18th Mar 2008 07:02
Mirland Development Corporation PLC18 March 2008 NOTE 1:- GENERAL a. Mirland Development Corporation Plc ("the Company") was incorporated inCyprus on 10 November 2004 under the Cyprus Companies Law, Cap. 113 as a publiccompany limited by shares. Its registered office is located at ThessalonikisStreet, Nicolaou Pentadromos Centre, 6th floor, Limassol 3025, Cyprus. b. The principal activities of the Company and its subsidiaries ("theGroup"), which did not change from last year, are investment and development ofreal estate assets in Russia. c. On 18 December 2006, the Company, issued 30 million shares in aninitial public offering and all of its shares were admitted for trading on AIM.The shares represent 30% of the Company's share capital. On 3 January 2007, theunderwriters of the offering exercised options to purchase an additionalapproximately 3.6 million shares representing approximately 3.5% of theCompany's share capital. d. On 6 December 2007, the Company issued two series of debentures. Thepar value of both of the series that were issued is NIS 244,134,000(approximately $ 63 million). Issuance expenses of approximately $ 1 millionwere deducted from the consideration. All of the debentures were admitted fortrading on the Tel-Aviv Stock Exchange (see also Note 20). e. Following are the principal shareholders of the Company as of 31December 2007: Shareholder Rate of holding Jerusalem Economic Corporation Ltd. ("JEC") (a company traded on the Tel-Aviv 27%Stock Exchange) Industrial Buildings Corporation Ltd. ("IBC") (67%-owned subsidiary of JEC 27%and traded on the Tel-Aviv Stock Exchange) Darban Investments Ltd. (a company traded on the Tel-Aviv Stock Exchange) 14% All of the above shareholders are companies that are controlled, directly andindirectly, by the Fishman Group. NOTE 1:- GENERAL (Cont.) f. Following is a list of the fully consolidated subsidiaries: NAME OF SUBSIDIARY COUNTRY OF INCORPORATION ACTIVITY % OF HOLDING HYDROMASHSERVICE LLC ("HYDRO") RUSSIA LEASE OF BUILDINGS 100 MASHINOSTROENIE & HYDRAVLIKA OJSC RUSSIA LEASE OF BUILDINGS 100 ("MAG") CREATIVECOM LLC ("CREATIVE") RUSSIA ERECTING RESIDENTIAL 100 PROJECTS PETRA 8 LLC ("PETRA") RUSSIA ERECTING RESIDENTIAL 100 PROJECTS REALSERVICE LLC ("REALSERVICE") RUSSIA ERECTING COMMERCIAL 100 PROJECTS INVESTISIONNO IPOTECHNAYA KOMPANIA LTD. RUSSIA ERECTING COMMERCIAL *) 90 ("IIK") PROJECTS MALL PROJECT CO. LTD. ("MALL PROJECT") CYPRUS HOLDING COMPANY *) 90 GASCONADE HOLDING LTD. CYPRUS HOLDING COMPANY 100 LAYKAPARK TRADING LTD. CYPRUS HOLDING COMPANY 100 DUNCHOILLE HOLDINGS LTD. CYPRUS HOLDING AND FINANCING 100 COMPANY MIRLAND MANAGEMENT LIMITED CYPRUS CONSULTING **) 100 MIRLAND MANAGEMENT RUS LLC RUSSIA CONSULTING 100 HECKBERT 22 GROUP FINANCING LIMITED KFT HUNGARY FINANCING COMPANY 100 ISRARUSSIA SERVICES LTD. ("IRS") ISRAEL CONSULTING 100 TAMIZ LLC RUSSIA ERECTING COMMERCIAL 100 PROJECTS DESIGN PROJECT LLC RUSSIA ERECTING COMMERCIAL 100 PROJECTS TTM LLC RUSSIA ERECTING COMMERCIAL 100 PROJECTS LIGA 45 LLC RUSSIA ERECTING COMMERCIAL 100 PROJECTS *) The Company holds 90% of the share capital of Mall Project (which holds100% of the share capital of IIK). The remaining 10% are held by Norman AssetManagement Ltd ("NAM") and do not confer any voting rights. The shareholders ofMall Project have entered into an agreement regarding the manner of decisionmaking in the company. Regarding post-balance sheet events, see Note 29. **) On 23 April 2007, Felixtowe Holdings Ltd's name was changed to MirlandManagement Limited. NOTE 1:- GENERAL (Cont.) g. List of jointly controlled entities: COUNTRY OF % OF NAME OF COMPANY INCORPORATION ACTIVITY HOLDING INVERTON ENTERPRISES LLC CYPRUS HOLDING COMPANY 49 ASTRAESTATE & CO. LIMITED CYPRUS PARTNERSHIP FOR 50 PARTNERSHIP ("ASTRA") HOLDING A COMPANY, ERECTING COMMERCIAL PROJECTS AND LEASE OF BUILDINGS WINTA HOLDINGS LTD CYPRUS LIMITED PARTNER IN 50 PARTNERSHIP FOR HOLDING A COMPANY, ERECTING COMMERCIAL PROJECTS AND LEASE OF BUILDINGS GLOBAL 1 LLC ("GLOBAL") RUSSIA LEASE OF COMMERCIAL 49 PROPERTY TECHAGROCOM-2 RUSSIA ERECTING COMMERCIAL 50 ("TECHAGROCOM") PROJECTS MALL MORTGAGE LTD CYPRUS FINANCING COMPANY 49 h. Definitions: In these financial statements: THE COMPANY - MIRLAND DEVELOPMENT CORPORATION PLC. THE GROUP - MIRLAND DEVELOPMENT CORPORATION PLC AND ITS SUBSIDIARIES AS LISTED ABOVE. SUBSIDIARIES - COMPANIES OVER WHICH THE COMPANY EXERCISES CONTROL (AS DEFINED IN IAS 27) AND WHOSE ACCOUNTS ARE CONSOLIDATED WITH THOSE OF THE COMPANY. JOINTLY CONTROLLED - COMPANIES HELD BY A NUMBER OF ENTITIES, AMONG WHICH CONTRACTUAL ENTITIES AGREEMENT EXISTS FOR JOINT CONTROL AND WHOSE FINANCIAL STATEMENTS ARE CONSOLIDATED WITH THE FINANCIAL STATEMENTS OF THE COMPANY ACCORDING TO THE PROPORTIONATE CONSOLIDATION METHOD. ASSOCIATES - COMPANIES OVER WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE, WHICH ARE NOT SUBSIDIARIES NOT JOINT VENTURES AND WHICH ARE RECORDED ACCORDING TO THE EQUITY METHOD. PARENT - JEC ULTIMATE CONTROLLING - FISHMAN FAMILY. SHAREHOLDER RELATED PARTIES - AS DEFINED IN IAS 24. NOTE 1:- GENERAL (Cont.) i. Reclassification of comparative figures: Certain numbers shown in the comparative statements do not correspondto the 2006 financial statements and reflect adjustments made as following inorder to present the financial position of the Group in a true and fair value: a. Reclassification of restricted deposits from cash and cashequivalents to restricted deposits. b. Reclassification of long-term loans to short-term loans. c. Update in statements of changes in equity the effect ofpooling of interests. d. All the reclassifications were also adjusted in cash flowstatements, together with update of net cash flow of operating activities. NOTE 2:- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of presentation of the financial statements: These financial statements have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS") as adopted by the European Union ("EU").International Financial Reporting Standards comprise standards andinterpretations adopted by the International Accounting Standards Board, andinclude: a) International Financial Reporting Standards (IFRS). b) International Accounting Standards (IAS). c) Interpretations issued by the International Financial ReportingInterpretations Committee (IFRIC) and by its predecessor, the StandingInterpretations Committee (SIC). Furthermore, the financial statements are prepared in accordance with therequirement of the Cyprus Companies Law, Cap and under historical costconvention except for investment properties, share options and swap agreementwhich are measured at fair value. The Company has been preparing financial statements in accordance with IFRSsince its establishment. Basis of consolidation: The consolidated financial statements include the accounts of companies overwhich the Company exercises control (subsidiaries). Control is normallyevidenced when the Company is able, directly or indirectly, to govern thefinancial and operating policies of an enterprise so as to benefit from itsactivities. In the examination of the existence of control, the effect ofpotential voting rights exercisable as of the balance sheet date is taken intoconsideration. Subsidiaries are fully consolidated from the date of acquisition,being the date on which the Group obtains control, and continue to beconsolidated until the date that such control ceases. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) All intercompany balances and transactions among the Group companies have beeneliminated in the consolidated financial statements. Minority interests represent the portion of profit or loss and net assets notheld by the Group and are presented within equity in the consolidated balancesheet, separately from the parent shareholders' equity. The accounts of a jointly controlled entity in which the shareholders sharecontrol under contractual consent are consolidated with those of the Companyusing the proportionate consolidation method. The Group consolidates its sharein the jointly controlled entity's assets, liabilities, revenues and expenseswith the proper financial statement items. All intercompany balances andtransactions and gains and losses between the Group companies and the jointlycontrolled entity are eliminated based on the Company's stake in the jointlycontrolled entity. The financial statements of the subsidiaries and jointly controlled entities areprepared for the same reporting periods as the parent company, using consistentaccounting policies. b. Acquisition of businesses from companies under common control: The acquisition of businesses from companies under the Company's control are notbusiness combinations within the scope of IFRS 3. The Company accounts for theseacquisitions in accordance with the pooling of interests method. Accordingly,the consolidated financial statements have been retrospectively adjusted toreflect the acquisitions as if they had occurred at the beginning of theearliest period presented. Thus, the consolidated financial statements comprisethe consolidated financial position, results of operations and cash flows of theCompany and of the companies acquired. For those companies that were acquired bythe Company under common control subsequent to the beginning of the earliestperiod presented, the financial statements reflect the acquisitions of thosecompanies from the dates those companies were acquired by the Company undercommon control. On 30 September 2006, the Company, then owned by JEC, issued to IBC and Darbanshares. During the transaction, some Russian subsidiaries were transferred tothe Company. The transaction was represented as acquisition of business fromcompanies under control. c. Critical accounting judgments and estimates: Judgments: In the process of applying the Company's accounting policies, management hasmade the following judgments which have the most significant effect on theamounts recognized in the financial statements: Operating lease of investment properties: The Group classifies its investment property portfolio as operating lease sinceit retains all the significant risks and rewards of ownership of theseproperties. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) Estimates and assumptions: The preparation of financial statements requires management to make estimatesand assumptions that affect the adoption of accounting policies and the reportedamounts of assets, liabilities, revenues and expenses. The underlying estimatesand assumptions are reviewed on an ongoing basis. The changes in accountingestimates are carried to the period in which they are made. The following are the principal assumptions in the financial statementsregarding uncertainties as of the balance sheet date and the critical judgmentsused by the Group in respect of which any material change might modify the costof assets and liabilities in the coming reporting year: Investment property: Investment property is presented at fair value as of balance sheet date. Changesin fair value of investment property are carried to the income statement. Fairvalue is determined by independent outside appraisers based on economicevaluations that are also performed according to the revenue capitalizationmethod. This method consists of estimating the value of the asset by discountingthe expected flow of revenues over the economic useful life of the asset. Thiscalculation involves making assumptions, among other things, as to thecapitalization rates, the continued lease of the assets by the existing tenants,including during the option periods, and the occupancy rates in the differentassets. Fair value is sometimes measured with reference to recent real estatetransactions with similar characteristics and location to the estimated asset.Additional information is provided in Note 9. Acquisitions of subsidiaries that are not business combinations: On the day of acquisition of subsidiaries and operations, the Companyassesses whether business is acquired in accordance with IFRS 3. A businessgenerally consists of inputs, processes applied to those inputs, and resultingoutputs that are, or will be, used to generate revenues. If goodwill is present,the transferred set of activities and assets shall be presumed to be a business.When no business is acquired, according to IFRS 3, the consideration isallocated between the identifiable assets and liabilities acquired on the basisof relative fair values, without allocating to goodwill or deferred taxes. Deferred tax assets: Deferred tax assets are recognized for unutilized carryforward tax losses andtemporary differences to the extent that it is probable that taxable profit willbe available against which the losses can be utilized. Significant managementjudgment is required to determine the amount of deferred tax assets that can berecognized, based upon the likely timing and level of future taxable profitstogether with future tax planning strategies. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) d. Functional and foreign currencies: 1. Functional currency: The financial statements are prepared in thousands of U.S. dollars,which is the Company's functional currency and best reflects the economicenvironment in which the Company operates and conducts its transactions. The functional currency is separately determined for each subsidiaryand is used to measure the subsidiary's financial position and operatingresults. When the subsidiary's functional currency differs from that of theCompany, the subsidiary represents a foreign operation whose financialstatements are translated in order to be included in the Company's financialstatements as follows: a) Assets and liabilities in all balance sheets presented (includingcomparative data) are translated at the closing rate as of each balance sheetpresented. Goodwill and all adjustments of the assets and liabilities' fairvalue to their carrying amount on the date of acquisition of the foreignoperation are treated as the foreign operation's assets and liabilities and aretranslated at the closing rate at each balance sheet date. b) Income and expenses in all statements of income (including comparativedata) are translated at the exchange rates at the dates of the transactions orat average exchange rates for the periods during which the transactions weremade if such exchange rates approximate the actual exchange rates. c) Share capital, capital reserves and other changes in capital aretranslated at the exchange rate prevailing as of the date of incurrence. d) Retained earnings are translated based on the opening balance at theexchange rate as of that date and other relevant transactions during the periodare translated as described in b) and c) above. e) All translation differences are recorded as a separate item inshareholders' equity ("foreign currency translation adjustments of foreignoperations"). 2. Foreign currency transactions: Transactions in foreign currencies are initially recorded at theexchange rate on the date of transaction. Monetary assets and liabilitiesdenominated in foreign currencies are translated into the functional currency ofthe operation at the exchange rates prevailing at balance sheet date. Exchangerate differences are carried to the income statement. Non-monetary assets andliabilities are translated into the functional currency of the operation at theexchange rates prevailing on the date of the transaction (or date of laterrevaluation). Non-monetary assets and liabilities denominated in foreigncurrencies are translated at the exchange rates prevailing on the date of theinitial transaction. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) e. Cash equivalents: The Company considers all highly liquid investments, including unrestrictedshort-term bank deposits purchased with original maturities of three months orless, to be cash equivalents. f. Allowance for doubtful accounts: The allowance for doubtful accounts is determined in respect of specific debtswhose collection, in the opinion of the Company's management, is doubtful. g. Inventory of buildings for sale under construction: The cost of the inventory of buildings for sale includes direct identifiablecosts in respect of the cost of the land such as taxes, fees and levies andconstruction costs. The Company also capitalizes to cost of inventory ofbuildings for sale specific borrowing costs incurred in the period during whichthe Company began the land's development pursuant to IAS 23. Capitalized costsare charged to operations, along with other costs related to the project, whenrevenues are recognized. Inventories of buildings and apartments for sale are measured at thelower of cost or net realizable value. Net realizable value is the estimatedselling price during the ordinary course of business less estimated completionand selling costs. h. Real estate under construction: Real estate under construction is included at cost. Cost of real estate includesborrowing costs relating to the financing of the erection of the propertiesuntil their operation, planning and design costs, allocated indirectconstruction costs and other related costs. i. Financial instruments: The accounting treatment of investments in financial assets is based ontheir classification into one of the following groups: • Financial assets or liabilities measured at fair value through profit or loss • Held-to-maturity investments • Loans and receivables • Available-for-sale financial instruments Loans and receivables: Loans and receivables are financial assets with fixed or determinable paymentsthat are not quoted in an active market. After initial measurement, loans andreceivables are subsequently carried at amortized cost using the effectiveinterest method less any allowance for impairment. Amortized cost is calculatedtaking into account any discount or premium on acquisition and includes feesthat are an integral part of the effective interest rate and transaction costs.Gains and losses are recognized in the income statement when the loans andreceivables are derecognized or impaired, as well as through the amortizationprocess. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) Interest-bearing loans and borrowings: Loans and borrowings are initially recognized at the fair value of theconsideration received less directly attributable transaction costs. Afterinitial recognition, interest-bearing loans and borrowings are subsequentlymeasured at amortized cost using the effective interest method. Impairment of financial assets: The Group assesses at each balance sheet date whether a financial asset or groupof financial assets is impaired. Assets carried at amortized cost: If there is objective evidence that an impairment loss on loans and receivablescarried at amortized cost has been incurred, the amount of the loss is measuredas the difference between the asset's carrying amount and the present value ofestimated future cash flows (excluding future expected credit losses that havenot been incurred) discounted at the financial asset's original effectiveinterest rate (i.e. the effective interest rate computed at initialrecognition). The carrying amount of the asset is reduced through use of anallowance account. The amount of the loss shall be recognized in profit or loss. Swap transactions: The Group measures swap transactions as hedging transactions not recognized foraccounting purposes, at fair value through profit and loss. j. Fixed assets: Office furniture and equipment are stated at cost, including direct acquisitioncosts, less accumulated depreciation and accumulated impairment losses, andexcluding day-to-day servicing expenses. Depreciation is calculated on a straight-line basis over the useful life of theasset at annual rates of 10%-20%. k. Impairment of non-financial assets: The Company assesses at each reporting date whether events or changes incircumstances indicate that an asset may be impaired. An impairment loss isrecognized if an asset's carrying amount exceeds its recoverable amount. Therecoverable amount is the higher of an asset's fair value less costs to sell andits value in use. In assessing value in use, the estimated future cash flows arediscounted using a pre-tax discount rate that reflects current marketassessments specific to the asset. The recoverable amount of an asset that doesnot generate independent cash flows is determined for the income-generating unitof that asset. Impairment losses are carried to the statement of income. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) l. Taxes on income: Taxes on income in the income statement include current and deferredtaxes. The tax results in respect of current or deferred taxes are carried tothe income statement other than if they relate to items that are directlycarried to equity. In such cases, the tax effect is also carried to the relevantitem in equity. 1. Current income taxes: Current income tax liabilities for the current and prior periods aremeasured at the amount expected to be recovered from or paid to the taxationauthorities. The tax rates and tax laws used to compute the amount are thosethat are enacted or substantively enacted by the balance sheet date. 2. Deferred income taxes: Deferred taxes are computed in respect of temporary differences between theamounts included in the financial statements and the amounts allowable for taxpurposes, other than a limited number of exceptions described in the Standard. Deferred income tax assets and liabilities are measured at the tax rates thatare expected to apply to the year in which the asset is realized or theliability is settled, based on tax rates (and tax laws) that have been enactedat the balance sheet date. Taxes that would apply in the event of the sale of investments ininvestees have not been taken into account in computing the deferred taxes, aslong as it is probable that the sale of the investments is not expected in theforeseeable future. Similarly, deferred taxes that would apply in the event of distribution ofearnings by investees as dividends have not been taken into account in computingthe deferred taxes, since the distribution of dividends does not involve anadditional tax liability. Deferred taxes attributed to items carried directly to equity are also carriedto equity. Deferred tax assets and deferred tax liabilities are presented as non-currentassets and long-term liabilities, respectively. Deferred taxes are offset ifthere is a legal enforceable right that allows offsetting a current tax assetagainst a current tax liability and the deferred taxes refer to the sametaxpayer and the same tax authority. The Company did not create deferred taxes in respect of temporary differencesarising from changes in the fair value of investment properties in view ofmanagement's intention to sell the companies holding these assets rather thanthe assets themselves (see Note 7). NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) m. Revenue recognition: Revenue is recognized to the extent that it is probable that the economicbenefits will flow to the Group, the revenue can be reliably measured and thecosts incurred or to be incurred in respect of the transaction can be reliablymeasured. The following specific recognition criteria must also be met beforerevenue is recognized: Rental income: Rental income is accounted for on a straight-line basis over the leaseterms. Rendering of services, including management fees: Revenue from the rendering of services is recognized by reference tothe stage of completion as of balance sheet date. Stage of completion ismeasured according to the reporting periods during which the services wererendered. Where the contract outcome cannot be measured reliably, revenue isrecognized only to the extent of the expenses recognized that are recoverable. Interest income: Interest income is recognized on a cumulative basis using the effectiveinterest rate method. Revenues from sale of residential apartments: Revenues from the sale of residential apartments are recognized whenthe principal risks and rewards relating to the ownership have been transferredto the buyer. Revenues are not recognized if there are significant uncertaintiesregarding the collection of the consideration and the related costs or if thereis continuing managerial involvement of the Group with respect to the realestate sold. These criteria are usually met once the apartment is transferred tothe buyer. n. Advertising expenses: Advertising expenses are charged to the statement of income as incurred. o. Borrowing costs in respect of qualified assets: The Company capitalizes borrowing costs in connection with investment propertiesunder construction and inventory of buildings for sale under construction. The capitalization of borrowing costs commences when the qualified asset'spreparation begins, and terminates when the qualified asset is ready for itsdesignated use or sale (see as below). The amount of borrowing costs capitalized in the reported period does not exceedthe borrowing costs in that reported period. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) p. Leases: The tests for classifying leases as finance or operating leases areperformed at the date of inception according to the provisions of IAS 17. Operating leases: Leases where the Group does not transfer substantially all the risksand benefits of ownership of the asset are classified as operating leases.Initial direct costs incurred in negotiating an operating lease are added to thecarrying amount of the leased asset and recognized over the lease term. q. Business combinations: Business combinations are treated using the acquisition method pursuant to IFRS3. This method consists of identifying the assets, liabilities and contingentliabilities of the acquired business at fair value upon the date of acquisitionand all the minority interests in the acquired entity are presented at theminority's share in the fair value, net of these items. Goodwill, if involved inthe business combination, is initially measured as the difference between thecost of the acquisition over the Group's share in the net fair value of theidentified assets, the liabilities and the contingent liabilities. Business combinations including entities under common control: IFRS 3, "Business Combinations", does not apply to entities under common controland therefore does not address the accounting treatment for this type oftransactions. Pursuant to the provisions of IAS 8, "Accounting Policies, Changesin Accounting Estimates and Errors", in the absence of an accounting standard orinterpretation concerning similar issues and in the absence of guidance as tothe treatment of the conceptual framework of International Standards, one mayrefer to publications of other standards boards whose conceptual framework isnot in contradiction to the conceptual framework of International Standards orIFRS. In view of the above, management has considered the adequate accountingtreatment in this type of transactions. In accordance with the above, since the conceptual framework underlying U.S.GAAP is not in contradiction to the conceptual framework of InternationalStandards, management has determined the accounting treatment of businesscombinations including entities under common control to be pursuant to FAS 141of the FASB according to which transactions between entities under commoncontrol will be accounted for using the pooling of interests method. Since in this type of transactions no change in control takes place, andultimately, all the entities are controlled by the same parties, both prior andsubsequent to the business combination, the pooling of interests best reflectsthe transaction. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) Accordingly, the Group's assets and liabilities are the assets and liabilitiesas included in the books of the merging companies under common control.Intercompany balances and transactions and significant gains or losses among theGroup companies have been eliminated in the consolidated financial statements. The Company has presented the assets and liabilities, results of operations andcash flows of the Company and transferred companies for all reported periods asif their transfer to the Company had always been in effect. r. Investment property: An investment property is property (land or a building or both) held by theowner or by the lessee under a finance lease to earn rentals or for capitalappreciation or both, and not for use in manufacture or supply of goods orservices or for administrative purposes or sale in the ordinary course ofbusiness. Investment properties are measured initially at cost, including directtransaction costs. Subsequent to initial recognition, investment properties arestated at fair value, which reflects market conditions at the balance sheetdate. Gains or losses arising from changes in the fair values of investmentproperties are included in the income statement in the year in which they ariseunder increase (decrease) in fair value of investment properties. Investmentproperties are not systematically depreciated. Property interests held under operating lease and leased out under operatinglease is classified as an investment property, if the property would otherwisemeet the definition of an investment property, as mentioned above, and the fairvalue model is used. In this case, the transaction is treated as a finance leasewith a corresponding liability reflecting the present value of future paymentsunder the primary operating lease. The transfer of an asset from investment property under construction toinvestment property is executed upon completion of the development of the realestate designed to serve as an investment property. When the Group completes the construction of the investment property, anydifference between the fair value of the property at that date and its previouscarrying amount is recognized in the income statement. In order to determine the fair value of investment properties, the Grouputilizes independent outside appraisals from expert real estate appraisers withthe proper knowledge and experience. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) s. Investment property under construction: An investment property under construction is included at cost. Cost includescost of acquisition, direct construction costs, borrowing costs relating tofinancing the erection of the properties until their operation, planning anddesign costs, allocated indirect construction costs and other related costs.Finance costs cease being capitalized when the construction is completed and theinvestment property is available for use. Before assets are classified as investment properties under construction, theyare usually first classified as investment properties and treated as such. Whendevelopment properties are completed, they are reclassified to investmentproperties and stated at fair value. t. Share-based payment transactions: The cost of equity-settled transactions with employees/service providers ismeasured according to the fair value of the equity instruments on the date ofgrant. The fair value is determined by an independent appraiser using a standardoption-pricing model. See more details in Note 20. No expense is recognized for awards that do not ultimately vest, except forawards where vesting is conditional upon a market condition, which are treatedas vesting irrespective of whether or not the market condition is satisfied,provided that all other performance conditions are satisfied. The cost of equity-settled transactions is recognized in profit andloss together with a corresponding increase in shareholders' equity over theperiod during which the performance and/or service conditions apply and endingon the date of the relevant employees' entitlement to compensation ("the vestingperiod"). The cumulative expense recognized in respect of equity-settledtransactions for each reported period through the vesting date reflects theGroup's best estimate of the number of equity instruments that will eventuallyvest. The charge or credit in the income statement for the period reflects thechange in the cumulative expense recognized at the beginning and end of theperiod, as described in the following paragraph. In the event of changes in the grant terms of an equity-settled transaction, theexpense recognized is the expense that would have been recognized had there notbeen a change in terms over the original vesting period. An additional expenseis recognized over the new vesting period in respect of any change thatincreases the total fair value of the share-based payment or that benefits theemployee/service provider as measured on the date of change. The cancellation of an equity-settled grant is treated as if the grant hadvested as of the date of cancellation and the as yet unrecognized expense inrespect of the grant is recognized immediately. However, if the cancelled grantis replaced by a new grant which is identified as a replacement grant as of thedate of grant, both the cancelled grant and the replacement grant are treated asa change in the terms of the original grant, as described in the precedingparagraph. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) u. Earnings (loss) per share: Earnings per share are computed according to the number of Ordinary shares.Basic earnings per share only include shares that were actually outstandingduring the period. Convertible securities (such as options) are only included inthe computation of diluted earnings per share. Furthermore, options that havebeen exercised during the period are included in diluted earnings per share onlyuntil the exercise date and starting from that date in basic earnings per share.Options are included in diluted earnings when their exercise results in theissuance of shares for a consideration which is less than the average marketprice of the shares. The investor's share of earnings of an investee is includedbased on the earnings per share of the investee multiplied by the number ofshares held by the investor. v. Changes in accounting policy and disclosures: The accounting policies adopted are consistent with those of the previousfinancial year except as follows: The Group has adopted the following new and amended IFRS and IFRICinterpretations during the year. Adoption of these revised standards andinterpretations did not have any effect on the financial performance or positionof the Group. They did however give rise to additional disclosures. IFRS 7 Financial Instruments: Disclosures IAS 1 Amendment - Presentation of Financial Statements IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment The principal effects of these changes are as follows: IFRS 7 Financial Instruments: Disclosures This standard requires disclosures that enable users of the financial statementsto evaluate the significance of the Group's financial instruments and the natureand extent of risks arising from those financial instruments. The newdisclosures are included throughout the financial statements. While there hasbeen no effect on the financial position or results, comparative information hasbeen revised where needed. IAS 1 Presentation of Financial Statements This amendment requires the Group to make new disclosures to enable users of thefinancial statements to evaluate the Group's objectives, policies and processesfor managing capital. These new disclosures are shown in Note 27. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) IFRIC 8 Scope of IFRS 2 This interpretation requires IFRS 2 to be applied to any arrangements in whichthe entity cannot identify specifically some or all of the goods received, inparticular where equity instruments are issued for consideration which appearsto be less than fair value. As equity instruments are only issued to employeesin accordance with the employee share scheme, the interpretation had no impacton the financial position or performance of the Group. IFRIC 9 Reassessment of Embedded Derivatives IFRIC 9 states that the date to assess the existence of an embedded derivativeis the date that an entity first becomes a party to the contract, withreassessment only if there is a change to the contract that significantlymodifies the cash flows. As the Group has no embedded derivative requiringseparation from the host contract, the interpretation had no impact on thefinancial position or performance of the Group. IFRIC 10 Interim Financial Reporting and Impairment The Group adopted IFRIC Interpretation 10 as of 1 January 2007, which requiresthat an entity must not reverse an impairment loss recognised in a previousinterim period in respect of goodwill or an investment in either an equityinstrument or a financial asset carried at cost. As the Group had no impairmentlosses previously reversed, the interpretation had no impact on the financialposition or performance of the Group. w. Standards issued but not yet effective: IAS 23 Borrowing Costs A revised IAS 23 Borrowing costs was issued in March 2007, and becomes effectivefor financial years beginning on or after 1 January 2009. The standard has beenrevised to require capitalisation of borrowing costs when such costs relate to aqualifying asset. A qualifying asset is an asset that necessarily takes asubstantial period of time to get ready for its intended use or sale. Inaccordance with the transitional requirements in the Standard, the Group willadopt this as a prospective change. Accordingly, borrowing costs will becapitalised on qualifying assets with a commencement date after 1 January 2009.No changes will be made for borrowing costs incurred to this date that have beenexpensed. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) IAS 1 (Revised) Presentation of Financial Statements The revised IAS 1 Presentation of Financial Statements was issued in September2007 and becomes effective for financial years beginning on or after 1 January2009. The Standard separates owner and non-owner changes in equity. Thestatement of changes in equity will include only details of transactions withowners, with all non-owner changes in equity presented as a single line. Inaddition, the Standard introduces the statement of comprehensive income: itpresents all items of income and expense recognized in profit or loss, togetherwill all other items of recognized income and expense, either in one singlestatement, or in two linked statements. The effect of the adoption of IAS 1 (Revised) will require the Group to presentthe above disclosure in the financial statements. IFRS 3 (Revised) Business Combinations and IAS 27 (Revised) Consolidated andSeparate Financial Statements The revised standards were issued in January 2008 and become effective forfinancial years beginning on or after 1 July 2009. IFRS 3R introduces a numberof changes in the accounting for business combinations that will impact theamount of goodwill recognized, the reported results in the period that anacquisition occurs, and future reported results. IAS 27R requires that a changein the ownership interest of a subsidiary is accounted for as an equitytransaction. Therefore, such a change will have no impact on goodwill, nor willit give rise to a gain or loss. Furthermore, the amended standard changes theaccounting for losses incurred by the subsidiary as well as the loss of controlof a subsidiary. The changes introduced by IFRS 3R and IAS 27R must be appliedprospectively and will affect future acquisitions and transactions with minorityinterests. IFRS 2 (Revised) Share-based Payment The amendment to IFRS 2 Share-based Payments was published in January 2008 andbecomes effective for financial years beginning on or after 1 January 2009. TheStandard restricts the definition of "vesting condition" to a condition thatincludes an explicit or implicit requirement to provide services. Any otherconditions are non-vesting conditions, which have to be taken into account todetermine the fair value of the equity instruments granted. In the case that theaward does not vest as the result of a failure to meet a non-vesting conditionthat is within the control of either the entity or the counterparty, this mustbe accounted for as a cancellation. The Group has not entered into share-based payment schemes with non-vestingconditions attached and, therefore, does not expect significant implications onits accounting for share-based payments. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) Amendments to IAS 32 and IAS 1 Puttable Financial Instruments Amendments to IAS 32 and IAS 1 were issued in February 2008 and become effectivefor annual period beginning on or after 1 January 2009. The amendment to IAS 32requires certain puttable financial instruments and obligations arising onliquidation to be classified as equity if certain criteria are met. Theamendment to IAS 1 requires disclosure of certain information relating toputtable instruments classified as equity. The Group does not expect theseamendments to impact the financial statements of the Group. IFRIC 12 Service Concession Arrangements IFRIC Interpretation 12 was issued in November 2006 and becomes effective forannual periods beginning on or after 1 January 2008. This Interpretation appliesto service concession operators and explains how to account for the obligationsundertaken and rights received in service concession arrangements. No member ofthe Group is an operator and hence this Interpretation will have no impact onthe Group. IFRIC 13 Customer Loyalty Programmes IFRIC Interpretation 13 was issued in June 2007 and becomes effective for annualperiods beginning on or after 1 July 2008. This Interpretation requires customerloyalty award credits to be accounted for as a separate component of the salestransaction in which they are granted and therefore part of the fair value ofthe consideration received is allocated to the award credits and deferred overthe period that the award credits are fulfilled. The Group expects that thisinterpretation will have no impact on the Group's financial statements as nosuch schemes currently exist. IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum FundingRequirements and their Interaction IFRIC Interpretation 14 was issued in July 2007 and becomes effective for annualperiods beginning on or after 1 January 2008. This Interpretation providesguidance on how to assess the limit on the amount of surplus in a definedbenefit scheme that can be recognised as an asset under IAS 19 EmployeeBenefits. The Group expects that this Interpretation will have no impact on thefinancial position. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) x. Provisions Provisions are recognised when the Company has a present obligation (legal orconstructive) as a result of a past event, it is probable that an outflow ofresources embodying economic benefits will be required to settle the obligationand a reliable estimate can be made of the amount of the obligation. Where theCompany expects some or all of a provision to be reimbursed, for example underan insurance contract, the reimbursement is recognised as a separate asset butonly when the reimbursement is virtually certain the expense relating to anyprovision is presented in the income statement net of any reimbursement. If theeffect of the time value of money is material, provisions are determined bydiscounting the expected future cash flows at a pre-tax rate that reflectscurrent market assessments of the time value of money and, where appropriate,the risks specific to the liability. Where discounting is used, the increase inthe provision due to the passage of time is recognised as a borrowing cost. y. Dividend distribution Dividend distribution to the Company's shareholders is recognized as a liabilityin the Company's financial statements in the period in which the dividends areapproved by the Company's shareholders. z. Share capital Share capital is recognised at the fair value of consideration received. Anyexcess over the nominal value of shares is taken to the share premium reserve. Costs incurred for issuing new share capital when the issuance results in a netincrease or decrease to equity are charged directly to equity. Costs incurredfor issuing new share capital when the issuance does not result in a change toequity are taken to the income statement. NOTE 3:- SEGMENT INFORMATION The segment reporting format is determined to be business segments as theGroup's risks and rates of return are predominantly affected by differences inthe use of real estate assets of the Company. Since most of the operating activity of the Company is in Russia, geographicalsegments are immaterial to the Company's activity. The commercial segment leases real estate for commercial purposes, theresidential segment develops real estate assets for sale for residentialpurposes. The following tables present revenue and profit and certain assets and liabilityinformation regarding the Group's business segments. NOTE 3:- SEGMENT INFORMATION (Cont.) Year ended 31 December 2007 Year ended 31 December 2006 Commercial Residential Total Commercial Residential Total U.S. dollars in thousandsRevenuesRental income from investment properties 10,446 - 10,446 3,707 - 3,707Revenue from management and consulting 1,977 - 1,977 533 - 533fees Total revenues 12,423 - 12,423 4,240 - 4,240Fair value adjustments of investment 82,138 - 82,138 35,878 - 35,878properties Total income 94,561 - 94,561 40,118 - 40,118Inter segment income - - - 203 - 203 94,561 - 94,561 40,321 - 40,321 Segment results (1) 69,872 (1,314) 68,558 33,289 (289) 33,000 Unallocated expenses (12,556) (2,584)Net finance income 14,301 2,330 Profit before income tax 70,303 32,746Tax expense (5,423) (2,797) Profit for the year 64,880 29,949 Assets and liabilitiesSegment assets 352,072 100,133 452,205 109,433 98,978 208,411Unallocated assets - - 207,237 - - 267,134 Total assets 659,442 475,545 Segment liabilities 23,370 1,202 24,572 2,743 - 2,743Unallocated liabilities (2) 160,627 106,250 Total liabilities 185,199 108,993 Other segment information: Capital additions 100,449 22,003 122,452 22,894 48,235 71,129Purchase of subsidiaries (included in 28,028 - 28,028 18,398 - 18,398capital additions)Depreciation 286 1 287 8 - 8 (1) Includes an expense for registration of land lease of $ 5,469 thousand. (2) Includes mainly tax, financing assets and genuine central assets. NOTE 4:- OPERATING EXPENSES Year ended 31 December 2007 2006 U.S. dollars in thousandsMaintenance of property 4,544 774Land lease payments 195 49Fee to management company 60 40Property tax on investment property 812 -Land tax on investment property under construction and 773 -inventories of buildings under construction 6,384 863 NOTE 5:- GENERAL AND ADMINISTRATIVE EXPENSES Year ended 31 December 2007 2006 U.S. dollars in thousandsOffice maintenance 1,330 85Professional fees 4,968 1,096Marketing fees 674 -Salaries (1) 8,506 3,152Depreciation of equipment 287 8Write-down of advance on account of investment 406 129Provision to service provider 7,643 3,588Traveling expenses 1,440 *) 738Other costs 1,452 *) 43 26,706 8,839 (1) Includes cost of share-based payment (see Note 3,851 2,34821) *) Reclassified. The fee in consideration of the audit is in the amount of approximately $ 1,398thousand (2006 - $ 305 thousand). The fee to directors is approximately $ 521 thousand (2006 - $ 28 thousand). NOTE 6:- FINANCE COSTS AND INCOME Year ended 31 December 2007 2006 U.S. dollars in thousands a. Finance costs: Interest costs - financial liabilities not at (10,669) (5,257)fair value through profit and lossNet capitalized interest costs 2,016 4,031Effect of discounting of long-term receivables 1,400 -capitalized to investment properties underconstructionFair value adjustment of swap agreement (50) -Effect of discounting of long-term receivables 1,400 - (8,703) (1,226) b. Finance income: Interest income - from cash and cash equivalents 10,744 399and restricted depositsInterest income from loans provided 843 -Interest income from financial assets not at fair 10,857 321value through profit and lossOther (mainly foreign exchange differences) 11,417 3,157 23,004 3,556 NOTE 7:- TAXATION a. Tax expense: Year ended 31 December 2007 2006 U.S. dollars in thousands Current taxes 2,659 993Prior year taxes - 908Deferred taxes 2,764 896 Tax expense in income statements 5,423 2,797 NOTE 7:- TAXATION (Cont.) b. A reconciliation between the tax expense in the income statements andthe product of profit before tax multiplied by the current tax rate can beexplained as follows: Year ended 31 December 2007 2006 U.S. dollars in thousands Profit before tax expense 70,303 32,746 Tax at the statutory tax rate in Cyprus (10%) 7,030 3,275Increase (decrease) in respect of:Temporary differences in respect of which no (17,918) (8,611)deferred tax was recorded *)Effect of different tax rate in Russia (24%) and 13,224 5,220Hungary (16%)Effect of change in tax law in Russia - 1,289Prior year taxes - 908Losses for which deferred tax assets were not 2,852 403recordedIncome not subject to tax (641) -Other 876 313 Income tax expense 5,423 2,797 *) The fair value adjustments of the investment properties result in atemporary difference between the carrying value of the properties and their taxbasis. Since it is the intention of management to sell the shares in companiesholding those properties rather than the properties themselves, deferred taxeson the above differences have not been recorded (see Note 9). Taxation in Russia The taxation of companies under the Russian Federation is as follows: Income tax - 24% of profits; VAT - 18% of sales; Asset tax - 2.2% of the net book value of fixed assets. NOTE 7:- TAXATION (Cont.) Taxation in Cyprus The Company is resident in Cyprus for tax purposes. The taxation of companies isbased on tax residence and all companies are taxed at the standard rate of 10%. In certain cases, Special Defense Contribution at the rate of 10% is imposed oninterest received and deemed interest income. Dividend income from Cyprus taxresident companies and profits from the sale of shares and certain other titlesare exempt from taxation. Dividend income received from abroad is exempt fromIncome Tax and provided that certain conditions are met could also be exemptfrom Special Defense Contribution. There is no withholding tax on payments of dividends to non-residentshareholders or shareholders that are companies resident in Cyprus. Payments ofdividend to shareholders who are individuals resident in Cyprus are subject to a15% withholding tax. Companies, which do not distribute 70% of their profits after tax, as defined bythe relevant tax law within two years after the end of the relevant tax year,will be deemed to have distributed as dividends 70% of these profits. SpecialDefense Contribution at 15% will be payable on such deemed dividends to theextent that the shareholders (companies or individuals) are Cyprus taxresidents. The amount of deemed distribution is reduced by any actual dividendspaid out of the profits of the relevant year. The Special Defense Contributionis payable for the account of the shareholders. c. Deferred taxes: 31 December 2007 2006 U.S. dollars in thousands Opening balance 1,755 301Additions from purchase of subsidiaries - 436Charged to the income statements 2,764 896Exchange rate differences 385 122 Closing balance 4,904 1,755 d. The loss carried forward of the Company (including subsidiaries)amounts to approximately $ 398 thousand and a deferred tax asset amounting to $92 thousand has been recognized. NOTE 8:- EARNINGS PER SHARE Year ended 31 December 2007 2006 Weighted average number of Ordinary shares used for 103,558 (1) 58,814computing basic earnings per share (in thousands) Weighted average number of Ordinary shares used for (2) 103,558 (1) 58,963computing diluted earnings per share (in thousands)(see Note 20) Income used for computing basic and diluted earnings 64,880 30,233per share (in thousands of U.S. dollars) (1) Retrospectively adjusted for the pooling of interests and for the sharesubdivision. (2) The options have no dilutive impact in 2007, since as of 31 December2007, the exercise price of the options is higher than the charge price. NOTE 9:- INVESTMENT PROPERTIES a. Composition: U.S. dollars in thousands At 1 January 2006 12,863Additions from acquisition of subsidiaries 6,239Additions for the year 4,031Fair value adjustments 35,878Exchange rate differences 6,698 At 31 December 2006 65,709Transfer from investment properties under construction (1) 32,081Additions for the year 36,056Fair value adjustments 82,138Exchange rate differences 11,046 At 31 December 2007 227,030 (1) Construction of a mall in Yaroslavl was finished during 2007 andtherefore the asset was reclassified from investment properties underconstruction to investment properties. See Note 10. b. The investment properties are stated at fair value, which has beendetermined based on valuations performed by independent appraisers (Cushman &Wakefield Stiles & Riabokobylko). The fair value represents the amount at whichthe assets could be exchanged between a willing buyer and willing seller in anarm's length transaction at the date of valuation, after proper marketingwherein the parties had each acted knowledgeably, prudently and withoutcompulsion, in accordance with International Valuation Standards. The valuationsare based on the income approach. In the case of completed and operatingbuildings, this approach involves a direct capitalization of the net income and,in respect of buildings under renovation, a discounted cash flow analysis. NOTE 9:- INVESTMENT PROPERTIES (CONT.) c. The fair value adjustments of the investment properties result in atemporary difference between the carrying value of the properties and their taxbasis. Since it is the intention of management to sell the shares in companiesholding these properties rather than the properties themselves, deferred taxeson the above differences have not been recorded. However, the fair values of theproperties have been reduced in 2007 and 2006 by $ 28,644 thousand and $ 17,202thousand, respectively, to reflect the fair values of the deferred taxliabilities that the Company would transfer to a buyer upon the sale of thecompanies owning the properties. The reduction was calculated based on the 24%income tax rate in Russia. The Company's management believes that the actualamount of the reduction might be substantially lower due to economic benefitsthat the buyer will be entitled to, based upon the differences arising from themethod of disposal, i.e. direct asset sale or share sale NOTE 10:- INVESTMENT PROPERTIES UNDER CONSTRUCTION U.S. dollars in thousands At 1 January 2006 11,358Additions from purchase of joint ventures 12,875Additions for the year 17,971Capitalized interest 3,658Exchange rate differences 1,068 At 31 December 2006 46,930Transfer to investments properties under construction (1) (32,081)Additions for the year 61,020Capitalized interest and effect of discounting of long-term receivables 3,416Exchange rate differences 8,678 At 31 December 2007 87,963 (1) See Note 9. a. Investment properties under construction are presented at cost. b. On 3 January 2007, the Company completed the initial stage of anagreement to acquire 100% of the share capital of Gasconade, a Cypriot companythat holds 58% of the shares of RealService, which owns leasehold rights to aplot of land in Moscow, in order to set up a skyscraper on the plot of land. Theoverall consideration was $ 13 million, of which $ 1.6 million was paid by theCompany in 2006. The Company also entered into an agreement to acquire 100% ofthe share capital of Laykapark, a Cypriot company which holds 21% of the sharesof RealService in consideration of $ 4.5 million. In October 2007, the Companysigned an amendment to the agreement, which included the acquisition of theremaining 21% of RealService's shares for an additional $ 3.9 million by the endof 2007 and for the assigning of shareholders' loans totaling approximately $600 thousand. NOTE 10:- INVESTMENT PROPERTIES UNDER CONSTRUCTION (Cont.) c. On 30 July 2007, a subsidiary of the Company entered into an agreementfor acquiring the share capital of two Russian companies which together hold therights to constructing an office building in Moscow. The Company intends to complete the construction of the officebuilding. The acquisition consideration amounted to approximately $ 6.3 million. d. In October 2007, a wholly-owned subsidiary of the Company signed anagreement for acquiring a building in Kazan, Russia for an overall cost ofapproximately $ 1.3 million. Signing the agreement represents a first step inthe exercise of the Company's memorandum of understandings signed with themunicipality of Kazan for acquiring rights to a complex in the city for erectinga commercial center. NOTE 11:- INVENTORIES OF LAND U.S. dollars in thousands At 1 January 2006 24,736Additions for the year 48,235Capitalized interest 373Exchange rate differences 2,849 At 31 December 2006 76,193 Reclassification to inventories of buildings under construction (see Note 12) (76,193)Capitalized interest -Exchange rate differences - At 31 December 2007 - Inventories of land are intended for construction of residential apartments andvacation homes that are to be sold, and are presented at cost. NOTE 12:- INVENTORIES OF BUILDINGS UNDER CONSTRUCTION U.S. dollars in thousands At 1 January 2007 - Reclassification to inventories of buildings under construction (See Note 11) 76,193Additions for the year 22,003Exchange rate differences 5,784 At 31 December 2007 103,980 Inventories of land are intended for construction of residential apartments andvacation homes that are to be sold, and are presented at cost. NOTE 13:- LOANS PROVIDED a. In December 2007, a wholly-owned subsidiary of the Company granted aloan to a third party for purchasing land in Saratov, Russia for buildings and alogistic center that is secured by a mortgage. The subsidiary intends to acquirethe rights to the land during the year 2008, upon fulfillment of certainconditions. The loan bears annual interest of 7% and is repayable on demand ofthe subsidiary. b. On 31 December 2007, a wholly-owned subsidiary of the Company enteredinto a memorandum of understandings with two private companies ("the sellers")for the purchase of 51% of the sellers' shares in the companies Inomotor andAvtoprioritet, both incorporated under the laws of the Russian Federation. The Project is adjacent to Hydro and Mag Projects and is composed of twobuildings. One building is owned by Inomotor and the other is owned byAvtoprioritet, which after their renovation and expansion shall include theproject complex and project buildings. The subsidiary granted a loan of approximately $ 6.5 million to Avtoprioritetfor purchasing this company. The loan bears 11% annual interest and is repayableno later than 3 years from its receipt. Regarding post-balance sheet date events, see Note 29c. c. In May 2007, the Group signed a master agreement ("the agreement") witha local Russian company for setting up two real estate projects in Moscow ("theprojects"). The Group will extend loans totaling approximately $ 116.5 million to the localcompany for the purpose of erecting the residential projects, subject to thecompletion of a due diligence study, entering into detailed agreements and theoccurrence of certain conditions determined in the agreement. The loans willbear 10% interest per annum. In June 2007, the Group provided a loan of approximately $ 14 million to thelocal company, bearing interest of 10% per annum, in order to support theinitial planning and development stages of the projects. The Group is acting to record mortgages on the real estate properties producedas a guarantee for the repayment of the loan, which as of the date of thesefinancial statements, are still in various recording stages in such a mannerthat to date, the loan is not secured by any guarantee. The loan is carried at amortised cost. The loan is to be repaid after the localcompany constructs the residential projects. NOTE 14:- ADVANCE ON ACCOUNT OF INVESTMENT a. In 2006, the Company paid a total of $ 1,600 thousand in the context ofa master agreement for the acquisition of the entire issued share capital ofCypriot companies holding 100% of the shares of a Russian company which owns theleasehold rights to a skyscraper project in Moscow for the lease of offices. On 28 December 2006, the acquisition transaction was finalized (seeNote 10d). b. In March 2007, the Company signed a letter of intent for theacquisition of 100% of the share capital of a Russian company holding a plot ofland in Ufa, Russia for the purpose of erecting a logistic center. The Companypaid a sum of $ 1 million as an advance which the Company believes will berecovered should the transaction fail to be executed. As of the date of theapproval of the financial statements, the acquisition agreement has not beensigned. NOTE 15:- EQUIPMENT U.S. dollars in thousands At 1 January 2006, net of accumulated depreciation 104Additions for the year 892Depreciation for the year (8)Exchange rate differences 94 At 31 December 2006, net of accumulated depreciation 1,082Additions for the year 3,373Depreciation for the year (287)Exchange rate differences 698 At 31 December 2007, net of accumulated depreciation 4,866 At 31 December 2005Cost 108Accumulated depreciation (4) Net carrying value 104 At 31 December 2006Cost 1,094Accumulated depreciation (12) Net carrying value 1,082 At 31 December 2007Cost 5,165Accumulated depreciation (299) Net carrying value 4,866 NOTE 16:- LONG-TERM RECEIVABLES AND PREPAYMENTS 31 December 2007 2006 U.S. dollars in thousands Prepayments - 2,315Long-term receivables 12,891 3,643 12,891 5,958 Comprises VAT which was paid upon the purchase and construction of land, andwhich the Group expects to recover more than 12 months from the balance sheetdate. NOTE 17:- CASH AND CASH EQUIVALENTS 31 December 2007 2006 U.S. dollars in thousands Cash in banks 65,476 7,112Short-term deposits (1) 52,282 189,474 117,758 196,586 (1) The short-term deposits are deposited in the bank for terms under 3months that bear an annual interest of 1.5%-5.9%. NOTE 18:- TRADE AND OTHER RECEIVABLES 31 December 2007 2006 U.S. dollars in thousands Trade receivables (1) 268 2,896Prepayments to suppliers 1,195 1,622Government authorities (mainly VAT) 4,696 1,606Advances paid for IPO - 1,053Other 1,566 2,980 7,725 10,157 (1) The balances represent amounts that are neither past due nor impaired. NOTE 19:- RESTRICTED DEPOSITS Deposits held to secure the Company's compliance with liabilities to banks, seeNote 24. The deposits are for periods of one day to one month and are renewedeach period. Interest 31 December rate 2007 2006 % U.S. dollars Restricted deposits 4.2 71,312 71,330 NOTE 20:- EQUITY 31 December 2007 2006 U.S. dollars Authorized shares of $ 0.01 par value each 1,200,000 1,200,000 Issued and fully paid shares of $ 0.01 1,035,580 1,000,000par value each NOTE 20:- EQUITY (Cont.) The Company was incorporated with an issued share capital of C£ 5,000, dividedinto 5,000 Ordinary shares of C£ 1 par value each. On 10 October 2005, theCompany's authorized share capital was subdivided into 7,110 Ordinary shares of$ 1 par value each and was paid. The following changes in share capital of theCompany are as follows: Date Nature of Number of Number of issued and fully paid shares Share Par Change authorized capital value shares after (in the change thousands) Before The change After the the change change 29 Issues of 17,775 7,110 10,665 17,775 17 $ 1September shares in2006 respect of pooling of interests 13 November Subdivision 1,777,500 - - 1,777,500 17 $ 0.012006 of share capital 13 November Increase in 70,000,000 - - - 17 $ 0.012006 authorized share capital 13 November Issuance of 70,000,000 1,777,500 68,222,500 70,000,000 700 $ 0.012006 bonus shares 13 November Increase in 120,000,000 70,000,000 - 70,000,000 700 $ 0.012006 authorized share capital 18 December Issuance of 120,000,000 70,000,000 5 70,000,005 700 $ 0.012006 shares in consideration of capitalization of loans 18 December Issue of 120,000,000 70,000,005 30,000,000 100,000,005 1,000 $ 0.012006 shares 4 January Issue of 120,000,000 100,000,005 3,558,000 103,558,005 1,036 $ 0.012007 shares NOTE 20:- EQUITY (Cont.) On 18 December 2006, the Company issued 30 million Ordinary shares at a price ofGBP 4.78 per share in an initial public offering ("IPO"), and all of itsOrdinary shares were submitted for trading on the AIM, a market operated by theLondon Stock Exchange. The proceeds received from the IPO amounted to $ 259,222thousand, net of issuance expenses of $ 20,328 thousand. As part of the IPO process, an underwriting agreement was signed between theissuance underwriters, the Company, its controlling shareholders and the boardmembers whereby JEC, Industrial Buildings and Darban, subject to exceptionsdetermined in the underwriting agreement, committed not to sell their shares inthe Company to the public for a period of one year from the date of the IPO. On 4 January 2007, the Company issued about an additional 3,558 thousand sharesto Merrill Lynch and Credit Suisse as a result of the options granted to them asaccompanying underwriters in the public offering. In return for the exercise ofthe options, the Company received $ 30,811 thousand after issuance expenses of $ 2,389 thousand. Dividend policy The Company adopted a dividend policy which reflects the long-term earnings andcash flow potential of the Company, taking into account the Company's capitalrequirements, while at the same time maintaining an appropriate level ofdividend cover. Subject to these factors, and where it is otherwise appropriateto do so, the Company intends to declare a dividend of 2% of the Adjusted NAV onAdmission (taking into account the net proceeds of the Placing) for thefinancial year 2008, and 7% of the Adjusted NAV on Admission (market value ofcompany's property assets, as determined by a third party valuation, adjusted toreflect the percentage interests held by the Group, plus its non-property assetsminus its total liabilities minus assumed amounts payable under certainmanagement services agreements with Senior Managers) for the financial year2009, with a view to increasing the dividend in line with the Company's cashflow growth in the future. Share option scheme The Company has share option plans, adopted by the Company on 19 November 2006("the adoption date"), according to which a certain portion of the options wasgranted immediately and the remaining options will be granted in the future. In the issuance that took place on 18 December 2006, options to purchase1,871,658 Ordinary shares were granted under the share option plan to employees("employee options"). The exercise price of the employee options is equivalentto the price in the offering of the Ordinary shares (GBP 4.78 per share). Theemployee options will vest over three years from the grant date, in equaltranches from the anniversary of the grant date. Termination of employmentrenders the options that are not yet vested expired. The options will expirewithin five years from the date of grant or within three months from the date oftermination of employment, whichever is sooner. Also, in the issuance that took place on 18 December 2006, options to purchase1,497,326 Ordinary shares were granted under the share option plan to officersof subsidiaries of the Company ("options to officers"). NOTE 20:- EQUITY (Cont.) The terms of half of the options to officers are identical to the terms ofoptions to employees. The options to officers will vest over three years fromthe grant date, in equal tranches from the anniversary of the grant date.Termination of employment renders the options that are not yet vested expired Half of the options to officers are vested on the grant date. The exercise pricewill be paid by a cashless exercise according to a mechanism determined by theCompany's Board (so that in practice, the number of shares allocated to theoptionee will only be in respect of the bonus component upon the exercise, wherethe exercise price is not paid by the optionee). The options are to be exercisedwithin five years from the grant date, otherwise they expire. Also in the context of the issuance that took place on 18 December 2006, theunderwriters accompanying the issuance received an option to purchase 3,558,000shares of the Company for an exercise price of Stgf 4.78 per share. The optionwas exercisable until 6 January 2007. On 4 January 2007, the option wasexercised. The above grant had no effect on the financial statements since itwas accounted as transaction of the issuance of the shares carried to equity. Details on equity-settled share-based payment transaction: 2007 2006 U.S. dollars in thousands Fair value of the options 8,823 8,823Less - recognized as expense in the income statement (6,199) (2,348) Expense to be recognized in the future 2,624 6,475 Fair value per option 2.62 2.62 There has been no movement in options granted. The following table lists the binomial model used for the plans for the yearended 31 December 2007: Vested on grant date Expected volatility (%) 31.89Risk-free interest rate (%) 5Expected life of option (months) 6Weighted average share price (Stgf) 4.78 Vested over three years Expected volatility (%) 31.89Risk-free interest rate (%) 5Expected life of option (months) 24Weighted average share price (Stgf) 4.78 NOTE 20:- EQUITY (Cont.) The expected life of the options is based on historical data and Company'sexpectations and is not necessarily indicative of exercise patterns that mayoccur. The expected volatility reflects the assumption that the historicalvolatility is indicative of future trends, which may also not necessarily be theactual outcome. The volatility was calculated according to comparative data ofcompanies with similar activity. No options were exercised as of the balance sheet date. The options were appraised by an independent appraisal company. NOTE 21:- RELATED PARTIES a. Transactions with related parties: Year ended 31 December 2007 2006 U.S. dollars in thousands Interest expense to shareholders *) 97 4,498 *) Includes amounts capitalized - 3,626 b. Balances with related parties: 31 December 2007 2006 U.S. dollars in thousands Debentures acquired by shareholders (see Note 22) 24,687 - Terms and conditions of loans: c. For details of agreements with related parties - see Note 28. NOTE 21:- RELATED PARTIES (Cont.) d. Compensation of key management personnel of the Group 31 December 2007 2006 U.S. dollars in thousands Salaries (1) 856 40Share-based payments 3,851 101 4,707 141 (1) Key personnel were appointed at the end of 2006. NOTE 22:- DEBENTURES On 7 December 2007, the Company raised approximately $ 63 million by issue of 2series (A and B) of debentures in NIS on the Tel-Aviv Stock Exchange of NIS 1par value. Both series are redeemed in 6 annual equal and consecutive paymentson 31 December for each of the years 2010-2015 (inclusive). Issuance expenseswere discounted from the debentures and will be recognized according to theeffective interest method. Issuance expenses of approximately $ 1 million werededucted from the consideration. Series A - is in NIS linked to the Israeli Consumer Price Index. The debenturepays an annual interest of 6.5%. The Company has signed a swap agreementregarding this series (see Note 27c). Series B - is in NIS, linked to the NIS/U.S. dollar exchange rate. The debenturepays an interest of Libor (for dollar deposits for a period of six months) plusa margin of 2.75%. 31 December 2007 Number in Effective U.S. dollars thousands interest rate in thousands Series A 39,260 4.16% (1) 10,048Series B 204,874 3.84% 52,040 62,088 (1) In respect of a swap agreement (see Note 27c). Regarding acquisitions by related parties, see Note 28. NOTE 23:- ACCOUNTS PAYABLE AND ACCRUALS 31 December 2007 2006 U.S. dollars in thousands Trade payables 6,640 2,385Property tax payable 570 -Income tax payable 526 -Rent received in advance 2,761 783Payment due on account of purchase of subsidiary - 300Other creditors in connection with IPO - 3,413Accrued expenses and other payables 648 1,788 11,145 8,669 NOTE 24:- CREDIT FROM BANKS a. In October 2006, the Company received approximately $ 71.4 million ason-call loans from banks guaranteed by shareholders. The guarantees werecancelled in the course of 2007. The bank loans bear annual interest at rates ofLIBOR plus 1.1% to 1.25%. Bank deposits have been placed to secure the Company'sliabilities in respect of these loans (see also Note 19). Weighted interest 31 December rate 2007 2006 % U.S. dollars in thousands Short-term credit from banks Libor + 1.25 71,406 71,330 Current maturities of long-term 5,290 -loans 76,696 71,330 b. In February 2006, a jointly controlled entity received a loan ofapproximately $ 42 million from the Company, bearing annual interest of 12%. Thejointly controlled entity's relative share in the loan is approximately $ 21million. The loan is carried at amortised cost. NOTE 24:- CREDIT FROM BANKS (Cont.) The maturity dates of long-term loans subsequent to balance sheet dateare as follows: 31 December 2007 2006 U.S. dollars in thousands First year - current maturities 5,290 -Second year 5,290 5,430Third year 5,290 5,430Fourth year 5,293 10,859 21,163 21,719 NOTE 25:- OTHER LONG-TERM LIABILITY U.S. dollars in thousands At 1 January 2006 582Provision to service provider 3,588Exchange rate differences 143 At 31 December 2006 4,313Provision to service provider 7,643Exchange rate differences 783 At 31 December 2007 12,739 According to the management services agreement signed between MAG and Hydro("the companies") and FIN ("the service provider"), the service provider shallbe entitled to receive a one-time payment equal to 10% of the net profit (asdefined below) of the companies from the sale of properties, if they are sold toa third party, this in return for the service provider's assistance in sourcingthe project. See also Notes 26b and 26i. The net profit in relation to these properties is calculated as: the price ofthe property paid by the third party, less any expenses that the companiesincurred as a result of such sale, less repayments of any external debt of thecompanies, and only after the balance of any outstanding shareholder loans plusan annual interest of 10% have been repaid in full to the relevant shareholderand/or repayment of any other third party financing relating to said property.The amounts paid for the acquisition of the companies at the date of acquisitionand thereafter will be treated as shareholders loans to the Company for thepurposes therein. The Company's books include income from the revaluation of investmentproperties. Accordingly, a liability measured at fair value has been recordedbased on the fair value of the properties as recorded in the financialstatements at each balance sheet date. The changes in the fair value of theliability in the reported period are carried to the income statement. NOTE 26:- COMMITMENTS AND CONTINGENCIES a. Group as lessee: The Group entered into commercial lease agreements for real estate. These leasesare irrevocable and have a life of 4-45 years with a renewal option. One of thelease contracts contains a condition allowing the Company to update the leasefees on an annual basis according to changes in market conditions. Future minimum lease payments at 31 December 2007 are as follows: U.S. dollars in thousands First year 178After one year but no more than five years 587More than five years 4,305 Total 5,070 b. On 1 July 2005, Hydro and FIN entered into a management serviceagreement for an indefinite period. FIN is a Russian company where thecontrolling shareholder also serves as the CEO of Hydro. Either party mayterminate the agreement without cause at any time upon providing the other partywith advance written notice of a minimum of three months. In return for the management services, FIN will be entitled to 2% ofthe lease fees actually received by Hydro from the project's buildings. It wasfurther agreed that the direct expenses of hiring additional employees in FINfor providing said management services will be paid by Hydro. Hydro's booksinclude the proper expenses. c. On 10 February 2006, IIK entered into a management agreement withNorman Project LLC ("Norman Project"), a subsidiary of NAM ("Norman AssetManagement"). According to the management agreement, Norman Project agreed toassume upon itself the current management of IIK and in return, IIK agreed topay Norman Project $ 200 thousand. The agreement is for an indefinite period.Either party may terminate the agreement at its discretion by providing priorwritten notice to the other party. d. On 22 May 2005, the Company and the other shareholders in Inverton(Gazprombank Invest and NAM) signed a shareholders' agreement whereby it wasagreed that NAM would be entitled to receive fees from Inverton based on a fixedformula in the shareholders' agreement in a total of approximately $ 1,763thousand for rendering certain management services stipulated in the agreement(mainly coordination with local factors). NOTE 26:- COMMITMENTS AND CONTINGENCIES (Cont.) e. On 27 November 2006, Global 1 entered into an agreement with a thirdparty for the current management of the commercial center in Yaroslavl, whichbegan its operations in April 2007. The agreement is in effect until 31 December2009 and will be automatically renewed for three more years unless either of theparties informs the other party of its wish to terminate the agreement. Inexchange for said management services Global 1 will pay monthly fees based on amechanism established in the agreement an adequate expense was recorded inGlobal 1's books in respect of the agreement. An expense of approximately $ 1.4million was recorded in the financial statements. f. The Company extended a loan to Mall Project whose balance as of 31December 2006 and 2007 is $ 3,616 thousand and $ 3,826 thousand, respectively,for the financing of the acquisition of the property under development inSaratov. According to the shareholders' agreement, the minority shareholders inMall Project will be entitled to receive rights to shares subsequent to therepayment of the loan and the accrued interest. The intercompany balancesregarding this loan were eliminated in the consolidated financial statements. g. On 16 March 2006, IIK entered into a consulting agreement with NormanProject according to which the latter undertook to provide consulting servicesto IIK in connection with the development and construction of a commercialproject in Saratov, in consideration of the equivalent of approximately $ 1million excluding VAT. The agreement expires on the performance in full by theparties of their obligations under the agreement. h. In December 2006, RealService entered into an agreement with FIN forproviding management services. The terms of the agreement are identical to theterms of Hydro's engagement with FIN. The adequate expenses were included inRealService's books. In addition, FIN will be entitled to 10% of the net profitsfrom the sale of the project after completion. i. In February 2006, MAG and FIN entered into a management serviceagreement. The terms of the agreement are identical to Hydro's engagement withFIN. MAG's books include the adequate expenses. j. On 24 May 2007, IIK entered into a contracting agreement with aRussian company controlled by Denya Cebus Ltd. ("Denya") for the construction ofthe commercial center in Saratov as a main contractor in consideration of anoverall $ 50.8 million principally paid at the rate of the project's progress.As of 31 December 2007, Denya commenced supplying services as detailed in theagreement. The overall expense recorded as of 31 December 2007 in the financialstatements of the Company is approximately $ 5 million, which was capitalized toinvestment property under construction. NOTE 26:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) k. On 29 May 2007, IIK entered into an agreement with a bank whereby thebank will extend a loan of approximately $ 48.5 million to IIK for a period of15 years to be repaid in quarterly installments, while during the first twoyears, IIK will pay interest alone. The loan will bear interest of Libor + 0.5%. The Company guaranteedIIK's liabilities towards the bank until the conditions undertaken by IIK towardthe bank are met as detailed below: 1. The project will be completed by 31 December 2011. 2. IIK's debt coverage ratio will not be below 1.3. 3. The ratio of equity to total liabilities will not be below 0.5 beforethe project is completed and 0.4 after the project is completed. 4. No dividends will be distributed until the project is completed. 5. No investments in a total exceeding $ 250 thousand that are not incompliance with the bank approved project budget will be performed. To secure the loan, IIK will pledge its rights to the project area and rights tothe project as well as the shares of IIK held by the Company in favor of thebank. Expenses regarding this loan are recorded as other assets in the balance sheet.Once the loan is received, these deferred expenses will be discounted from theloan and recognized in profit and loss according to the effective interestmethod. l. On 27 November 2006, Petra entered into an agreement with a thirdparty for receiving management services for which it shall pay approximately $9.3 million in 95 monthly installments. Petra will also pay success commissionsof approximately $ 1.7 million for complying with established targets. Thefinancial statements include adequate expenses. m. On 30 November 2006, Creative entered into an agreement for receivingmanagement services from FIN. In return for the management services, FIN will beentitled to an amount equal to 2% of the net selling price obtained by Creativefrom the sale of residential units. The direct expenses relating to therecruiting and hiring of additional employees in FIN for providing saidmanagement services will be paid by Creative. n. On 1 August 2006, Creative entered into an agreement for receivingmanagement and supervision services from a third party whereby the third partywill be entitled to approximately $ 2 million to be paid in 33 equal monthlyinstallments. NOTE 26:- COMMITMENTS AND CONTINGENCIES (Cont.) o. Expected rental income: The lease agreements of the Company's subsidiaries are for periods of up to 10years. The minimum rental income is as follows: 31 December 2007 2006 U.S. dollars in thousands First year 16,498 11,086 Second year until five years 55,577 44,314 More than five years 24,712 - 96,787 55,400 p. The previous owners of a plot of land in Yaroslavl, which is currentlyowned by the Group and on which the Group has erected a commercial center, haveentered into an agreement with the municipality of Yaroslavl whereby themunicipality of Yaroslavl will be entitled to 8% of the value of the built areaon said land. The Company's management estimates that based on the analysis of the series ofagreements regarding said engagement, it is not materially exposed in respect ofthe built stage of the project. q. On 1 August 2007, Creative entered into an agreement with a third partyfor the construction of a residential project of semi-detached houses inconsideration of a total of approximately $ 24 million to be paid according tothe rate of completion of the project's construction. r. As for events subsequent to balance sheet date, see Note 29. NOTE 27:- FINANCIAL INSTRUMENTS a. Financial risk factors: The Group's activities in the Russian market expose it to various financialrisks such as market risk (including foreign currency risk, fair value risk inrespect of interest rate and price risk) and credit risk. The Group'scomprehensive risk management plan focuses on activities that reduce to aminimum any possible adverse effects on the Group's financial performances. 1. Exchange rate risk: The Group has balances of financial instruments held in Ruble, New IsraeliShekels ("NIS") and Hungarian Forint ("HUF"). The Group is exposed to changes inthe value of these financial instruments due to changes in exchange rates. TheGroup's policy is not to enter into any hedging transactions in order to hedgeagainst exchange rate risks, except for raising funding from the public. a) The following table represents the sensitivity to a reasonably possiblechange in the U.S. dollar/Ruble exchange rates in the year 2007: Effect on equity Increase Decrease 10% 5% 10% 5% U.S. dollars in thousands Cash and cash 588 294 (588) (294)equivalentsTrade and other 689 344 (689) (344)receivablesLong-term receivables 1,569 785 (1,569) (785)Trade and other payables (1,002) (502) 1,002 502 b) The following table represents the sensitivity to a reasonable possiblechange in U.S. dollars/NIS exchange rates in the year 2007: Effect on equity Increase Decrease 10% 5% 10% 5% U.S. dollars in thousands Cash and cash 4 2 (4) (2)equivalentsTrade and other (9) (4) 9 4receivables Effect on profit before tax Increase Decrease 10% 5% 10% 5% U.S. dollars in thousands Debentures (series A) (194) (98) 194 98and swap agreement NOTE 27:- FINANCIAL INSTRUMENTS (Cont.) c) The following table represents the sensitivity to a reasonable possiblechange in U.S. dollars/HUF exchange rate differences in the year 2007: Effect on equity Increase Decrease 10% 5% 10% 5% U.S. dollars in thousands Trade and other (55) (28) 28 55receivables 2. Credit risk: The Group performs ongoing evaluations of the prospects of collecting debts ofcustomers and buyers and, if necessary, it records a provision in the booksreflecting the losses anticipated by management. The financial statements do notinclude an allowance for doubtful accounts since management believes the chancesof collecting all the debts of customers and buyers are good. The maximum creditrisk is the carrying amount of the financial assets in the balance sheet. Maximum credit risk exposure is the carrying amount of financial assets. All theassets are not past due or impaired. 3. Interest rate risk: The Group has placed deposits in banks, which are held for short periods, andhas also taken out loans from banks. In December 2007, the Group issueddebentures (see Note 22). These balances bear variable interest and thereforeexpose the Group to cash flow risk in respect of increase in interest rates. a) The following table represents the sensitivity to a reasonable possiblechange in interest on balances in NIS in the year 2007: Effect on profit before tax Increase Decrease 10% 5% 10% 5% U.S. dollars in thousandsDebentures (series A) 117 60 (126) (62)and swap agreement b) The following table represents the sensitivity to a reasonable possiblechange in interest on balances in U.S. dollars in the year 2007: Effect on profit before tax Increase Decrease 10% 5% 10% 5% U.S. dollars in thousands Rent agreements (2) (1) 2 1Long-term loan (177) (89) 181 91Lease agreements 91 47 (108) (52)Long-term loans 465 235 (239) (483) NOTE 27:- FINANCIAL INSTRUMENTS (Cont.) 4. Linkage to Israeli CPI risk: In December 2007, the Company issued in the Israeli Stock Exchange debentures(series A) (see Note 22). These debentures are linked to the Israeli CPI. Inorder to hedge this risk, the Company entered into a swap agreement (see cbelow). The following table represents the sensitivity to a reasonably possible changein Israeli CPI in 2007: Effect on profit before tax Increase Decrease 10% 5% 10% 5% U.S. dollars in thousands Debentures (series A) and swap 38 19 (38) (19)agreement 5. Significant risk exposure: The only item in the balance sheet that is affectedsignificantly by various risks is debentures nominated in shekels. Since thereis a hedge on this item, the risk is not material. b. Fair value of financial instruments: Set out below is a comparison by category of carrying amounts and fair values ofall the financial instruments of the Group in 2007 (in the year 2006 - all theinstruments are presented at their fair value): 31 December 2007 Carrying Fair value amount U.S. dollars in thousands Long-term loan 14,829 15,016 Long-term receivables and prepayments 15,691 15,691 Trade and other receivables 7,725 7,905 Short-term loans 7,692 7,692 Restricted deposits 71,312 71,312 Cash and cash equivalents 117,758 117,758 Debentures (series A) and swap agreement (1) (10,098) (10,257) Debentures (series B) (52,040) (52,040) Long-term loans from banks (21,163) (21,128) Accounts payable and accruals, including (12,635) (13,069) income tax (1) The fair value represents the market value of the debenture on the TAStock Exchange. NOTE 27:- FINANCIAL INSTRUMENTS (Cont.) c. On 31 December 2007, the Company entered into a transaction agreementwith Bank Leumi (UK) plc. According to the agreement, payments of the Company onaccount of Series A debentures (see Note 22) will be linked to the NIS/U.S.dollar as of 31 December 2007, and the interest payments will be according toLIBOR (for dollar deposits for a six-month period), plus a margin of 3.72%. Thetransaction is hedging not recognized for accounting purposes, therefore isrecorded in each period according to the fair value. The fair value of the swapagreement at 31 December 2007 amounted to $ 50 thousand. d. Capital management: The primary objective of the Group's capital management is to ensurethat it maintains a strong credit rating and healthy capital ratios in order tosupport its business and maximize shareholder value. The Group manages its capital structure and makes adjustments to it, inlight of changes in economic conditions. To maintain or adjust the capitalstructure, the Group may adjust the dividend payment to shareholders, returncapital to shareholders or issue new shares. No changes were made in theobjectives, policies or processes during the years ended 31 December 2007 and2006. e. The table below summarizes the maturity profile of the Group'sfinancial assets at 31 December 2007 and 2006 based on contractual undiscountedpayments. 31 December 2007 On demand Less than 3 to 12 1 to 5 > 5 years Total 3 months months years U.S. dollars in thousands Long-term loans - - - - 14,829 14,829Long-term receivables and - - 7,400 5,491 - 12,891prepaymentsTrade and other receivables - 6,436 - - - 6,436Short-term loans - - 7,692 - - 7,692Restricted deposits 71,406 - - - - 71,406Cash and cash equivalents 117,758 - - - - 117,758 189,164 6,436 15,092 5,491 14,829 231,012 31 December 2006 On demand Less than 3 to 12 1 to 5 > 5 years Total 3 months months years U.S. dollars in thousands Long-term receivables and - - - 3,643 3,643prepaymentsTrade and other receivables 8,535 - - - - 8,535Restricted deposits 71,330 - - - - 71,330Cash and cash equivalents 196,586 - - - - 196,586 276,451 - - - 3,643 280,094 NOTE 27:- FINANCIAL INSTRUMENTS (Cont.) f. The table below summarizes the maturity profile of the Group'sfinancial liabilities at 31 December 2007 and 2006 based on contractualundiscounted payments. 31 December 2007 On demand Less than 3 to 12 1 to 5 > 5 years Total 3 months months years U.S. dollars in thousands Long-term loans from banks - 1,958 5,872 19,683 - 27,513Debentures and swap - - 4,683 57,418 22,465 84,566agreementOther long-term liability - - - - 12,739 12,739Short-term loan from bank 75,667 - - - - 75,667Accounts payable and 10,619 - - - - 10,619accruals 86,286 1,958 10,555 77,101 35,204 211,104 31 December 2006 On demand Less than 3 to 12 1 to 5 > 5 years Total 3 months months years U.S. dollars in thousands Long-term loans from banks - 635 1,905 27,512 - 30,052Other long-term liability - - - - 4,313 4,313Short-term loan from bank 75,587 - - - - 75,587Accounts payable and 7,886 - - - - 7,886accruals 83,473 635 1,905 27,512 4,313 117,838 NOTE 28:- AGREEMENTS WITH RELATED PARTIES a. From time to time, the Company purchases foreign travel services formembers of the board and senior officers in their line of duty. The flightservices are purchased, among other things, from a third party, Merhav, whichmaintains and operates the private jet owned by a private company that isindirectly wholly owned by Mr. Fishman and his family. Merhav charges theCompany for the actual flight hours and the number of hours of the jet's stayabroad. b. In December 2006, IRS entered into a lease agreement with AckersteinTowers Ltd. ("Ackerstein"), a subsidiary of IBC, under which IRS leases officesfrom Ackerstein. The lease period is for five years starting February 2007 andIRS has an option for extending the lease period by two additional years. Thelease fees approximate $ 60 thousand per annum. NOTE 28:- AGREEMENTS WITH RELATED PARTIES (Cont.) During 2007, renovation work was carried out at the Ackerstein Towersby Industrial Buildings. The Group's relative share in the renovation workamounted to approximately $ 198 thousand. c. Global, which holds a commercial center in Yaroslavl has entered into alease agreement with Home Centers LLC ("Home Center"), controlled by the Fishmanfamily, the controlling shareholders in the Company. The area leased to theGroup spans 6,712 sq. m., the minimal lease fees are $ 120 per sq. m. and thelease period, assuming the exercise of all the option periods, is 300 months.The engagement is under market conditions. d. Hydro leases to Home Center offices with an overall area of some 730sq. m. used for office purposes. The monthly lease fees approximate $ 22thousand. It was also agreed that Hydro will bear the offices' refurbishmentexpenses totaling $ 186 thousand. The lease period terminates on 30 September2011. The engagement is under market conditions. e. In December 2006, approximately $ 62 million of shareowners' loans werecapitalized to Company's equity and approximately $ 9 million shareholders'loans were repaid to the shareholders. NOTE 29:- SIGNIFICANT EVENTS SUBSEQUENT TO BALANCE SHEET DATE a. In February 2008, the Company purchased an additional 5% of the MallProject, for approximately $ 750 thousand. b. In February 2008, IIK entered into an additional management agreementwith NAM, according to which IIK will pay to NAM an amount of $ 450 thousandduring 2008. c. In January and February 2008, the Group granted a loan to Inomotor ofapproximately $ 7.4 million. In February 2008, in consideration of purchasingthe rights in Inomotor and Avtoprioritet, the Group provided the sellers a loanof $ 1 million. In addition, the Group committed to invest $ 1.6 million inInomotor and $ 3.3 million in Avtoprioritet for the purpose of investing in theproject buildings and the repayment of former debts to third parties. It wasfurther agreed that the Group shall provide a loan to Avtoprioritet in theamount of up to $ 7 million bearing an annual interest rate of 11% in order toenable Avtoprioritet to repay debts to third parties. NOTE 30:- DATE OF APPROVAL OF THE FINANCIAL STATEMENTS The Board of Directors approved these financial statements on 18 March 2008. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MLD.L