sell the plots and continually examining the possibilities to do so. The Group has pledged inventories having a carrying amount of EUR 13,045 thousands to secure credit facilities granted to the Group by the banks (2011: EUR 19,730 thousands). As of 31 December 2012 the amount of inventory that is carried at net realizable value is EUR 8,836 thousands (2011: EUR 13,659 thousands). The net realizable value of the inventory is based on the Company’s best estimation of the expected selling price and costs of completion less selling expenses. In determining the expected selling price of housing units the Company based its estimations on actual selling prices during the period. For determining the net realizable value of empty plots, in most cases, the Company uses the services of an external, independent valuation companies, having appropriate, recognized professional qualifications and recent experience in the location and category of the inventory being valued (see Note 37(3)). Inventories includes an amount of EUR 8,993 thousands which relates to the part of the plot in Serbia and planned for developing of residential units, this part of plot, was valued by an independent valuer (“CBRE d.o.o”) which estimated its fair value at the amount of EUR 24,500 thousands as of 31 December 2012.

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NOTE 11 - INVESTMENT PROPERTY

The movements of the investment property balances were as follows: 2012 2011 Thousands Euro Balance at 1 January 21,100 26,850 Classifications for held for sale (see Note 35) - (4,139) Currency translation adjustments (1,717) (232) Change in fair value 1,617 (1,379)

Balance at 31 December 21,000 21,100

As of 31 December 2012 the Group holds one plot in Serbia for purposes of commercial development. The Group decided to treat this asset as investment property because the Group’s intention was to hold the property for long term, for capital appreciation or rental. In estimating the property value in Serbia using the residual method, the appraiser estimated an expected selling price of the completed development based on external evidence such as current prices for similar developed properties in a similar location and condition adjusted for future price changes. The cost of development was also estimated based on construction projections by the Group and market estimates of construction costs taking into consideration a developer's profit of 17.42%. Under the residual method the fair value of the land is calculated as the difference between the estimated selling price of the development and the estimated cost of construction of the commercial structures less the developer's profit. Information regarding ownership rights for investment property:

Amounts recognised in the profit or loss: (a)

(a) Includes also the results of the investment property which is classified under “held for sale”, see Note 35.

31 December End of the lease 2012 2011 period (in years) Thousands Euro Leased property 93 21,000 21,100 Total 21,000 21,100

For the year ended 31 December 2012 2011 Thousands Euro Rental income 1 8 Operating expenses 70 513

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NOTE 12 - PROPERTY AND EQUIPMENT

Furniture, office equipment and other

assets Thousands Euro Cost Balance at 1 January 2011 359 Additions 6 Disposals (36) Disposal of subsidiaries (a) (10) Balance at 31 December 2011 319 Additions 9 Disposals (86) Balance at 31 December 2012 242

Accumulated depreciation Balance at 1 January 2011 292 Depreciation for the year 19 Disposals (22) Disposal of subsidiaries (a) (10) Balance at 31 December 2011 279 Depreciation for the year 35 Disposals (86) Balance at 31 December 2012 228 Carrying amounts At 1 January 2011 67 At 31 December 2011 40

At 31 December 2012 14

(a) See Note 34.a

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NOTE 13 - DEFERRED TAX ASSETS AND LIABILITIES The following are the deferred tax assets and liabilities recognized by the Group before off- sets, and the movements thereon, during the current and prior reporting periods:

Balance 1 January

2011

Recognized in profit or

loss Translation adjustments

Disposal of subsidiary

(a)

Balance 31 December

2011 Thousands Euro

Losses carry forward 1,296 142 4 - 1,442 Inventory (344) (52) (20) 8 (408) Loans and borrowings 7 22 (2) - 27 Investment property (2,150) 59 (19) - (2,110) Accounts receivable (14) (6) 2 - (18) Other payable 23 1 1 - 25 Finance lease liability 2,388 170 15 - 2,573 Provisions and other payables 89 148 (8) - 229 Total 1,295 484 (27) 8 1,760

Balance 1 January

2012

Recognized in profit or

loss Translation adjustments

Disposal of subsidiary

Balance 31 December

2012 Thousands Euro

Losses carry forward 1,442 735 (128) - 2,049 Inventory (408) (970) 81 - (1,297) Loans and borrowings 27 38 2 - 67 Investment property (2,110) (162) 172 - (2,100) Accounts receivable (18) 23 (1) - 4 Other payable 25 (33) - - (8) Finance lease liability 2,573 665 (219) - 3,019 Provisions and other payables 229 (171) (14) - 44 Total 1,760 125 (107) - 1,778

The following table sets out the Group's deferred tax assets and liabilities, net of off-sets:

31 December 2012 2011 Thousands Euro Deferred tax assets (non-current assets) 1,980 1,977 Deferred tax liabilities (non-current liabilities) (202) (217) Net deferred taxes 1,778 1,760 (a) See Note 34.a

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For the year ended 31 December 2012 NOTE 13 - DEFERRED TAX ASSETS AND LIABILITIES (continued)

The Group recognized deferred tax assets in the amount of EUR 2,049 thousands over losses totalling to EUR 20,375 thousands, which will expire in the following years:

2015 2016 2017 2018 2019 Total 3,943 2,869 8,037 1,660 3,866 20,375

Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of tax losses amounting to EUR 13,883 thousands as of 31 December 2012 (2011: EUR 13,026 thousands). Deferred tax assets have not been recognised in respect of losses where it is not probable that future taxable profit will be available against which the Group can utilise the benefits from the losses.

NOTE 14 - SUBSIDIARIES AND JOINT VENTURES

As at 31 December 2012 the Company holds interests in the following companies:

Jointly controlled entities:

a. Arces International B.V. (“Arces”) - holding company, Amsterdam, The Netherlands. The Company and HCEPP II Luxembourg Master S.à r.l ("Heitman") each hold 50% of Arces’ shares. Arces is considered a jointly controlled entity. During the reporting period Heitman has signed with related party agreement of selling it rights in Arces, see Note 33(3). Arces holds the following subsidiaries, each of which is wholly owned by Arces:

1. Engel Sun Palace Kft. (“Sun Palace”) - built a mix-use project with a majority of residential in

Budapest, Hungary 2. Palace Engel Dejvice s.r.o. (“Dejvice”) - through its wholly owned subsidiary Palac Engel Safranka

s.r.o. ("Safranka") - built a residential project in Prague, Czech Republic. 3. Palace Engel Estate s.r.o. (“Vokovice”) - built a residential project in Prague, Czech Republic. 4. Palace Engel Vokovice s.r.o. – is planning to build the third building in the project Vokovice in

Prague, Czech Republic. 5. Palace Engel I S.p. Z.o.o. (“Zabky”) - built a residential project in Warsaw, Poland. 6. Engel Apartmenty Emilii Plater S.p. Z.o.o. (“Emilii Plater”) - built a residential project in Warsaw,

Poland. 7. Engel HÁZ Ingatlanfejlesztő Kft. ("Haz") - inactive.

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NOTE 14 - SUBSIDIARIES AND JOINT VENTURES (continued) Jointly controlled entities: (continued)

a. continued

The following amounts are net amounts included in the Group's financial statements as a result of the proportionate consolidation of Arces:

31 December 2012 2011 Thousands Euro Current assets 5,056 6,903 Non-current assets 73 322 Current liabilities (3,832) (5,448) For the year ended 31 December 2012 2011 Thousands Euro Income 2,827 4,027 Expenses (3,113) (5,256)

The Group’s proportionate share of non-current assets of Arces includes the relevant proportion of an investment in equity accounted investees (see Note 15).

b. ENMAN B.V. ("ENMAN") - holding company, Amsterdam, The Netherlands. The Company and HEPP III Luxembourg Master S.à r.l. ("Heitman") each hold 50% of ENMAN’s shares. On July 2010 the Company signed an amendment to its joint venture agreement with Heitman according to which the Company's share in profit distributions from ENMAN are 25% and the Company's share in profit distributions from “Koncern” project in Czech Republic are 50%. ENMAN is considered a jointly controlled entity: During the reporting period Heitman has signed with related party agreement of selling it rights in Arces, see Note 33(3).

ENMAN holds the following subsidiaries, each of which is wholly owned by ENMAN: 1. Palace Engel Wilanow 1 Sp.z o.o. ("Wilanow") - plans to build a residential project in Warsaw,

Poland. 2. Engel Ingatlan Ingatlanfejlesztő Kft. ("Ingatlan") - built a residential project in Budapest, Hungary,

after the reporting period the company entered into a bankruptcy procedure, see also Note 39.a. 3. Palace Engel Veleslavin a.s. ("Veleslavin") and Palace Engel Villa s.r.o. (“Villa”) - plan to build a

residential project in Prague, Czech Republic. 4. Engel Lylia s.r.l ("Lylia") - plans to build a residential project in Bucharest, Romania. 5. Engel Crizantema s.r.l ("Crizantema") - through its wholly owned subsidiary, Engel Tulip s.r.l

("Tulip") plans to build a residential project in Bucharest, Romania. 6. Troja Gardens s.r.o ("Koncern") - plans to build a residential project in Prague, Czech Republic.

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NOTE 14 - SUBSIDIARIES AND JOINT VENTURES (continued)

Jointly controlled entities: (continued)

b. continued

The following amounts are net amounts included in the Group's financial statements as a result of the proportionate consolidation of ENMAN:

31 December 2012 2011 Thousands Euro Current assets 7,277 7,570

Non-current assets 50 192

Current liabilities (5,439) (5,406) For the year ended 31 December 2012 2011 Thousands Euro Income 426 75

Expenses (997) (2,814)

c. ECG Trust Canada Holding Trust ("ECG") – 95% interest subsidiary - a holding trust. ECG holds 20% interest in future distributions of a jointly controlled entity: Montreal Residential Holdings Master Limited Partnership ("MLP"). The remaining 80% in future distributions is owned by Lehman Brothers Real Estate Partners II ("Lehman Brothers") represented by Silverpeak Real Estate Partners (“Silverpeak”). The above mentioned shares of each investor are relevant till the initial investment returned and after that the future distributions will be 50% to each party. MLP holds (directly and indirectly) the following subsidiaries:

1. Le Quartier Quebec LP - 99.99% in the partnership rights – owns land in Montreal, Canada. 2. Trianon Sur Le Golf Quebec LP - 99.99% in the partnership rights - owns land in Montreal,

Canada. 3. Le Chagall Quebec LP - 99.99% in the partnership rights - owns land in Montreal, Canada. 4. Le Quartier Parisien Inc. - 99.99% in the share capital - beneficial title holder company, Canada 5. Trianon Sur Le Golf Inc. - 99.99% in the share capital - beneficial title holder company, Canada. 6. Le Chagall Condominiums Inc. - 99.99% in the share capital - beneficial title holder company,

Canada.

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Jointly controlled entities: (continued)

c. continued The following amounts are net amounts included in the Group's financial statements as a result of the proportionate consolidation of MLP:

31 December 2012 2011 Thousands Euro Current assets 2,020 2,010 Non-current assets - - Current liabilities (3,044) (2,966) For the year ended 31 December 2012 2011 Thousands Euro Income - - Expenses (130) (145)

Subsidiaries:

d. Palace Engel s.r.o. (“Prokopsky”) - 64% interest subsidiary - built a residential project in Prague, Czech Republic (see also Note 32.d).

e. Palace Engel Development s.r.o. (“Barandov”) - 64% interest subsidiary– built a residential project in

Prague, Czech Republic (see also Note 32.d).

f. Engel Management s.r.o. ("DA") - a wholly owned subsidiary - management company, Czech Republic.

g. Burlington Hungary Kft. ("Burlington") - a wholly owned subsidiary - management company, Hungary.

h. Turlington Ingatlanfejlesztő Kft. (“Turlington”) - a wholly owned subsidiary - management company, Hungary.

i. Engel Management S.p. Z.o.o – a wholly owned subsidiary - management company, Poland.

j. Marina Management doo. ("Marina Management") - a wholly owned subsidiary - management company,

Serbia.

k. Marina Dorcol doo. ("Marina Dorcol") - 95% interest subsidiary - plans to build mix-use project with a majority of residential in Belgrade, Serbia.

l. Engel Orchidea s.r.l ("Orchidea") - a wholly owned subsidiary - inactive (voluntary liquidation in

progress, which started during the reporting period).

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Subsidiaries: (continued)

m. Engel Rose s.r.l ("Rose") - a wholly owned subsidiary - plans to build a residential project in Bucharest, Romania, see also Note 32.c.

n. Davero Invest s.r.l ("Davero") - a wholly owned subsidiary - management company, Romania.

o. Euro-bul Ltd. ("Eurobul") - a wholly owned subsidiary - administration services company, Israel.

p. Palace Engel Troja a. s. ("Troja") - a wholly owned subsidiary, Czech Republic - inactive.

q. 6212-964 Canada Inc. ("Canada Inc.") - a wholly owned subsidiary - management company, Canada - inactive.

r. 9152-8372 Quebec Inc. ("Quebec Inc.") - a wholly owned subsidiary - management company, Canada -

inactive.

s. Wilanow 1 Developments sp.zoo – through its wholly owned subsidiary Wilanow 2 sp.zoo ("Wilanow 2"), Warsaw, Poland. During 2009 the shares were transferred to ERD (see Note 32.a), during a sale process, the companies are classified as held for sale, see also Note 35.

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NOTE 15 - INVESTMENT IN EQUITY ACCOUNTED INVESTEES

a. Arces, a jointly-controlled entity, owns a 40% associate interest in the share capital of Palace Engel Vrsovice s.r.o. ("Vrsovice”). The additional 45% and 15% are held by a former manager in the Group and a company owned by the Company's former CEO, respectively. Vrsovice, through its wholly owned subsidiary (Agentura Novy Domov 2000, spol s.r.o) built and sold units in a residential project in Prague, Czech Republic.

b. Composition of investment in equity accounted investee:

31 December

2012 2011 Thousands Euro Cost of investment 2 2 Share of profits since date of acquisition 162 162 Dividend received since date of acquisition (164) (164) Carrying value of interest in investment in equity accounted investee - -

c. Summarised financial information in respect of the associate is set out below:

31 December

2012 2011 Thousands Euro Total assets 10 27 Total liabilities (10) (27) Net assets - - Group's proportionate share of the interest in investment in equity accounted investee net assets - - For the year ended 31 December 2012 2011 Thousands Euro Results for the year - - Group's proportionate share of the interest in investment in equity accounted investee net profit for the year - -

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For the year ended 31 December 2012 NOTE 16 - INTEREST-BEARING LOANS FROM BANKS 31 December Year the loan

become over due 2012 2011

Comment Currency Interest rate Thousands Euro Secured loan 2 HUF AKK (a) 110 % + 9% 2010 1,525 1,371 Secured loan 5 CZK 3m Pribor + 3.3% 2011 121 1,289 Secured loan 4 Euro 1m Euribor + 11% 2011 771 691 Secured loan 3 Euro 3m Euribor + 5% 2012 806 752 Secured loan (b) - Euro 3m Euribor + 7.5% 2009 2,777 2,558 Secured loan 1 PLN - - - 5,933 Total interest-bearing loans from banks 6,000 12,594

(a) AKK - the appropriate latest 3 months' average yield for the one year Hungarian Treasury bill. (b) The loan is secured by guarantees provided by the indirect parent company of the Company (see also Note 33(3)).

All of the secured bank loans have been provided to individual entities and each loan has been granted in respect of a specific project. In each case, the security for the loan is a first ranking lien on the assets of the project company. The first ranking liens include: liens on rights for the land and the projects for which the loans were received and liens on rights, including by way of assignment of rights, pursuant to the agreements to which the company is a party (including establishment contracts and lease, operating and management agreements). Further, loans that these companies have received from their shareholders and/or every existing or future right of the holders of the rights in those companies are subordinated to the loans received from the banks. In addition, in most cases payments to the shareholders from the entities (including dividend payments but excluding amounts in respect of project management) are not allowed, until the bank loan has been repaid. The Company has not provided any securities in respect of the bank loans granted to its subsidiaries and jointly controlled entities, except the following case:

• ENMAN B.V., a jointly controlled entity, has provided guarantees for interest payments and costs overruns, to the bank which finances the project Ingatlan in Budapest, Hungary, the amount of the loans as of the reporting period EUR 6,099 thousands (the Company’s share is EUR 1,525 thousands). After the reporting period following the appeal of one of the entity’s creditors, a bankruptcy procedure started, see Note 39.a.

Arces International B.V., a jointly controlled entity, has an exposure in relation with the bank loans which financed the project in Gyor, Hungary in the amount of EUR 12,648 thousands (the Company’s share is EUR 6,324 thousands). The bank claims that the loans were additionally guaranteed by Arces International B.V. The company has disputed the validity of this guarantee with the bank. As well there is legal dispute between the Company and Heitman regarding the responsibility of this guarantee, however, no official legal claim has been filed by any of the parties. A relative provision was booked in the financial statements according to the management best estimation.

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NOTE 16 - INTEREST-BEARING LOANS FROM BANKS (continued)

Comments in respect of several interest-bearing loans from banks:

1. During the fourth quarter of 2009, the subsidiary, Palace Engel III Sp. z.o.o, breached its requirement to repay the bank loan, which finances the project "Krakow" in Poland, During the reporting period, a receiver was appointed by court in Poland due to the overdue bank loan in relation to Palace Engel III sp zoo (“Krakow”), a wholly owned subsidiary of the Company, which owns the Krakow project in Poland, see Note 34.c.

2. During 2010 the jointly controlled entity, Engel Ingatlan Ingatlanfejlesztő Kft. ("Ingatlan") breached

its requirement to repay a bank loan totaling EUR 6,099 thousands (the Company's share is EUR 1,525 thousands). After the reporting period following the appeal of one of the Ingatlan’s creditors, a bankruptcy procedure started, see Note 39.a.

3. During 2011, the jointly controlled entity, Engel Lylia s.r.l. ("Pipera") breached its requirement to

repay a bank loan totaling EUR 3,224 thousands (the Company's share is EUR 806 thousands). The Group is in negotiation with the financing bank in order to restructure this loan.

4. During the first quarter of 2012, the jointly controlled entity, Engel Crizantema s.r.l. ("Sisest")

breached its requirement to repay a bank loan totaling EUR 3,084 thousands (the Company's share is EUR 771 thousands). During November 2012, following the requirement to repay the loan, the lender bank started legal procedures to enforce the securities granted by the jointly controlled entity. As of 31 December 2012 the jointly controlled entity still owns the asset. The bank loan is non-recourse to the rest of the Group.

5. During the first quarter of 2011, the jointly controlled entity, Palace Engel Dejvice s.r.o. ("Dejvice")

breached its requirement to repay a bank loan totaling EUR 242 thousands (the Company's share is EUR 121 thousands). After the reporting period the bank loan was fully repaid by the jointly controlled entity.

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NOTE 17 - FINANCE LEASE LIABILITY 31 December 2012 2011 Thousands Euro Non-current liabilities Finance lease liability 18,858 21,685 Total Non-current liabilities 18,858 21,685 Current liabilities Current portion of finance lease liability 4,949 4,041 Over-due amounts due to a municipality (a) 6,383 1,910 Total current liabilities 11,332 5,951 Total 30,190 27,636

(a) As of 31 December 2012 the amount represents overdue installments to the municipality in Serbia according to the lease agreement. The balance consists mainly of: overdue monthly installments, an amount which is under disagreement with the municipality, overdue installments according to the lease agreements and penalty interest. The amounts carry an average penalty interest of 1.5% per month. Terms and conditions of outstanding financial lease liabilities were as follows:

31 December 2012 2011

Thousands Euro Nominal Year of Face Carrying Face Carrying Currency interest rate maturity value amount value amount Finance lease liability

Serbian Dinar 6.34% 2012-2105 71,831 30,190 69,197 27,636

The financial lease liability relates to the project in Serbia where the Group is obliged to pay monthly rent for land for 99 years. Following the adoption of the changes in IAS 17, the Group classified the lease agreement as finance lease. Finance lease liability is payable as follows:

Future minimum lease

payments Interest

Present value of minimum lease

payments 2012 2011 2012 2011 2012 2011 Thousands Euro

Less than one year 11,499 6,068 167 117 11,332 5,951 Between one and five years 14,687 18,728 1,929 2,911 12,758 15,817 More than five years 45,645 44,401 39,545 38,533 6,100 5,868 Total 71,831 69,197 41,641 41,561 30,190 27,636

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NOTE 17 - FINANCE LEASE LIABILITY (continued) The value of the finance lease and its payments are adjusted on a monthly basis by the local index of retail prices in Belgrade, Serbia. The increases of the local index of retail prices in Belgrade, Serbia in 2012 and 2011 were 13% and 7.5% respectively. As of 31 December 2012, the Group breached its requirements to pay total amount of EUR 6.4 million which were determine by the new lease agreement. After the reporting date the Company breached is requirements to pay an additional amount of EUR 1.4 million. The Group is in the process of negotiation to restructure the liability.

NOTE 18 - LOANS AND AMOUNTS DUE TO RELATED PARTIES AND JOINT VENTURE PARTNERS

31 December 2012 2011 Currency Thousands Euro Payable to related parties: Engel Resources and Development Ltd.(a) NIS 21,575 18,924 GBES Ltd.(b) EUR 361 262 Jointly controlled entities (c) EUR 376 263 Payable to joint venture partners and other: Heitman Fund (d) EUR 2,171 2,445 Lehman Brothers (e) CAD 2,898 2,769 Total 27,381 24,663

No repayment dates have been set with regard to the above loans and advances, except for the loans from Engel Resources and Development Ltd. which are due till 31 March 2013 and the loans due to GBES Ltd. which is due till 30 April 2013. All the loans are expected to be restructured or to be settled by proceeds generated from sales of the development projects to which these related to. As such, these are classified as current liabilities. For more details about the related parties transactions, see also Note 33. (a) The loans were received from Engel Resources and Development Ltd (“ERD”).

The amount of EUR 19,996 thousands bears interest of 6% per annum and linked to an annual change in Israeli CPI and the amount of EUR 1,579 thousands bears interest of 6.5% per annum. The loans are secured by the following guarantees (see also Note 33(3)): • The shares of Wilanow 1 Development sp.zoo. (which controls Willanow 2 - a project in Poland. • Pledge over the shares of Marina Dorcol D.o.o in the total value of EUR 20.3 million. • The future proceeds generated from its Canadian project. The total amount will be twice the loans

granted by ERD since the beginning of 2012. (b) The loan bears interest of 6% per annum. (c) The loans bear mainly interest of 3 month Euribor + 1% per annum. (d) The balance is comprised of two loans:

• EUR 485 thousands - bears interest of 15% per annum. • EUR 1,686 thousands - bears interest of 8% per annum.

(e) The loans bear no interest.

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NOTE 19 - OTHER PAYABLES 31 December 2012 2011 Thousands Euro Advances from customers 382 574 VAT payable 228 136 Provision for expected costs of completion of housing units 350 511 Retention from constructors 222 314 Accruals 301 168 Payroll and related expenses 220 179 Exposure of jointly controlled entity to liquidated company 1,622 1,622 Other 36 27 Total 3,361 3,531

NOTE 20 – PROVISIONS

2012 2011 Thousands Euro Balance at 1 January 1,581 2,177 Provisions made during the year 13 285 Provisions used during the year (111) (766) Disposal of subsidiary (a) (96) - Provisions reversed during the year (174) (37) Translation adjustment - (78) Balance at 31 December 1,213 1,581

(a) See Note 34.d.

a. During 2007, two legal claims were filed against Engel Sun Palace Kft. , a wholly owned subsidiary of Arces: 1. On 3 April 2007 the subsidiary was sued by a former constructor. The constructor sued for return of

the entire bank guarantee which was forfeited by the subsidiary, in amount of HUF 1,475 million (approximately EUR 5.6 million).

2. On 27 July 2007 the subsidiary received a notice from the bank claiming an amount of HUF 145 million (approximately EUR 549 thousands). The claim relates to an alleged breach of the original bank loan agreement.

As a result of series of financial transactions initiated by the management, the Company succeeded to reduce the total amount of the above two claims to EUR 1.2 million to be paid in several instalments, during the reporting period the claims were fully settled.

b. The jointly controlled entities in Canada and its parent company are in the legal proceeding with a minority shareholder who was employed as technical manager for the Canadian projects and was dismissed by the Company. The amount of the claim is CAD 13 million (approximately EUR 7.6 million). According to the court decision, disposal of assets in Canada will require the approval of the court. Provision for this claim was initially recognised by the Group in its 2007 financial statements.

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NOTE 20 - PROVISIONS (continued)

c. By the end of 2008, the Company and the parent company were sued for brokerage fee and legal services in the amount of NIS 10 million (approximately EUR 1.9 million) in relation with the plot in Gyor, Hungary. Provision for this claim was initially recognised by the Group in its 2008 and 2009 financial statements. During the reporting period the Company reached a compensation agreement with the plaintiff. After the reporting period the compensation agreement was fully settled.

d. During 2010 the Company recognized provisions for future expected defects in the project Zabki in Poland, as of 31 December 2012; in the amount of EUR 458 thousands (the Company part EUR 229 thousands). During 2010 and 2011, part of the residents in the project appealed to the local court. During 2011 part of the claims were settled by the subsidiary.

e. During 2011 a former main constructor of Zabki project (“Zabki”), a wholly owned subsidiary of Arces, has filed a claim for amount of EUR 0.2 million for returning bank guarantees. The Company has reached a settlement with the plaintiff and as a result a provision for this claim was recognised by the Group in its financial statements. During the reporting period, the Company breached the agreed settlement; as a result the plaintiff put a lien on Zabki’s bank accounts. The Company estimated provisions in respect of these legal claims, based on the management's estimations following consulting its legal advisors.

NOTE 21 - EQUITY

31 December 2011 and 2012 Thousands Euro

Authorised: 120,000,000 ordinary shares of par value EUR 0.01 each 1,200 Issued and fully paid: At the beginning of the year (87,777,777 ordinary shares) 878 At the end of the year (87,777,777 ordinary shares) 878 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 Company. All shares rank equally with regard to the Company’s residual assets. On 15 December 2005 the Company initially offered its shares in the AIM stock exchange market in London ("the IPO"). The proceeds from the IPO were 30,000,000 British Pounds and 27,777,778 shares were issued, accordingly EUR 39,298 thousands were recorded as share premium. Dividends

Dividends are declarable based on the retained earnings presented in the Company's consolidated financial statements prepared in accordance with The Netherlands Civil Code and not from the retained earnings presented in these consolidated financial statements.

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For the year ended 31 December 2012 NOTE 22 - REVENUES


2012 2011 Thousands Euro

Sale of housing units 2,403 4,047 Project management fees 84 29 Rent 4 12 Other 103 43 Total 2,594 4,131

NOTE 23 - WRITE-DOWN OF INVENTORY


2012 2011 Thousands Euro

Poland 21 236 Hungary - 408 Romania 473 308 Czech Republic 4 1,006 Total 498 1,958

Write down of inventory to net realizable value was preformed based on independent valuers reports. Refer also to Note 37 regarding critical accounting estimations.

NOTE 24 - COST OF SALES


2012 2011

Thousands Euro

Cost of housing units 2,229 3,739 Payroll and related expenses 291 366 Depreciation and amortization 90 167 Professional services 117 60 Maintenance 26 638 Other 113 133 Total 2,866 5,103

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NOTE 25 - OTHER INCOMES (LOSSES) For the year ended 31 December 2012 2011 Thousands Euro Income due to de-recognition of jointly controlled entities (a) 2,064 - Loss due to de-recognition of jointly controlled entities (b) - (88) Total 2,064 (88)

(a) See Note 34.c and 34.d (b) See Notes 34.a and 34.b

NOTE 26 - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


2012 2011

Thousands Euro

Selling 39 70 Payroll and related expenses 643 652 Professional services 761 838 Travel and accommodation 85 77 Provisions for legal claims (see Note 20) (161) 248 Maintenance 232 252 Depreciation 23 1 Taxes 134 80 Other 13 8 Total 1,769 2,226

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For the year ended 31 December 2012 NOTE 27 - NET FINANCE COSTS


2012 2011

Thousands Euro

Finance income: (3) (8) Interest earned on restricted bank deposits (292) (276) Interest on loans to related parties (295) (284) Total Finance costs: Interest on interest bearing loans from banks 571 1,169 Interest on loans from related parties 1,681 1,681 Impairment loss on loans given to jointly controlled entities 64 - Interest on loans from others - 5 Adjustment of finance lease for inflation 3,556 1,986 Interest on finance lease 1,303 1,554 Total 7,175 6,395 Net foreign exchange losses 939 517 Net finance costs recognized in profit or loss 7,819 6,628

NOTE 28 - TAXES


2012 2011

Thousands Euro

Current year 147 116 Deferred tax (125) (484) Adjustment for prior years (48) (16) Total tax benefits (26) (384)

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NOTE 28 - TAXES (continued) Reconciliation of statutory to effective tax rate:

For the year ended 31 December 2012 2011 Thousands Euro Loss before tax (6,677) (13,251) Statutory income tax rate in the Netherlands 25% 25% Total theoretical tax benefits (1,669) (3,313) Changes in tax burden as a result of: Effect of tax rates in foreign jurisdictions 991 1,194 Current year losses for which no deferred tax asset is recognized 393 1,257 De-recognition of previously recognized deferred tax assets 453 297 Over provided in prior years (48) (16) Other differences, net (146) 197 Total tax benefits (26) (384)

The main tax laws to which the Group companies are subject in their countries of residence are as follows:

a. The Netherlands Companies resident in the Netherlands are subject to corporate income tax at the general rate of 25%. The first EUR 200,000 of profits is taxed at a rate of 20%. Tax losses may be carried back for one year and carried forward for nine years. As part of the measures to combat the consequences of the economic crisis, taxpayers can elect for an extension of the loss carry back period to three years (instead of one year). The election is only available for losses suffered in the taxable years 2009, 2010 and 2011. If a taxpayer makes use of the election, two additional limitations apply: (i) the loss carry forward period for the taxable years 2009, 2010 and/or 2011 will be limited to a maximum of six years (instead of nine years); and (ii) the maximum amount of loss that can be carried back to the second and third year preceding the taxable year will be limited to EUR 10 million per year. The amount of loss that can be carried back to the year directly preceding the taxable year for which the election is made will remain unrestricted. As of the taxable year 2012, the election for extended loss carry back is not available anymore and the regular loss carry back and carry forward limitations apply. Under the participation exemption rules, income (including dividends and capital gains) derived by Netherlands companies in respect of qualifying investments in the nominal paid up share capital of resident or non-resident investee companies, is exempt from Netherlands corporate income tax provided the conditions as set under these rules have been satisfied. Such conditions require, among others, a minimum percentage ownership interest in the investee company and require the investee company to satisfy at least one of the following tests:

• Motive Test, the investee company is not held as passive investment; • Tax Test, the investee company is taxed locally at an effective rate of at least 10% (calculated based on

Dutch tax accounting standards); • Asset Test, the investee company owns (directly and indirectly) less than 50% low taxed passive assets.

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NOTE 28 - TAXES (continued) b. Hungary The corporation tax rate in Hungary is 10/19% in 2012 (the first HUF 500 million is taxed at 10%). (2011: 10/19%). Since 2007 capital gains can be considered exempted income provided that certain criteria are fulfilled. Losses can be carried forward indefinitely. As of 2012 the losses carry forward rules changed significantly (e.g: transformation, change in ownership limitation implemented and only of 50% of the profit of the current year could be covered by past losses). Losses incurred before 2005 can be carried forward for five years, subject to certain limitations. c. Czech Republic The corporation tax rate in the Czech Republic is 19 % in 2012. Capital gain could be tax exempted under certain circumstances. Tax losses can be carried forward up to five years to offset future taxable income (previously seven years), under certain circumstance (e.g no significant change in the business, ownership). Dividends paid out of net income are subject to a withholding tax of 15%, subject to the relevant double taxation treaty or EU regulations.

d. Poland The corporation tax in Poland (including capital gains) is 19% in 2012 (2011: 19%).Tax losses can be carried forward for five years and only 50% of a the current year profit could be cover by past losses. Dividends paid out of net income are subject to a withholding tax of 19%, subject to the relevant double taxation treaty or EU regulations. e. Canada

The federal corporate tax rate of the subsidiaries incorporated in Canada (including capital gains) is 15% in 2012 (2011: 16.5%). The combined corporate and provincial tax rate is 26.9% (2011: 28.4%). Non-capital tax losses can be carried back three years and carried forward up to 20 years for losses arising in 2006 and later, 10 years for losses arising in taxation years ending after 22 March, 2004 and before 2006, 7 years for losses arising in taxation years ending before 23 March, 2004. Capital tax losses can be carried back three years and carried forward indefinitely against other capital gains. Dividends paid out of net income are subject to a withholding tax of 25%, subject to the relevant double taxation treaty. f. Romania The corporation tax in Romania (including capital gains) is 16% in 2012 (2011: 16%). Dividends paid out of net income are subject to a withholding tax of 16%, subject to the relevant double taxation treaty or EU regulations. Tax losses can be carried forward and deducted from taxable profits in the following 7-year period (the carry forward period for losses recorded up to 31 December 2008 is 5 years), on a first-in-first-out basis. g. Serbia Corporate income tax is levied at a rate of 10% in 2012 (2011: 10%). Capital gains are taxable at the rate of 10%. Losses may be carried forward for 5 years (capital loss could be carried forward separately), losses generated in the period 2003-2009 may be carried forward for 10 years. No carry-back of losses is permitted. Dividends paid outside the country are subject to a withholding tax of 20% subject to the relevant double taxation treaty.

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NOTE 29 - LOSS PER SHARE

The calculation of basic loss per share attributable to the ordinary shareholders of the Company is based on the following data: For the year ended 31 December 2012 2011 Thousands Euro Loss attributable to ordinary shareholders Loss for the purposes of basic and diluted losses per share for the year, attributable to owners of the Company

(6,651)

(12,867)

31 December 2011 and 2012 Weighted average number of ordinary shares (in thousands of shares) Issued ordinary shares at 1 January 87,778 Changes during the year - Weighted average number of ordinary and diluted shares at 31 December 87,778

There are no dilutive factors.

NOTE 30 - FINANCIAL INSTRUMENTS

a. Liquidity risk

The table below summarizes the maturity profile of the Group's financial liabilities at 31 December 2012 and 31 December 2011 based on contractual undiscounted cash flow.

Year ended 31 December 2012 Less than 1 1-2 3-5 Above 5 Total Carrying year years years years amount amount Thousands Euro Interest-bearing loans from banks 6,244 - - - 6,244 6,000 Loans and amounts due to related parties and others 27,381 - - - 27,381 27,381 Trade payables 1,019 - - - 1,019 1,019 Other liabilities 2,629 - - - 2,629 2,629 Finance lease liability 11,499 2,176 12,511 45,645 71,831 30,190 Total 48,772 2,176 12,511 45,645 109,104 67,219

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NOTE 30 - FINANCIAL INSTRUMENTS (continued)

a. Liquidity risk (continued)

Year ended 31 December 2011 Less than 1 1-2 3-5 Above 5 Total Carrying year years years years amount amount Thousands Euro Interest-bearing loans from banks 13,043 - - - 13,043 12,594 Loans and amounts due to related parties and others 24,663 - - - 24,663 24,663 Trade payables 1,262 - - - 1,262 1,262 Other liabilities 2,446 - - - 2,446 2,446 Finance lease liability 6,068 4,971 13,757 44,401 69,197 27,636 Total 47,482 4,971 13,757 44,401 110,611 68,601

b. Currency and inflation risk

The tables below summarise the foreign exchange exposure on the net monetary position of each currency that is denominated in a currency other than the functional currency, expressed in the Group’s presentation currency:

Functional currency – net exposure

Serbian

Dinar Hungarian

Forint Polish Zloty

Czech Crown

Romanian Lei

New Israeli Shekel

Thousands Euro 31 December 2012 (18,727) (2,453) (4,143) (5,744) (8,185) (21,113) 31 December 2011 (17,989) (2,377) (7,329) (4,426) (8,109) (18,857)

Additionally the Company has exposure to the changes in the local retail index in Belgrade, Serbia on a finance lease liability amounted to EUR 30,190 thousands as at 31 December 2012 (2011: EUR 27,636 thousands). Sensitivity analysis: The following table demonstrates the post-tax impact of:

• 9% strengthening of the Euro compared with Serbian Dinar (CSD) (2011:9%) • 10% strengthening of the Euro compared with Hungarian Forint (HUF) (2011:11%) • 8% strengthening of the Euro compared with Polish Zloty (PLN) (2011:9%) • 6% strengthening of the Euro compared with Czech Crown (CZK) (2011: 6%) • 4% strengthening of the Euro compared with Romanian Lei (RON) (2011:5%) • 5% strengthening of the Euro compared with Canadian Dollar (CAD) (2011:10%) • 8% strengthening of the Euro compared with New Israeli Shekel (NIS) (2011:10%) • 10% strengthening of the Serbian index (2011:5%)

With all other variables held constant (the impact on the Group's equity is the same).

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For the year ended 31 December 2012 NOTE 30 - FINANCIAL INSTRUMENTS (continued)

b. Currency and inflation risk (continued)


2012 2011

Increase in currency rate/ Serbian Index

Effect on post-tax profit

Increase in currency rate/ Serbian Index


Euro vs. CSD 9% (1,517) 9% (1,457) Euro vs. HUF 10% (199) 11% (212) Euro vs. PLN 8% (268) 9% (534) Euro vs. CZK 6% (279) 6% (215) Euro vs. RON 4% (275) 5% (341) Euro vs. NIS 8% (1,267) 10% (1,414) Euro vs. Serbian index 10% (2,717) 5% (1,244)

At 31 December 2012, a 4% - 10% weakening of the Euro and/or 10% weakening of the Serbian index would have had the equal, but opposite effect on the post-tax profit to the amount shown above on the basis that all other variables remain constant.

c. Interest rate risk The following table sets out the carrying amount of the Group's financial instruments that are exposed to interest rate risk: 31 December 2012 2011 Thousands Euro Fixed rate instruments Financial assets Cash and cash equivalents 296 959 Loans to related parties and other 5,970 5,830 6,266 6,789 Financial liabilities Loans and amounts due to related parties and other 7,009 6,953 Finance lease liability 30,190 27,636 37,199 34,589 Variable rate instruments Financial assets Restricted bank deposits 28 53 Loans to related parties and other 367 354 395 407 Financial liabilities Interest-bearing loans from banks 6,000 12,594 Loans and amounts due to related parties and other 20,372 17,710 26,372 30,304

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NOTE 30 - FINANCIAL INSTRUMENTS (continued)

c. Interest rate risk (continued)

The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group's results before tax (through the impact on floating rate borrowings). There is no impact on the Group's equity, except of the profit and loss.


2012 2011

Increase in basis points


Increase in basis points


Variable rate interest of HUF 54 (7) 53 (6) Variable rate interest of CZK 14 - 10 (1) Variable rate interest of PLN 21 - 33 (16) Variable rate interest of RON 283 (3) 227 - Variable rate interest of EUR 5 (2) 20 (6) Variable rate interest of NIS 30 (45) 48 (63) At 31 December 2012, a decrease in 5 till 283 basis points would have had the equal but opposite effect to the amount shown above on the basis that all other variables remain constant. Fair values versus carrying amounts The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows: 31 December 2012 2011 Carrying Fair Carrying Fair amount value amount value Thousands Euro

Financial assets Cash and cash equivalents 296 296 959 959 Restricted bank deposits and cash in escrow 261 261 68 68 Trade receivables 10 10 209 209 Fixed rate loans to related parties and other 5,970 4,567 5,830 4,646 Floating rate loans to related parties and other 367 367 354 354 Total financial assets 6,904 5,501 7,420 6,236

Financial liabilities Floating rate interest-bearing loans from banks 6,000 6,244 12,594 13,043 Trade payables 1,019 1,019 1,262 1,262 Fixed rate loans due to related parties and other 7,009 6,146 6,953 6,226 Floating rate loans due to related parties and other 20,372 20,724 17,710 18,026 Finance lease liability 30,190 29,253 27,636 24,840 Total financial liabilities 64,590 63,386 66,155 63,397 The fair value floating rate interest-bearing loans from banks notes has been calculated using market interest rate 4.18% to 9.25% depending on the specific loan conditions (securities provided, currency, etc). The fair value of short term receivables and payables expected to be settled within 12 months was based on their carrying amounts. The fair value of the finance lease liability has been calculated using market interest rate of 7%.

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For the year ended 31 December 2012 NOTE 31- CONTINGENT LIABILITIES AND COMMITMENTS

Warranties and guarantees Most of the Group entities are engaged in the construction and sale of residential housing units. The entities provide and/or will provide their customers with performance and quality guarantees in accordance with the Czech, Polish, Romanian, Serbian, and Hungarian civil codes. The entities require from the sub-contractors building the housing units, performance and quality guarantees in the form of bank guarantees and of funds held in retention.

NOTE 32 - SIGNIFICANT EVENTS DURING THE PERIOD Poland

a. During December 2009 the Company transferred to ERD its entire shareholding in Wilanow 1 Development sp zoo (“Wilanow 2”), the company which owns the commercial plot in Wilanow (see Note 33(3)). During the reporting period ERD has signed a preliminary agreement to sell the plot of Wilanow 2 in Poland for a total consideration of EUR 4.14 million, see also Note 35. The Group has recognized a loss of approximately EUR 0.8 million in the financial statements for the year ended at 31 December 2011. After reporting period the final sale agreement was signed, the net proceeds of the sale were deducted from the total debt of the Group towards ERD. Hungary

b. During 2011, a liquidator was appointed following a court decision in regards to a legal procedure in

Hungary in relation with the jointly controlled entity “Engel Park Kft.” (“Engel Park”). As a consequence the Company has ceased to consolidate the jointly controlled entity Engel Park in its consolidated financial statements, see Note 34.a. Romania

c. During 2011, the court in Israel accepted the plaintiff's request and instructed the Company to prevent any further dispositions of the plot Bragadiro located in Bucharest, Romania or of the subsidiary Engel Rose s.r.l (a wholly owned subsidiary) in regards to the legal claim of a former service provider of the Company. Provision on behalf of this claim was initially recognized by the Group in its 2010 financial statements. During 2011 the Company signed a compensation agreement with the former service provider and the provision was updated respectively, the compensation was fully paid during the reporting period. Czech Republic

d. During 2011, the Group started a process of purchasing the shares held by the minority (Immoconsult Leasinggeselschaft m.b.H) of its two subsidiaries: Palace Engel S.r.o (Prokopsky) and Palace Engel Development S.r.o (Barandov) for the total amount of EUR 7.5 thousands, following this purchase the Group will increase its holding in the above mentioned subsidiaries to 95%. The process was not finalized by 31 December 2012.

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NOTE 32 - SIGNIFICANT EVENTS DURING THE PERIOD (continued)

The Netherlands

e. During the reporting period one of the subsidiary’s previous contractors issued a lien against a jointly controlled entity bank account, the Company share in the lien account is EUR 0.2 million. The company acts to remove the lien.

Bulgaria

f. During the reporting period and following the initiation of a liquidation procedure, the Group has re-examine the existence of control at a jointly controlled entity E.G. Panorama EOOD (“Panorama”). During 2009, the lending bank to Panorama, appointed a liquidator to take possession of the Panorama project in Bulgaria. The loan was non- recourse to rest of the Company. As a consequence the Company has ceased to consolidate the jointly controlled entity in its consolidated financial report. The Group recognized a profit on the book value of its investment in Panorama as a result of this appointment, in the amount of EUR 0.3 million in the statement of profit and loss under “other incomes (losses)”, see Note 34.d.

NOTE 33 - RELATED PARTIES 1. General

As of 31 December 2012, the main shareholder of the Company is Engel General Developers Ltd. (incorporated in Israel), ("EGD") which owns, as of 31 December 2012, 68.35% of the Company's shares. On 7 July 2010, GBES Ltd. (a company incorporated in Cyprus) has signed an agreement with Engel Resources and Development Ltd. ("ERD”), the parent company of Engel General Developers Ltd., and with EGD, to invest capital of approximately EUR 9.2 million for 53% of the enlarged share capital of ERD (part of which will be given as loan until the receipt of court approval) and to provide an additional credit line of approximately EUR 10.2 million to ERD. The agreement was approved by the bond holders of ERD and was subjected to the approval of bond holders in Engel Europe Ltd. ("EEL"), which is the parent company of ERD and to the approval of the district Court of Tel Aviv, Israel. On 30 June 2011 the district court in Israel approved ERD request for the debt settlement and the investment agreement by the company GBES Ltd. During 2011 the agreement between GBES and ERD, has been completed, following which GBES holds 53% of the issued share capital of ERD. ERD owns 100% of the issued share capital of EGD, which in turn owns 68.35% of the issued share capital of the Company. GBES therefore has an aggregate equitable interest of 36.25% of the issued share capital in the Company.

Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.

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NOTE 33 - RELATED PARTIES (continued) 2. Directors

As of 31 December 2012, the Company has 4 directors (31 December 2011: 3 directors). During the reporting period one of the Company’s directors has resigned from his position and two new directors were appointed. The annual salary cost and expenses return of the directors is as follow: For the year ended 31 December 2012 2011 Name Position Thousands Euro Gad Raveh (a,d) CEO and executive director 240 - Moshe Naveh (d) Executive director - - Terry Roydon Non executive director 26 25 Marius van Eibergen Santhagens (b) Non executive director 28 31 Micha Shkedi (c) Non executive director 11 24 Total 305 80

(a) The fees above include payments as CEO of the Group. (b) The cost above includes VAT. (c) Resigned from his position during the reporting period. (d) Appointed as director during the reporting period. Excluding the amounts above there are not any additional employee benefits, requirements to provide post-employment benefits, termination benefits etc. in relation to the Company’s directors.

3. Related party transactions

Securities provided by parent company and related parties

(a) As of 31 December 2012, bank loan in the amount of EUR 2,777 thousands (2011: EUR 2,558

thousands), granted to a wholly controlled entity Euro-bul Ltd., is secured by guarantees provided by ERD.

(b) As part of the agreement with ERD, the Company agreed to pledge two assets (a plot in Wilanow district in Warsaw, Poland designated for commercial purposes and Marina Dorcol in Serbia) in favor of ERD. The Company has not been able to provide the pledge over the Wilanow commercial project in Poland as security within the required time scale, and therefore agreed in December 2009 to transfer to ERD its entire shareholding in Wilanow 1 Development s.p z.o.o (“Wilanow”), the company which owns the Wilanow plot. As of 31 December 2012 the Company included Wilanow in its consolidated financial statements, as significant risks and rewards related to the ownership of the investment property held by Wilanow were not yet transferred to ERD.

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For the year ended 31 December 2012 NOTE 33 - RELATED PARTIES (continued)

3. Related party transactions (continued)

Securities provided by parent company and related parties (continued)

(c) As part of the agreement with ERD, the Company agreed to pledge the shares of Marina Dorcol D.o.o

in the value of EUR 20.3 million to ERD and EUR 1.2 million to GBES. During the reporting period the Company removed the pledge of the EUR 1.2 million which was granted to GBES Ltd.

(d) During the reporting period the Company agreed to pledge the future proceeds generated from its Canadian project as security for the loans drawn down since the beginning of the year to date and any future loans from ERD. The total amount pledged to ERD will be twice the total amount of such loans.

Support due to the Company’s financial situation In order to manage its financial situation the Company requested ERD to provide additional financial support to assist the Company to settle its immediate liabilities. During the reporting period ERD provided several bridge loans in the total amount of approximately EUR 1.1 million. After the reporting period the Company received additional loans from ERD in the total amount of EUR 0.3 million. During the reporting period the Company received loan from GBES in the total amount of EUR 80 thousands, the loans carries a yearly interest of 6%. Transactions of related party in regards to joint venture companies During the reporting period, GBES Limited has reached agreement with funds managed by Heitman LLC (“Heitman”) to acquire all of Heitman’s interests in Arces International B.V. (“Arces”) and ENMAN B.V. (“ENMAN”). Arces and ENMAN are both joint venture companies currently jointly owned by Heitman and by the Company. The aggregate consideration for the two acquisitions will be paid in installments and it will include the assignment of shareholder loans provided by Heitman to the joint venture companies. Completion of both acquisitions is subject to a number of precedent conditions, and is agreed to take place on or before 30 June 2012. Some of the precedent conditions will require the consent of the Company. During the reporting period an amount of EUR 100 thousands was paid by GBES to Heitman in accordance to the above agreement. According to the information provided to the Company, as of the signature date of the financial statements, the parties did not fulfill the above sale agreement.

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For the year ended 31 December 2012 NOTE 33 - RELATED PARTIES (continued)

4. Trading transactions

The following trading transactions and balances with related parties are included in the financial statements: For the year ended 31 December 2012 2011 Thousands Euro Income statement Interest payable to Engel Resources and Development Ltd. 1,460 1,462 Interest payable to GBES Ltd. 19 2 Interest payable on loans from jointly controlled entities 202 217 Interest due on loans to jointly controlled entities (292) (276) Total 1,389 1,405 31 December 2012 2011 Thousands Euro Statement of financial position Loans to jointly controlled entities (see Note 9) 6,337 6,184 Due to Engel Resources and Development Ltd. (see Note 18) (21,575) (18,924) Due to GBES Ltd. (see Note 18) (361) (262) Loans from jointly controlled entities (see Note 18) (376) (263) Total (15,975) (13,265)

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NOTE 34 - DISPOSAL OF SUBSIDIARIES During the reporting periods the Group started to liquidate, sell and transfer several subsidiaries: Hungary

a. During 2011, a liquidator was appointed following a court decision in regard to a legal procedure in Hungary in relation with the jointly controlled entity “Engel Park Kft.” (“Engel Park”). As a consequence the Company has ceased to consolidate the jointly controlled entity Engel Park in its consolidated financial statements. The Group recognized a loss on the disposal in the amount of EUR 75 thousands in the consolidated income statement under “other incomes (losses)”. The disposal due to loss of control in the jointly controlled entity had the following effect on the Group’s assets and liabilities:

Poland

b. During 2011 the Company liquidated the companies Palace Engel Mokotow sp. zoo and Palace Engel II

sp.zoo. The Group recognized a loss on the disposal in the amount of EUR 13 thousands in the consolidated income statement under “other incomes (losses)”. The disposal had the following effect on the Group’s assets and liabilities:

Thousands Euro Prepayments and other assets 1 Short term loans to related parties 3 Inventories of housing units 86 Short term loans from related parties (1) Trade accounts payable (5) Deferred tax liabilities (8) Other payables (1) Net identifiable assets and liabilities disposed 75 Loss on disposal (75) Net cash (outflow) inflow -

Thousands Euro Loans to related parties 13 Net identifiable assets and liabilities disposed 13 Loss on disposal (13) Net cash (outflow) inflow -

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NOTE 34 - DISPOSAL OF SUBSIDIARIES (continued)

Poland (continued)

c. During the reporting period, a receiver was appointed by court in Poland due to the overdue bank loan in relation to Palace Engel III sp zoo (“Krakow”), a wholly owned subsidiary of the Company, which owns the Krakow project in Poland. The bank loan is non-recourse to the rest of the Group. As a consequence the Company has ceased to consolidate the entity in its consolidated financial report. The Group recognized a profit on the book value of its investment in Krakow as a result of this appointment, in the amount of EUR 1.8 million in the statement of profit and loss under “other incomes (losses)”. The disposal due to loss of control in the wholly owned subsidiary had the following effect on the Group’s assets and liabilities:

d. During the reporting period and following the initiation of a liquidation procedure, the Group has re-examine the existence of control at a jointly controlled entity E.G. Panorama EOOD (“Panorama”). As a consequence the Company has ceased to consolidate the jointly controlled entity in its consolidated financial report. The Group recognized a profit on the book value of its investment in Panorama as a result of this appointment, in the amount of EUR 0.3 million in the statement of profit and loss under “other incomes (losses)”.

The disposal due to loss of control in the jointly controlled entity had the following effect on the Group’s assets and liabilities:

Thousands Euro Prepayments and other accounts 46 Inventories of housing units 4,680 Interest-bearing loans from banks (6,320) Trade payables (177) Net identifiable liabilities disposed (1,771) Income on disposal 1,771 Cash (outflow) inflow -

Thousands Euro Cash and cash equivalents 2 Prepayments and other accounts 1 Loans and amounts due to related parties (18) Trade payables (24) Other payables (158) Provisions (96) Net identifiable liabilities disposed (293) Income on disposal 293 Cash and cash equivalents disposal (2) Cash outflow (2)

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For the year ended 31 December 2012 NOTE 35 - ASSET AND LIABILITIES IN DISPOSAL HELD FOR SALE

During 2011 ERD has signed a preliminary agreement to sell the plot of Wilanow 2 in Poland for a total consideration of EUR 4.14 million. The Group has recognized a loss of approximately EUR 0.8 million in the financial statements for the year ended at 31 December 2011. The net proceeds of the sale will be deducted from the total debt of the Group towards ERD. After the reporting period, the final sale agreement has been signed and a total amount of EUR 2.2 million was transferred to ERD. As of 31 December 2012 and 31 December 2011 the disposed company comprised the following assets and liabilities:

31 December

2012 2011

Thousands Euro

Cash and cash equivalents 88 13 Trade receivables - 1 Prepayments and other assets 2 - Investment property 4,139 4,139 Total assets held for sale 4,229 4,153

Trade payables 549 26 Other payables 1,244 1,479 Total liabilities held for sale 1,793 1,505

The fair value of the property in Poland was determined based on the preliminary agreement which was signed during the reporting period, see also Note 32.a. Due to the above preliminary agreement the assets and the related liabilities were classified as assets and liabilities held for sale.

NOTE 36 - OPERATING SEGMENTS

The Group has two reportable segments, as described below, which are the Group’s strategic business units. The strategic business units offer different products and services, and are managed separately because they require different financial and marketing strategies. For each of the strategic business units, the Group’s CEO of the Group reviews internal management reports on at least a quarterly basis. The following summary describes the operations in each of the Group’s reportable segments:

1. Residential- the residential segment includes purchasing, developing and selling real estate assets

mainly in Eastern Europe. 2. Commercial - The commercial segment includes the activities related to investment property in Serbia

and Poland).

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

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For the year ended 31 December 2012 NOTE 36 - OPERATING SEGMENTS (continued)

Information about reportable segments

Reconciliation of reportable segment assets and liabilities: 31 December 2012 2011 Thousands Euro Assets Total assets for reportable segments 49,929 58,129 Income tax receivable 111 106 Current tax assets 1,980 1,977 Loans to related parties 6,337 6,184 Consolidated total assets 58,357 66,396 Liabilities Total liabilities for reportable segments 43,576 48,109 Current tax liabilities 313 200 Deferred tax liabilities 202 217 Loans and amounts due to related parties and joint venture partners 27,381 24,663 Consolidated total liabilities 71,472 73,189

Residential Commercial Total 2012 2011 2012 2011 2012 2011 Thousands Euro

External revenues 2,593 4,123 1 8 2,594 4,131

Inter-segment revenues - - - - - - Finance income 295 284 - - 295 284 Finance costs (3,843) (4,134) (3,332) (2,261) (7,175) (6,395) Depreciation 113 168 - - 113 168 Segment loss before income tax (4,888) (9,090) (1,789) (4,161) (6,677) (13,251) Other material non-cash items: Change in fair value of investment property - - 1,617 (1,379) 1,617 (1,379) Write down of inventory (498) (1,958) - - (498) (1,958) Other information: Reportable segment assets 24,700 32,876 25,229 25,253 49,929 58,129 Capital expenditure 9 6 - - 9 6 Reportable segment liabilities 22,251 28,925 21,325 19,184 43,576 48,109

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NOTE 36 - OPERATING SEGMENTS (continued) Geographical information

In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets.

NOTE 37 - ACCOUNTING ESTIMATES

1. Tax expenses

The Group is subject to taxes in numerous jurisdictions. Significant judgement is required in determining the provision for income taxes. Where estimates are revised or the final tax outcome of these matters is different from the amounts that were previously recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. 2. Investment property

The values attributed to investment properties are subject to considerable estimation uncertainty: the risk that an investment property will not be appropriately evaluated exists, since factors not known to the valuator or to the Company might affect the value of the asset (see also Note 11). 3. Inventory The determination of net realisable values of inventory is subject to considerable estimation uncertainty: the risk that inventory net realisable value will not be appropriately evaluated exists, since factors not known to the valuator or to the Company might affect the net realisable value of the inventory (see also Note 10). Inventories are measured at the lower of cost and net realizable value. In situations where excess inventory balances are identified, estimates of net realizable values for the excess amounts are made.

31 December 2012 2011

Non- current Non- current Revenues assets Revenues assets Thousands Euro

Hungary 475 - 693 13 Czech Republic 1,450 3 2,382 3 Poland 625 - 1,056 - Serbia 2 21,010 - 21,122 Romania 42 1,418 - 2 Total 2,594 22,431 4,131 21,140

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For the year ended 31 December 2012 NOTE 37 - ACCOUNTING ESTIMATES (continued)

3. Inventory (continued) Management is responsible for determining the net realizable value of the Group’s inventories. In determining net realizable value of the vast majority of inventories, management utilizes the services of an independent third party recognized as a specialist in valuation of properties. The independent valuation service utilizes market prices of same or similar properties whenever such prices are available. Where necessary, the independent third party valuation service uses models employing techniques such as discounted cash flow analyses. The assumptions used in these models typically include assumptions for rental levels, residential units sale prices, cost to complete the project, developers profit on costs, financing costs and capitalization yields, utilizing observable market data, where available. On an annual basis, the Company reviews the valuation methodologies used for each property. At 31 December 2012, the vast majority of the inventories were valued by the independent third party valuation service. Determining net realizable value is inherently subjective as it requires estimates of future events and takes into account special assumptions in the valuations, many of which are difficult to predict. Actual results could be significantly different than our estimates and could have a material effect on our financial results. This evaluation becomes increasingly difficult as it relates to estimates and assumptions for projects in the preliminary stage of development in addition to current economic uncertainty and the lack of transactions in the real estate market in the CEE region for same or similar properties. Inventories accumulated write-downs from cost as of 31 December 2012 amounted to EUR 4,213 thousands or 16% percent of gross inventory balance.

NOTE 38 - ADOPTION OF IFRS 11

The Group is planning to adopt IFRS 11 Joint Arrangements with a date of initial application of 1 January 2013. IFRS 11, Joint Arrangements, supersedes and replaces IAS 31, Interest in Joint Ventures, see also note 40.e. As a result of the adoption of IFRS 11, the Group will change its accounting policy with respect to its interests in joint arrangements. Under IFRS 11, the Group classifies its interests in joint arrangements as either joint operations or joint ventures depending on the Group’s rights to the assets and obligations for the liabilities of the arrangements. When making this assessment, the Group considers the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangements and other facts and circumstances. Previously, the structure of the arrangement was the sole focus of classification. The Group will re-evaluate its involvement in its joint arrangements and will reclassify the investments from jointly controlled entity to joint venture. Notwithstanding the reclassification, the investment continues to be recognized by applying the equity method and there has been no impact on the recognized assets, liabilities and comprehensive income of the Group. The following tables summarize the expected transitional adjustments to the statement of financial position, comprehensive income and statement of cash flow upon the implementation of the new accounting policy:

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NOTE 38 - ADOPTION OF IFRS 11 (continued) Statements of financial position:

1 January 2012

As previously reported Adjustments As restated

Thousands Euro

Cash and cash equivalents 959 (905) 54 Restricted bank deposits and cash in escrow 68 (58) 10 Trade receivables 209 (175) 34 Prepayments and other assets 589 (253) 336 Loans to related parties 6,184 3,777 9,961 Current tax assets 106 (101) 5 Inventories of housing units and land 31,011 (14,832) 16,179 Property and equipment 40 17 57 Investment and loans in equity accounted investees - 864 864 Deferred tax assets 1,977 (514) 1,463 Overall impact on total assets 41,143 (12,180) 28,963

Interest-bearing loans from banks 12,594 (4,103) 8,491 Loans and amounts due to related parties and joint venture partners 24,663 (5,072) 19,591 Trade payables 1,262 (468) 794 Other payables 3,531 (3,228) 303 Provisions 1,581 (413) 1,168 Current tax liabilities 200 (196) 4 Deferred tax liabilities 217 (217) - Negative investment in equity accounted investees - 1,517 1,517 Overall impact on total liabilities 44,048 (12,180) 31,868

Capital reserve (340) 340 - Accumulated translation adjustment 1,234 (340) 894 Overall impact on total equity 894 - 894

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NOTE 38 - ADOPTION OF IFRS 11 (continued) Statements of financial position (continued):

31 December 2012


Thousands Euro

Cash and cash equivalents 296 (276) 20 Restricted bank deposits and cash in escrow 261 (251) 10 Trade receivables 10 (10) - Prepayments and other assets 636 (400) 236 Loans to related parties 6,337 3,927 10,264 Current tax assets 111 (110) 1 Inventories of housing units and land 22,066 (13,219) 8,847 Property and equipment 14 17 31 Deferred tax assets 1,980 (123) 1,857 Overall impact on total assets 31,711 (10,445) 21,266

Interest-bearing loans from banks 6,000 (3,223) 2,777 Loans and amounts due to related parties and joint venture partners 27,381 (4,909) 22,472 Trade payables 1,019 (365) 654 Other payables 3,361 (2,900) 461 Provisions 1,213 (313) 900 Current tax liabilities 313 (302) 11 Deferred tax liabilities 202 (202) - Negative investment in equity accounted investees - 1,769 1,769 Overall impact on total liabilities 39,489 (10,445) 29,044

Capital reserve (340) 340 - Accumulated translation adjustment 1,505 (340) 1,165 Overall impact on total equity 1,165 - 1,165

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NOTE 38 - ADOPTION OF IFRS 11 (continued)

Statements of comprehensive income:



Thousands Euro

Revenues 4,131 (4,090) 41 Write down of inventory (1,958) 1,938 (20) Cost of sales (5,103) 3,584 (1,519) Other losses (88) 70 (18) Selling, general and administrative expenses (2,226) 546 (1,680) Net foreign exchange (losses) income (517) 775 258 Finance income 284 267 551 Finance costs (6,395) 767 (5,628) Share of loss of equity-accounted investees (net of tax) - (3,964) (3,964) Tax benefit 384 107 491 Overall impact on comprehensive income (11,488) - (11,488)



Thousands Euro

Revenues 2,594 (2,507) 87 Write down of inventory (498) 297 (201) Cost of sales (2,866) 2,068 (798) Other losses 2,064 (293) 1,771 Selling, general and administrative expenses (1,769) 448 (1,321) Net foreign exchange losses (939) (415) (1,354) Finance income 295 280 575 Finance costs (7,175) 564 (6,611) Share of loss of equity-accounted investees (net of tax) - (920) (920) Tax benefit 26 478 504 Overall impact on comprehensive income (8,268) - (8,268)

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NOTE 38 - ADOPTION OF IFRS 11 (continued) Statement of cash flows:



Thousands Euro

Net cash flow from operating activities (167) (1,379) (1,546) Net cash flow from investing activities (339) 350 11 Net cash flow from financing activities (169) 1,661 1,492 Overall impact on comprehensive income (675) 632 (43)

NOTE 39 - SUBSEQUENT EVENTS

a. After the reporting period, a receiver was appointed by court in Hungary due to an appeal of one of the entity’s creditors in the jointly controlled entity, Engel Ingatlan Ingatlanfejlesztő Kft. ("Ingatlan"), which owns the Punko project in Hungary.

As a consequence the Company will cease to consolidate the jointly controlled entity in the consolidated financial statement of 2013. The Group will recognize a profit on the book value of its investment in Ingatlan as a result of this appointment, in the estimated amount of EUR 2.4 million (the Company's share is EUR 0.6 million). ENMAN B.V., the parent company of Ingatlan, provided guarantees for the interest payments and the costs overruns, to the lender bank. The amount of the loan as of the reporting period is EUR 6,099 thousands (the Company’s share is EUR 1,525 thousands).

b. During 2011 ERD has signed a preliminary agreement to sell the plot of Wilanow 2 in Poland for a total

consideration of EUR 4.14 million. After the reporting period the final sale agreement has been signed and a total amount of EUR 2.2 million was transferred to ERD which were deducted from the total debt of the Group towards ERD, see also Note 35.

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For the year ended 31 December 2012 NOTE 40 - NEW IFRS PRONOUNCEMENTS

A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2012, and have not been applied in preparing these consolidated financial statements.

c. Amendments to IAS 1 Presentation of Financial Statements: Presentation of Items of Other Comprehensive

Income (Effective for annual periods beginning on or after 1 July 2012; to be applied retrospectively. Earlier application is permitted) The amendments:

• require that an entity presents separately the items of other comprehensive income that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss. If items of other comprehensive income are presented before related tax effects, then the aggregated tax amount should be allocated between these sections.

• change the title of the Statement of Comprehensive Income to Statement of Profit or Loss and Other Comprehensive Income, however, other titles are also allowed to be used.

The amendments will not have any material effect to the entity’s financial statements, since the entity applied most of the amendment provisions already.

d. IAS 19 (2011) Employee Benefits (Effective for annual periods beginning on or after 1 January 2013; to be applied retrospectively. Transitional provisions apply. Earlier application is permitted) The amendment requires actuarial gains and losses to be recognized immediately in other comprehensive income. The amendment removes the corridor method previously applicable to recognizing actuarial gains and losses, and eliminates the ability for entities to recognize all changes in the defined benefit obligation and in plan assets in profit or loss, which currently is allowed under the requirements of IAS 19. The amendment also requires the expected return on plan assets recognized in profit or loss to be calculated based on rate used to discount the defined benefit obligation. The amendments are not relevant to the entity’s financial statements, since the entity does not have any defined benefit plans.

e. Amendments to IFRS 7 Disclosures - Offsetting Financial Assets and Financial Liabilities (Effective for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods; to be applied retrospectively.) The Amendments contain new disclosure requirements for financial assets and liabilities that are:

• offset in the statement of financial position; or • subject to master netting arrangements or similar agreements.

The entity does not expect the Amendments to have any impact on the financial statements since it does not apply offsetting to any of its financial assets and financial liabilities and it has not entered into master netting arrangements.

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NOTE 40 - NEW IFRS PRONOUNCEMENTS (continued)

f. IFRS 10 Consolidated Financial Statements and IAS 27 (2011) Separate Financial Statements (Effective for annual periods beginning on or after 1 January 2014; Earlier application is permitted if IFRS 11, IFRS 12, IAS 27 (2011) and IAS 28 (2011) are also applied early.) This Standard is to be applied retrospectively when there is a change in control conclusion. IFRS 10 provides a single model to be applied in the control analysis for all investees, including entities that currently are SPEs in the scope of SIC-12. IFRS 10 introduces new requirements to assess control that are different from the existing requirements in IAS 27 (2008). Under the new single control model, an investor controls an investee when:

• it is exposed or has rights to variable returns from its involvements with the investee; • it has the ability to affect those returns through its power over that investee; and • there is a link between power and returns.

The new Standard also includes the disclosure requirements and the requirements relating to the preparation of consolidated financial statements. These requirements are carried forward from IAS 27 (2008). The Group does not expect the new standard to have any impact on the financial statements, since the assessment of control over its current investees under the new standard is not expected to change previous conclusions regarding the Group’s control over its investees.

g. IFRS 11 Joint Arrangements (Effective for annual periods beginning on or after 1 January 2014; to be applied retrospectively subject to transitional provisions. Earlier application is permitted if IFRS 10, IFRS 12, IAS 27 (2011) and IAS 28 (2011) are also applied early.)

IFRS 11, Joint Arrangements, supersedes and replaces IAS 31, Interest in Joint Ventures. IFRS 11 does not introduce substantive changes to the overall definition of an arrangement subject to joint control, although the definition of control, and therefore indirectly of joint control, has changed due to IFRS 10. Under the new Standard, joint arrangements are divided into two types, each having its own accounting model defined as follows: A joint operation is one whereby the jointly controlling parties, known as the joint operators, have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is one whereby the jointly controlling parties, known as joint ventures, have rights to the net assets of the arrangement. IFRS 11 effectively carves out from IAS 31 jointly controlled entities those cases in which, although there is a separate vehicle for the joint arrangement, separation is ineffective in certain ways. These arrangements are treated similarly to jointly controlled assets/operations under IAS 31, and are now called joint operations. The remainder of IAS 31 jointly controlled entities, now called joint ventures, are stripped of the free choice of equity accounting or proportionate consolidation; they must now always use the equity method in its consolidated financial statements. If the new Standard will be initially applied from 1 January 2013, the impact would be that joint ventures Arces International B.V., ENMAN B.V and MLP should be accounted for using the equity method instead of proportionate consolidation, see also note 38.

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h. IFRS 12 Disclosure of Interests in Other Entities (Effective for annual periods beginning on or after 1 January 2014; to be applied retrospectively. Earlier application is permitted. IFRS 12 requires additional disclosures relating to significant judgements and assumptions made in determining the nature of interests in an entity or arrangement, interests in subsidiaries, joint arrangements and associates and unconsolidated structured entities. It is expected that the new Standard, when initially applied, will have an impact on the level of disclosure in the financial statements. However, the Group is not able to prepare an analysis of the impact this will have on the financial statements until the date of initial application.

i. IFRS 13 Fair Value Measurement (Effective prospectively for annual periods beginning on or after 1 January 2013. Earlier application is permitted.) IFRS 13 replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. IFRS 13 explains ‘how’ to measure fair value when it is required or permitted by other IFRSs. The standard does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards. The standard contains an extensive disclosure framework that provides additional disclosures to existing requirements to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements and, for recurring fair value measurements those significant unobservable inputs, the effect of the measurements on profit or loss or other comprehensive income. The entity does not expect IFRS 13 to have material impact on the financial statements since management considers the methods and assumptions currently used to measure the fair value of assets to be consistent with IFRS 13.

j. Amendments to IAS 12: Deferred Tax: Recovery of Underlying Assets (Effective for annual periods beginning on or after 1 January 2013; to be applied retrospectively. Earlier application is permitted.) The amendments introduce a rebuttable presumption that the carrying value of investment property measured using the fair value model would be recovered entirely by sale. Management’s intention would not be relevant unless the investment property is depreciable and held within a business model whose objective is to consume substantially all of the asset’s economic benefits over the life of the asset. This is the only instance in which the presumption can be rebutted. The Group does not expect the amendments to have any impact on the financial statements, since it does not results in a change in the Group‘s accounting policy. The measurement of deferred tax assets and liabilities relating to investment properties measured using the fair value model in IAS 40 will not change.

k. IAS 27 (2011) Separate Financial Statements (Effective for annual periods beginning on or after 1 January 2014. Earlier application is permitted if IFRS 10, IFRS 11, IFRS 12 and IAS 28 (2011) are also applied early.) IAS 27 (2011) carries forward the existing accounting and disclosure requirements of IAS 27 (2008) for separate financial statements, with some minor clarifications. As well, the existing requirements of IAS 28 (2008) and IAS 31 for separate financial statements have been incorporated into IAS 27 (2011). The Standard no longer addresses the principle of control and requirements relating to the preparation of consolidated financial statements, which have been incorporated into IFRS 10, Consolidated Financial Statements. The Company does not expect IAS 27 (2011) to have material impact on the financial statements, since it does not results in a change in the entity‘s accounting policy.

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l. IAS 28 (2011) Investments in Associates and Joint Ventures (Amendments effective for annual periods beginning on or after 1 January 2014; to be applied retrospectively. Earlier application is permitted if IFRS 10, IFRS 11, IFRS 12 and IAS 27 (2011) are also applied early.) There are limited amendments made to IAS 28 (2008):

• Associates and joint ventures held for sale. IFRS 5, Non-current Assets Held for Sale and Discontinued Operations applies to an investment, or a portion of an investment, in an associate or a joint venture that meets the criteria to be classified as held for sale. For any retained portion of the investment that has not been classified as held for sale, the equity method is applied until disposal of the portion held for sale. After disposal, any retained interest is accounted for using the equity method if the retained interest continues to be an associate or a joint venture.

• Changes in interests held in associates and joint ventures. Previously, IAS 28 (2008) and IAS 31 specified that the cessation of significant influence or joint control triggered remeasurement of any retained stake in all cases, even if significant influence was succeeded by joint control. IAS 28 (2011) now requires that in such scenarios the retained interest in the investment is not remeasured.

The entity does not expect the amendments to Standard to have material impact on the financial statements since it does not have any investments in associates or joint ventures that will be impacted by the amendments.

m. Amendments to IAS 32 – Offsetting Financial Assets and Financial Liabilities (Effective for annual periods beginning on or after 1 January 2014; to be applied retrospectively. Earlier application is permitted, however the additional disclosures required by Amendments to IFRS 7 Disclosures - Offsetting Financial Assets and Financial Liabilities must also be made.) The Amendments do not introduce new rules for offsetting financial assets and liabilities; rather they clarify the offsetting criteria to address inconsistencies in their application. The Amendments clarify that an entity 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 entity and all counterparties. The entity does not expect the Amendments to have any impact on the financial statements since it does not apply offsetting to any of its financial assets and financial liabilities and it has not entered into master netting arrangements.

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n. IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (Effective for annual periods beginning on or after 1 January 2013. It applies prospectively to production stripping costs incurred on or after the beginning of the earliest period presented. Earlier application is permitted.) The Interpretation sets out requirements relating to the recognition of production stripping costs, initial and subsequent measurement of stripping activity assets. To the extent that benefits from production stripping are realised in the form of inventory produced, the related production stripping costs are accounted for in accordance with IAS 2 Inventories. Production stripping costs that improve access to ore to be mined in the future are recognised as a non-current asset if, and only if, all of the following criteria are met:

• it is probable that future economic benefits will flow to the entity; • the entity can identify the component of the ore body for which access has been improved; and • the costs relating to the stripping activity associated with that component can be measured reliably.

The stripping activity asset shall be accounted for as an addition to, or as an enhancement of, an existing asset. The stripping activity asset shall initially be recognised at cost while after initial recognition; it shall be carried at either its cost or its revalued amount, less depreciation or amortisation and impairment losses, in the same way as the existing asset of which it is a part. The Interpretation also requires that when the costs of the stripping activity asset and of the inventory produced are not separately identifiable, the entity allocates production stripping costs between the two based on a ‘relevant’ production measure. The entity does not expect the Interpretation to have any impact on the financial statements since it does not have any stripping activities.

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