TIDMDUPD
RNS Number : 0172Q
Dragon-Ukrainian Prop. & Dev. PLC
01 June 2018
This announcement contains inside information for the purposes
of Article 7 of Regulation (EU) No. 596/2014.
Dragon-Ukrainian Properties & Development PLC
("DUPD" or the "Company")
1 June 2018
Results for the year ended 31 December 2017
Dragon-Ukrainian Properties & Development plc, a leading
investor in the real estate sector in Ukraine, is pleased to
announce its results for the year ended 31 December 2017.
Highlights
Operational Highlights
-- The Company continues to follow its investing policy as
approved by shareholders at the EGM in February 2014.
-- Sold the remaining interest in the Obolon Residences project
to Cheriton Overseas Limited, the same third-party developer that
acquired the rights to develop phase 2 of the Obolon Residences
project in February 2015.
-- Green Hills won a prestigious Eastern Europe Real Estate
Project Award for the Cottage of the Year while Obolon Residences
won an International Property Award for the Interior Design Show
Home category.
-- Green Hills, the suburban gated community, continued to
capitalize on its high quality and leading position in the market
as 25 land plots were sold during 2017 (2016: 29, 2015: 23).
Financial Highlights
-- Total NAV of USD 42.8 million as of 31 December 2017 (down
from USD 47.7 million as of 31 December 2016).
-- Cash balance as of 31 December 2017 is USD 9.2 million
(compared to USD 7.8 million as of 31 December 2016). The Company
has no debt at either the holding company level or project
level.
-- DUPD incurred a USD 4.9 million loss from operating
activities in 2017 (2016: USD 4.7 million loss), USD 3.0 million of
which was attributable to net loss from financial assets and USD
1.9 million attributable to operational expenses.
-- Current cash position after payment of both distributions is USD 5.8 million.
Mark Iwashko, Non-executive Chairman of the Board commented in
his statement "...As a result of our continued focus on asset
realisations, DUPD was able declare a distribution of USD 0.09 per
ordinary share in 2018 while still leaving the Company in a
sufficiently strong current cash position to withstand any
unforeseen economic downturns or shocks and the ability to continue
the development of its existing residential projects. The Company
intends to continue distribute proceeds received from the
divestment of its assets in future."
For further information, please contact:
Dragon Ukrainian Properties & Development Plc (www.dragon-upd.com)
+380 (50) 381
Mark Iwashko (Chairman) 8811
DCM Limited (Investment Manager)
+380 (44) 490
Volodymyr Tymochko 7120
Panmure Gordon (UK) Limited
+44 (0)20 7886
Richard Gray / Andrew Potts 2500
Contents
Chairman's Statement 3
Investment Manager's Report 5
Market Overview 2017 6
Project Overview 8
Investing Policy 11
Directors' Remuneration Report 14
Corporate Governance 15
Directors' report 17
Statement of Directors' responsibilities 19
Independent auditors' report 20
Statement of financial position 24
Statement of comprehensive income 25
Statement of cash flows 26
Statement of changes in equity 27
Notes to the financial statements 28
Chairman's Statement
The Ukrainian economy continued to slowly but steadily recover
in 2017 with GDP rising by 2.5% year-on-year, a slight improvement
over the 2.4% increase in 2016. Private consumption also increased
by 7.8% year-on-year, fuelled by growth in real salaries and an
increase in pension spending. As a result, the consumer confidence
index reached its highest level since July 2014.
Two years of moderate growth of the Ukrainian economy give us
cautious optimism for the future. However, sporadic fighting from
the military conflict in eastern Ukraine and the stumbling progress
of the government's structural reforms remain impediments to
greater inflows of foreign direct investment into and the
acceleration of economic growth of the country.
DUPD's primary focus, accordingly, remains the orderly
realisation of its portfolio of assets to maximise distributions to
shareholders, with new investments limited to the continued
development of the Company's existing residential projects. To that
end, the most significant milestone in 2017 was the sale of the
Obolon Residences project to Cheriton Overseas Limited for a total
consideration of USD 9.0 million. While the sale of the project was
below its fair value (USD 15.3 million as at 30 June 2017), the
divestment eliminated development risk and compressed the timeline
for the distribution of net proceeds from the project to
shareholders. As bank debt for large construction projects remains
limited in Ukraine, the development of Phase 3 of Obolon would have
been financed via sale of individual apartments, the pace and
timing of would have been uncertain and which would have tied up
capital that would have otherwise been available to be distributed
to shareholders. The Company was also able to generated USD 5.2
million in contracted sales and USD 5.5 million in cash proceeds
from its other residential projects.
As a result of our continued focus on asset realisations, DUPD
was able declare a distribution of USD 0.09 per ordinary share in
2018 while still leaving the Company in a sufficiently strong
current cash position to withstand any unforeseen economic
downturns or shocks and the ability to continue the development of
its existing residential projects. The Company intends to continue
distribute proceeds received from the divestment of its assets in
future.
Financial Results
DUPD incurred a USD 4.9 million loss from operating activities
in 2017 (2016: USD 4.7 million loss), USD 3.0 million of which was
attributable to net loss from financial assets and USD 1.9 million
attributable to operational expenses. In terms of liquidity, DUPD's
financial position remained healthy with a cash balance of USD 9.2
million and no debt at either the holding company level or project
level as of 31 December 2017. Current cash position after payment
of both distributions is USD 5.8 million.
Corporate Governance
There were no changes in the make-up of the Board of Directors
of DUPD in 2017.
Awards
The prestigious Eastern Europe Real Estate Project Awards chose
Green Hills as the Cottage Complex of the Year while Obolon
Residences won the award winner in the Interior Design Show Home
category at the International Property Awards in 2017.
Dividends and Investment Policy
Having reviewed the Company's performance in 2017, including the
successful divestment of the Obolon Residence project for USD 9
million and steady sales in Green Hills and Sadok Vyshnevy
residential projects, and having assessed the Company's working
capital needs going forward, the Board of Directors of the Company
decided to make a distribution of USD 7,655,306.05, or USD 0.07 per
ordinary share, to its shareholders on 17 April 2018 and a further
distribution of USD 2,187,230.20 or USD 0.02 per ordinary share to
its shareholders on 16 May 2018.
Shareholding
Dragon Capital Investments Limited (DCI), having crossed the 30%
shareholding threshold during 2017, was required to make a
mandatory cash offer for all of DUPD's shares. Following the close
of the mandatory cash offer, DCI increased its interest in DUPD to
60.91% of the issued share capital of the Company as of the end of
August 2017.
Outlook
Real GDP growth is forecasted to accelerate slightly to 3.5% in
2018 as a result of further increases in private consumption and a
slight uptick in investments before moderating to 3.0% in 2019.
Inflation, meanwhile, is projected to finally decrease to single
digits in 2018 as the economy continues to stabilize. These
improving macroeconomic conditions will, in turn, help support a
recovery in Ukraine's real estate market; however, we expect the
recovery to be gradual and have only marginal impact on the pace of
monetization DUPD's remaining assets.
The Ukrainian Government continues to cooperate with the IMF but
has failed to fulfil some of the disbursement criteria for the next
tranche of the IMF loan as a result of a slowdown in the pace of
reforms. As such, the IMF postponed the planned disbursement for an
indefinite term. Still, the central bank expects Ukraine to receive
the next IMF tranche of USD 1.9 billion sometime in 2018 and
forecasts its reserves to reach USD 21 billion by the end of the
year. Progress on structural reforms remains key to the country's
access to funding from international donors, which is necessary to
keep national currency stable and improve investor sentiment.
The Ukrainian real estate market's dynamics will continue to
depend greatly pace of economic recovery of and improvement of
investor sentiment, which remain steady but fragile. Uncertainty
notwithstanding, we are keen to continue to advance DUPD's
investment policy in 2018, monetizing our existing properties as
quickly and effectively as the market conditions allows.
Mark Iwashko
Non-executive Chairman
30 May 2018
Investment Manager's Report
The stepwise recovery of the Ukrainian economy continued in
2017, allowing us to generate strong residential sales as well as
sell one of our key residential property projects, Obolon
Residences, in line with DUPD's divestment strategy.
In line with the Company's strategy, we continued the
development of the existing cash-generating residential projects
while remaining focused on strong marketing activity and
first-grade services to our clients. As a result, during the 2017
year, our four residential projects generated USD 5.2 million in
contracted sales (USD 8.5 million in 2016[1]) and USD 5.5 million
in cash proceeds.
In October 2017, DUPD successfully sold the Company's remaining
interest in the Obolon Residences project to the same party that
acquired the rights to develop phase 2 of the Obolon Residences
project in February 2015. The consideration of USD 9 million was
payable in cash in four instalments with the final instalment paid
by 30 April 2018.
Green Hills, a suburban gated community, continued to capitalise
on its high quality and leading position in the market as we closed
25 land plot sales during 2017 (2016: 29, 2015: 23, 2014: 6). Total
contracted sales amounted to USD 2.3 million in 2017, whereas cash
proceeds reached USD 2.0 million, with the combined land area sold
to date reaching 10.0 hectares (62% of the total area for sales).
Following the success in the sales of residences in the cottage
community, we commenced the construction of the lake recreational
zone, while the construction of a 2,000 m(2) fitness-center and the
second phase of the community's school are at the final stage. We
believe these improvements are important in order to continue to
generate stable sales.
Riviera Villas, our luxury suburban community project, delivered
5 new contracted sales in 2017 following sales of 4 land plots in
2016. The newly built Riviera Villas Club with multiple leisure and
sport options available was opened in 2017 as part of our effort to
remain competitive among other high-end communities.
Sadok Vyshnevy, our economy class townhouse community, brought 5
new contracted sales in 2017 for a total consideration of USD 0.6
million. As a result, the remaining stock of apartments is down to
15 out of an original 38.
Arricano Real Estate plc, our portfolio investment, in which
DUPD holds a 12.51% stake, continued the LCIA arbitration process
regarding its largest asset, Sky Mall. Further to the Company's
announcement made on August 17, 2016, when LCIA consequently ruled
for Stockman to cover legal expenses of Arricano in the amount of
USD 0.9 million, by the end of 2017 the High Court had dismissed an
application made by Stockman Interhold S.A. for permission to
appeal the High Court's earlier judgements, having brought an end
to Stockman's challenge proceedings in respect of the LCIA Awards
as Stockman has now exhausted all legal remedies available to it
bringing such challenges. Going forward Arricano will keep focusing
its legal efforts on enforcing the respective decisions of
LCIA.
During the year, Arricano increased its NOI from operating
activities (excluding revaluation gains) by 10.5 per cent to USD
17.6 million compared to USD 15.9 million in 2016 as a result of
growing rental rates across its portfolio of 5 shopping malls,
managing tenant mix and turnover. With strong residential sales and
the high quality of its projects, DUPD is well positioned to
maintain its strong market position despite the ongoing market
challenges. The Company remains on track with orderly realisations
of its assets and is focused on generating cash proceeds to its
shareholders both via development of the existing residential
projects and investment sales of its assets to local players.
30 May 2018
Volodymyr Tymochko
Partner, DCM Limited
Market Overview 2017
Macroeconomic highlights
The Ukrainian economy rose 2.5% y-o-y in 2017, in line with 2.4%
y-o-y in 2016 and following a cumulative decline of 16% in 2014-15.
The recovery was driven primarily by domestic demand, while private
consumption escalated due to the real salaries growth and increase
in pension spending. Investment in fixed capital rose by +18% y-o-y
in 2017, on top of +20% in 2016. Investment growth was broad-based
with industry, agriculture, trade and real estate contributing the
most. Exports advanced by 19% y-o-y in 2017 after five consecutive
years of decline. On the production side, faster growth in trade,
processing industries, construction and real estate helped offset
weakness in agriculture, caused by a lower harvest, and the adverse
effect of the severing of economic ties with separatist-held Donbas
on the extracting and utilities industries. Real GDP growth is
expected to accelerate to 3.5% y-o-y in 2018, before moderating to
3.0% in 2019, driven by further growth in private consumption and
continuing, though slowing, investment growth.
Headline consumer inflation accelerated to 13.7% y-o-y in 2017
from 12.4% in 2016, driven by supply-side factors in the food
segment and recovering domestic demand. The central bank began
tightening monetary policy in October, raising its key rate to
14.5% at the end of 2017.
The current account deficit stood at a moderate USD 2.1 billion
(1.9% of GDP) in 2017, slightly widening from USD 1.3 billion (1.4%
of GDP) in 2016. Trade deficit continued to widen driven by energy
and machinery imports, but was partially offset by growing inflows
of remittances, as labour migration intensified. Capital inflows
were sufficient to cover the current account deficit and enabled
the central bank to increase its reserves by 21% y-o-y, to USD
18.8bn, or 3.6 months of imports. The hryvnia inched down 3.1%
y-o-y to UAH 28.1: USD by end-2017, after 11.7% drop recorded in
2016.
Fiscal deficit stood at a moderate 2.0-2.5% of GDP over past
several years and public debt to GDP ratio turned on a downward
trend, sliding to 72% in 2017 from 81% in 2016.
Bank lending remained frozen, with outstanding loans remaining
virtually flat y-o-y on an F/X-adjusted basis, while recovery in
F/X-adjusted deposits accelerated to 10% y-o-y in 2017 (from 5%
y-o-y in 2016). Consumer lending started to recover in early 2018
and will likely gain pace.
Construction activity rose by 26% y-o-y, following 17% y-o-y
growth in 2016, with strong growth recorded in all major segments
including residential (+16% y-o-y), non-residential (+26%) and
infrastructure (+32%) construction.
Commercial property
Kyiv's retail property market was gradually gaining steam in
2017 incentivised by the rise in disposable income and domestic
consumption. Retail turnover continued to expand growing by 9.7%
y-o-y. Average market vacancy decreased from 11% to 5% throughout
the year, caused by stronger retailers' demand, low volume of new
supply, and gradual absorption of retail space added to the market
in the end of 2016. Rental rates continue to recover posting a
10-15% growth during a year.
Gradually improving business activity combined with limited new
supply of office space (+31,500 m2 or +2.0%) determined healthier
occupancies across the segment. Average vacancy narrowed to 17%
(-10.5%) by year-end, while annual take-up doubled reaching 155,000
sq. m. Telecommunications, IT and high-tech made up the lion's
share of the total lettings.
The warehousing market also continued to grow in 2017 and
reached an annual take-up volume of ca. 120,000 sq. m (+9%). Rising
occupier demand, lack of new supply and shrinking speculative stock
put a downward pressure on vacancy, which decreased from 12% to 6%
over the year. Rental rates for professional warehouse space were
mostly unchanged during the year: $3.0 - $4.1/sq. m/month for
top-quality properties and $2.3 - $3.0/sq.m/month for B-class
warehouses.
Residential property
The supply on Kyiv real estate market continued to exceed the
demand greatly with developers and real estate companies dumping
the prices for the apartments and houses. Given the low purchasing
power of the households, "economy" and "comfort" apartments in the
USD 500-700/m2 range comprised the main part of demand, accounting
for over 70% of the total number of transactions. At the same time,
Kyiv's residential market continues seeing more new projects being
started as it remains the only real estate sector appealing to
development investors.
Land
The situation on the land market remained characterised by
oversupply with asking prices for land plots staying at the
relatively same level during 2017. Most developers who suspended
their projects were not in a hurry to put on sale land plots in
good location waiting for improvement of land values as the real
estate market continues its recovery.
Project Overview
1. Land bank
The Company is focused on gradually selling the land as it is
rezoned and when the land market recovers
Details
Location: Kyiv suburbs
Land Title: Freehold
Land Area: 500 ha
DUPD Share: 85%
Fair value of investment
project: USD 9.2m
2. Obolon Residences
The project is sold to the Cheriton Overseas Limited, an
unrelated party, for a total consideration of USD 9 million.
3. Arricano Real Estate plc
-- The largest developer of shopping centres in Ukraine
-- Arricano has been listed on the AIM market of the LSE (ARO LN) since 2013
-- DUPD's shareholding is 12.51%
-- Portfolio of nine shopping centres of which six are
operational and three under various stages of development
-- Involved in ongoing international legal dispute with a local
partner over control of its largest project, Sky Mall
-- Hryvnia devaluation and foreign currency loan portfolio
together with high legal costs related to the Sky Mall dispute have
put the company in a challenging financial situation
Summary
DUPD Share: 12.51%
Directors: 1 board representative
Fair value of investment USD 6.5m
project:
(i) Sky Mall (Kyiv)
Gross leasable area (operating): 67,000 m(2)
Key Tenants: Auchan, Inditex Group, Planettoys,
Marks & Spencer,
New Yorker, Multiplex Cinema
(ii) Rayon (Kyiv)
Gross leasable area (operating): 24,300 m(2)
Key Tenants: Silpo, Comfy, Reserved,
Sportmaster, LC Waikiki,
Gloria Jeans, Game park
(iii) Sun Gallery (Kryvyi Rig)
Gross leasable area (operating): 37,470 m(2)
Key Tenants: Auchan, Comfy, Sportmaster,
Fly Park, Gloria Jeans,
New Yorker
(iv) South Gallery (Simferopol)
Gross leasable area (operating): 33,390 m(2)
Key Tenants: Auchan, DNS, PoiskHome,
LC Waikiki, L'Etoile, Baby
Boom
(v) City Mall (Zaporizhzhya)
Gross leasable area (operating): 21,440 m(2)
Key Tenants: Auchan, McDonald's, Comfy,
Colin's LC Waikiki, Brocard
(vi) Prospect (Kyiv)
Gross leasable area (operating): 30,900 m(2) (excluding
Auchan)
Key Tenants: Auchan (co-investor), McDonald's,
Names UA, LC Waikiki, Foxtrot,
Reserved, JYSK, Multiplex
Cinema
(vii) Lukyanivka (Kyiv)
Gross leasable area (under
construction): 47,000 m(2)
(viii) Petrivka (Kyiv)
Gross leasable area (to be
developed): 31,450 m(2)
(ix) Rozumovska (Odesa)
Gross leasable area (to be
developed): 38,000 m(2)
4. Riviera Villas
-- Elite cottage community near Kyiv
-- Project consists of two land parcels, one owned by DUPD and the other by its partner
-- Unique luxury leisure infrastructure, including pools, restaurants and sport facilities
-- Utilities on the site and waterfront infrastructure completed
-- Total of 30 land plots are sold (42%)
Details
Location: Kyiv suburbs
Land Title: Freehold
Land Area: 14.3 ha
DUPD share of overall
project: 59.6%
Fair value of investment USD 3.2m
project:
5. Green Hills
-- Business class cottage community near Kyiv
-- Furnished with mini-market, restaurant and café, tennis
court, soccer and basketball playgrounds, 2 kindergartens, children
playgrounds, school for 200 pupils, artificial lake and rest
area
-- 10.0 ha of land sold out of 16.2 ha (62%)
-- 72 families living in the community
-- Construction works of the Stage 2 finished, while the
construction of fitness centre and phase of the cottage's school at
the final stage
-- Construction works on the lake recreational zone has started
Details
Location: Kyiv suburbs
Land Title: Freehold
Land Area: 16.2 ha
DUPD Share: 100%
Fair value of investment USD 7.2m
project:
6. Sadok Vyshnevy
-- 38 apartments in a town-house community in Kyiv suburbs
-- Utilities on the site
-- All homes commissioned and available for sale
-- 23 apartments or 61% of all apartments sold (13% of sales were in 2017)
Details
Location: Kyiv suburbs
Land Title: Freehold
Land Area: 1.6 ha
DUPD Share: 100%
Fair value of investment USD 2.2m
project:
7. Avenue Shopping Centre
8. Glangate
Land plot for shopping centre development in Kremenchuk
Details
Location: Kremenchuk
Land Title: Leasehold
Land Area: 3.9 ha aggregate
GLA: 26,530 m(2)
DUPD Share: 100%
Fair value of investment USD 0.4 mln
project:
Investing Policy
Dragon - Ukrainian Properties & Development plc ("DUPD" or
"the Company") is an "investing company" for the purposes of the
AIM Rules for Companies. The AIM Rules for Companies require an
investing company to have in place an investing policy which is
"sufficiently precise and detailed so that it is clear, specific
and definitive". The AIM Rules for Companies provide guidance in
relation to what this investing policy is expected to include as a
minimum.
On 17 February 2014, the Company's shareholders approved a new
investing policy, which is set out below.
Investing strategy - asset allocation - geographic focus and
sector focus
The Board will seek to realise the Company's properties in an
orderly manner, such realisations to be effected at such times, on
such terms and in such manner as the Board (in its absolute
discretion) may determine.
Assets or companies in which the Company can invest
The Company will not make any investments in new properties.
However, this will not preclude the Board (in its absolute
discretion) from making any investment in existing properties in
the following circumstances:
-- where the Board, as advised by the Manager, believes such
investment is to protect or enhance the value and salability of
such property;
-- where the Company is contractually committed to make such investment;
-- in respect of properties currently under construction, where
the Company continues to pursue, where necessary, any licenses
and/or approvals which are required for a particular property to
continue its development;
-- undertaking investment in additional phases of such
properties (other than the existing phase currently being developed
in respect of such property) where the Board, as advised by the
Manager, believes such investment in additional phases is to
protect or enhance the value and saleability of such property;
-- authorising the expenditure of such capital as is necessary
to: (i) acquire any joint venture party's interests in any of the
Company's existing investments; or (ii) carry out any construction
necessary to maximise value and saleability of any existing
property; and
-- entering into any contract or other arrangement with any
third party to realise all or any part of its existing
properties.
In addition, the Company will only commence construction on any
of its existing properties that have yet to commence construction
to protect or enhance the value and saleability of such property.
In respect of such properties, the Company will also continue to
pursue, where necessary, any licenses and/or approvals which are
required for a particular property.
These above restrictions will not preclude the Company making
investments in short-dated cash or near cash equivalent securities,
which form part of its cash management practices.
Strategy by which the investing policy will be achieved
The Board and the Manager will investigate a number of
approaches to realisation of its properties, which will include,
but not be limited to, sales of individual assets or groups of
assets or a sale of the entire portfolio (or a combination of such
methodologies), or an in-specie distribution of such property.
Board will only consider in-specie distributions to shareholders
when other realisation alternatives have been fully explored and
the relevant property investment is quoted on a stock exchange.
The Board and the Manager may decide to appoint independent
advisers to assist in the execution of the New Investing Policy,
including, but not limited to, property valuers and property
agents.
Whether investments will be active or passive investments
The Manager assumes a proactive approach to every property
project in the Company's property portfolio.
Holding period for investments
The New Investing Policy includes an orderly realisation of the
Company's properties over the medium term with a view to maximising
returns for shareholders. Accordingly, the Board will seek to
realise the Company's properties and exercise all legal rights of
the Company in such manner and on such timescale as the Directors
see fit, with a view to ensuring that returns to shareholders are
maximised.
Spread of investments and maximum exposure limits
The Company does not have a prescribed policy in relation to the
spread of investments or maximum exposure limits. The realisation
of the Company's properties may, over time, result in the Company
having a reduction in the diversification of investments. However,
the realisation of the Company's properties over time will also
result in the reduction of the Company's overall investment in real
estate assets.
Policy in relation to gearing and cross holdings
The Board (in its absolute discretion) may make prudent use of
leverage to make investments or expenditure consistent with its
investing policy and to satisfy working capital requirements.
Borrowings may be undertaken by the Company itself or by any of its
subsidiaries or project companies. Given that the New Investing
Policy is an orderly realisation of the Company's properties over
the medium term, it is not expected that the Company will secure
additional debt financing other than where the Company believes it
is required to protect or enhance the value and saleability of such
property.
Investing restrictions
Other than the requirement for the Manager to manage any
potential conflicts of interest, and the requirement to invest in
accordance with its New Investing Policy, there are no other
investing restrictions.
Nature of returns that the Company will seek to deliver to
shareholders
Under the New Investing Policy, the Board will seek to return
any surplus funds to shareholders when appropriate. The net
proceeds of all property realisations will be returned to
shareholders, at the Board's discretion, having regard to:
-- the requirement to invest further funds in the Company's
existing property projects only to protect or enhance the value and
saleability of such property, and/or where the Company is
contractually committed to make such investment;
-- the Company's working capital requirements and running costs
(including the fees payable under the Third Management
Agreement);
-- the cost and tax-efficiency of individual transactions and/or distributions; and
-- the 2006 Act.
It is expected that surplus capital will be returned to
shareholders over time in a manner which may involve dividends,
share buy-backs, voluntary tender offers, dividends and/or capital
reductions. The decision to make any such returns, the method
through which such returns are effected, and the quantum and timing
of any such returns will be at the sole discretion of the Board.
The Board will only consider in-specie distributions to
shareholders when other realisation alternatives have been fully
explored and the relevant property investment is quoted on a stock
exchange.
Other matters
Cash management
Pending future returns of value to shareholders, all of the
Company's funds (whether in the form of cash or otherwise) will be
kept under the control of the Board or as it may direct.
Currency hedging
The Company will hedge currency and interest rate risk as and to
the extent that the Board (in its absolute discretion) considers
appropriate.
Management of liabilities
The Company will endeavour, at the direction of the Board (in
its absolute discretion), to manage all actual or potential
material liabilities, risks or exposures of the Company (including,
without limitation, any existing contractual commitments, disputes
(potential or actual) and litigation (threatened or actual)) in a
manner consistent with the orderly realisation of the Company's
properties.
Conflict policy
The Dragon Capital Group pursues a number of real estate
development projects in Ukraine. Under the terms of the Third
Management Agreement the Manager has no ability to commit the
Company or any of its subsidiaries to make any acquisition or
disposal. In the event that any Relevant Party has the opportunity
to acquire Conflict Property then the Manager shall cause the
Relevant Party to provide, inter alia, all material details of the
Conflict Property to the Company, in order for the Company to
decide whether or not to notify the Manager that it should pursue
the opportunity to acquire the Conflict Property (within the scope
of the New Investing Policy). If the Company so notifies the
Manager of its intention to pursue the opportunity to acquire a
Conflict Property, the Manager shall procure that no affiliate of
the Manager shall acquire any interest in the Conflict Property in
question without the prior consent of the Company.
Directors' Remuneration Report
Further to the revision of the remuneration policy of the Board
members in November 2014, in January 2016 the Board approved a
slight modification to the Chairman's remuneration. In accordance
with the modification of the remuneration, as Non-executive
Chairman, Mr. Iwashko is entitled to a fee of USD 50,000 instead of
a fee of USD 40,000 plus any applicable taxes plus USD 10,000
towards compensating his costs associated with carrying out his
duty as the Chairman of the Board.
Mr. Lou van der Heijden's remuneration remained unchanged and
Mr. van der Heijden is entitled to a fee of USD 35,000 plus any
applicable taxes plus USD 5,000 as compensation for additional
duties for chairing the Audit Committee.
The directors' fees for 2017 are summarised in the table
below:
Name Position Annual Fee Date of appointment Notice period
------------------- -------------- ----------------- -------------------- ------------------
Mark Iwashko Non-executive USD 50,000 26 November The Director
Chairman per year plus 2014 or Company
applicable may terminate
VAT payable on three month's
quarterly in written notice.
arrears.
------------------- -------------- ----------------- -------------------- ------------------
The Company has agreed to reimburse Mr Iwashko for reasonably
incurred expenses in the course of his duties to the Company.
------------------------------------------------------------------------------------------------
Aloysius Wilhelmus Non-executive USD 35,000 10 April 2007 The Director
Johannes van Director plus applicable or Company
der Heijden VAT payable may terminate
quarterly in on three month's
arrears plus written notice.
USD 5,000 to
compensate
for his duties
as the Chairman
of the Audit
Committee.
------------------- -------------- ----------------- -------------------- ------------------
The Company has agreed to reimburse Mr van der Heijden for reasonably
incurred expenses in the course of his duties to the Company.
------------------------------------------------------------------------------------------------
Tomas Fiala Non-executive No fee. 26 February The Director
Director 2007 or Company
may terminate
on three month's
written notice.
------------------- -------------- ----------------- -------------------- ------------------
The Company has agreed to reimburse Mr Fiala for reasonably
incurred expenses in the course of his duties to the Company.
------------------------------------------------------------------------------------------------
The aggregate amount paid to Directors for the period ending 31
December 2017 was equal to USD 99 thousand including reimbursement
of all reasonable business and travel expenses.
There were no other payments besides the ones mentioned above
being paid to the Directors for the year ending 31 December
2017.
Corporate Governance
Combined Code
The Directors recognise the importance of sound corporate
governance. The Company has complied, where possible, with the
Corporate Governance Guidelines for AIM Companies published by the
Quoted Companies Alliance. The Directors are committed to
maintaining the highest standards of corporate governance in the
future.
The Board and Board Committees
The Board is comprised of three directors: the Chairman, Mark
Iwashko, and two other non-executive directors: Aloysius Johannes
van der Heijden and Tomas Fiala. Tomas Fiala, one of the Company's
Directors, is the principal shareholder and Managing Director of
the Dragon Capital Group which holds 66,607,334 ordinary shares in
the Company at the date of publication of this annual report
(60.91% of the total number of shares). At the reporting date of 31
December 2017, Dragon Capital Group held same amount of shares. DCM
Limited is the investment manager for the Company and is a part of
the Dragon Capital Group. Save in that respect, the Board considers
the Directors (with the exception of Tomas Fiala), to be
independent for the purposes of the above-mentioned Corporate
Governance Guidelines. The letters of appointment of all directors
are available for inspection at the Company's registered office
during normal business hours.
The Board meets from time to time as required to take decisions
on the development of projects and to consider general matters
affecting the Company and otherwise as required. Issues which do
not require discussion by the Board members are dealt with by the
written board resolution.
The Audit Committee is chaired by Mr van der Heijden and
comprised of Mr van der Heijden and Mr Mark Iwashko. The Audit
Committee meets at least twice a year and otherwise on an ad hoc
basis as required. The Audit Committee reviews the annual and
interim accounts, meets with nomad and advisors, reviews supporting
property valuation reports and monitors internal controls and
company policies. It meets regularly with the Company's auditors to
review their reports on draft accounts and internal controls.
Risk Management and Internal Control
Risk management is the responsibility of the Audit Committee,
which is responsible to the Board for ensuring that proper
procedures are in place, and are being effectively implemented to
identify, evaluate and manage any significant risks faced by the
Company.
An outline of major risk factors affecting the Company was
described in the admission document and is regularly reviewed by
the Audit committee for their importance to the Company and for the
controls that are in place. The Board, on the advice of the
Manager, updates this risk outline as changes arise in the nature
of risks and reviews and amends controls that are necessary to
mitigate them. The Audit Committee reviews the risk outline and the
effectiveness of the risk-modelling undertaken by the Manager on a
regular basis.
Significant issues
The financial assets at fair value through profit or loss is
undertaken in accordance with the accounting policies, disclosed in
note 3(b) Subsidiaries, note 3(c) Associates and note 3(d) Loans
receivable from investee and the processes disclosed in note 4
Financial assets at fair value through profit or loss. The audit
includes an independent review of valuation models used for
reasonableness and verification of supporting documentation. All
financial assets have been categorised as Level 3 within the IFRSs
13 fair value hierarchy
Relations with shareholders
The Board acknowledges that a significant part of its role is to
represent and promote the interests of shareholders. The Board is
accountable to shareholders for the performance and activities of
the Company. The Board encourages participation at the Annual
General Meeting at which a detailed review of the business and
objectives of the Company are given to shareholders. The company
proposes separate resolutions at the AGM for each substantially
separate issue, and there is always an individual resolution
relating to re-election of every director, appointing auditors and
approval of financial statements. Company's shareholders have
access to current information on the Company through its website,
www.dragon-upd.com, which is regularly updated.
Directors' Report
The Directors present their annual report and the audited
Company financial statements of Dragon-Ukrainian Properties &
Development plc (the 'Company') for the year ended 31 December
2017.
Principal activities
The principal activities of the Company is that of investing in
the development of its existing real estate properties in Ukraine.
On 17 February 2014 an Extraordinary Meeting of Shareholders
approved a new Investing Policy as defined by the AIM Rules for
Companies. Under this revised policy the Board will seek to realise
the Company's Properties in an orderly manner, such realisations to
be effected at such times, on such terms and in such manner as the
Board (in its absolute discretion) may determine. The full text of
the Investing Policy can be found on the Company's website at
http://www.dragon-upd.com/files/Investing%20Policy%20approved%20by%20the%20EGM%20held%20on%2017%20Feb%202014.pdf
The Company was incorporated in the Isle of Man under the
provisions of the Companies Act 1931 to 2004 on the 23 February
2007 with a company number 119018C. Following the resolution of the
Extraordinary Meeting of Shareholders passed on 17 February 2014
the Company was de-registered under the provisions of the Companies
Acts 1931 to 2004 and has been re-registered under the provisions
of the Companies Act 2006 on 27 February 2014 with a company number
010832V. The Company's registered office is 2nd Floor, St Mary's
Court, 20 Hill Street, Douglas, Isle of Man, IM1 1EU and its
principal place of business is Ukraine.
On 1 June 2007 the Company raised USD 208 million through an
Initial Public Offering on the AIM market of the London Stock
Exchange. On 29 November 2007 the Company completed a secondary
placing on AIM and raised USD 100 million.
Results
The Company made a loss before taxation for the year ended 31
December 2017 of USD 4,853 thousands (2016: loss of USD 4,687
thousands) all of which has been transferred from reserves.
Directors
The Directors of the Company during the year and to date
are:
Aloysius Wilhelmus Johannes van der Heijden
Date of appointment 10 April 2007
Tomas Fiala
Date of appointment 26 February 2007
Mark Iwashko
Date of appointment: 26 November 2014
Directors' interests
The Directors interests in the shares of the Company as at 31
December are as follows:
2017 2016
Number of Ownership% Number of Ownership%
shares shares
Dragon Capital Group
(with Tomas Fiala as
principal shareholder
and managing director) 66,607,334 60.91 19,433,129 17.77
Mr Tomas Fiala, one of the Company's directors, is the principal
shareholder and managing director of the Dragon Capital Group which
acquired 6,831,500 shares (6.25%) of the Company during the first
(June 2007) and second (November 2007) share issues. In the
following years through a series of market purchases Dragon Capital
Group acquired additional shares and held in total 19,433,129
ordinary shares as at 31 December 2016.
During 2017 Dragon Capital Group purchased 47,174,205 ordinary
shares of the Company. Following this share purchase, Dragon
Capital Group holds 66,607,334 shares representing 60.91% of the
issued share capital of the Company.
DCM Limited, the Company's investment manager is the asset
management arm of the Dragon Capital Group.
Auditors
The auditors, KPMG Audit LLC, being eligible, have expressed
their willingness to continue in office.
On behalf of the Board
Mark Iwashko
Non-executive Chairman
30 May 2018
Statement of Directors' Responsibilities in Respect of the
Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations.
The Directors are required to prepare financial statements for
each financial year. They have elected to prepare the financial
statements in accordance with International Financial Reporting
Standards as adopted by the European Union (IFRSs as adopted by the
EU) and applicable law.
The Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state
of affairs of the Company and of its profit or loss for that
period. In preparing the financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether they have been prepared in accordance with IFRSs as adopted by the EU;
-- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and
-- use the going concern basis of accounting unless they either
intend to liquidate the Company or to cease operations, or have no
realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
its financial statements comply with the Isle of Man Companies Act
2006. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error, and have general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the
Company and to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the Isle of Man governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Mark Iwashko
Non-executive Chairman
30 May 2018
Independent Auditors' Report to the Members of Dragon-Ukrainian
Properties & Development PLC
1 Our opinion is unmodified
We have audited the financial statements of Dragon Ukrainian
Properties & Development PLC ("the Company") for the year ended
31 December 2017 which comprise the Statement of Financial
Position, the Statement of Comprehensive Income, the Statement of
Changes in Equity, the Statement of Cash Flows and the related
notes, including the accounting policies in note 3.
In our opinion the financial statements:
-- give a true and fair view of the state of the Company's
affairs as at 31 December 2017 and of its loss for the year then
ended;
-- have been properly prepared in accordance with International
Financial Reporting Standards as adopted by the European Union
(IFRSs as adopted by the EU); and
-- the financial statements have been prepared in accordance
with the requirements of the Isle of Man Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our
responsibilities are described below. We have fulfilled our ethical
responsibilities under, and are independent of the Company in
accordance with, UK ethical requirements including the FRC Ethical
Standard. We believe that the audit evidence we have obtained is a
sufficient and appropriate basis for our opinion.
2 Key audit matters: our assessment of risks of material
misstatement
Key audit matters are those matters that, in our professional
judgment, were of most significance in the audit of the financial
statements and include the most significant assessed risks of
material misstatement (whether or not due to fraud) identified by
us, including those which had the greatest effect on: the overall
audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. One such matter was
identified. This matter was addressed in the context of our audit
of the financial statements as a whole, and in forming our opinion
thereon, we do not provide a separate opinion on this matter.
Independent Auditors' Report to the Members of Dragon-Ukrainian
Properties & Development PLC (continued)
The risk Our response
Valuation of Subjective valuation Our procedures included:
investments (significance of risk
at fair value unchanged compared Control design:
through profit with 2016): Documenting and assessing
or loss (US$30,258k the processes in place to
(2016: US$40,779k)) Financial assets at record investment transactions
fair value through and to value the portfolio.
Refer to page profit or loss comprises
15 (Significant illiquid and/or unquoted Assessing valuer's credentials:
accounting matters equity investments Evaluation of the competence
identified by in and loans to entities and independence of the external
the Board), principally involved expert engaged by the Company,
note 1(b) (Business in property development including reference to professional
environment), in Ukraine. The estimation qualifications held.
note 2(d) (Use of fair value is based
of judgements, on adjusted net asset Methodology choice: Challenging
estimates and value of the investee the appropriateness of the
assumptions); entities, with the valuation basis selected by
note 4 (financial assets in those entities comparison with observed industry
assets at fair being principally comprised best practice and the provisions
value through of investment property. of the RICS Valuation - Global
profit or loss) The valuation of investment Standards;
and note 14 property is based on
(fair values independent, professional Benchmarking assumptions:
and financial valuations. This is Comparing the Company's assumptions
risk management). a key estimate. to externally derived data
in relation to key inputs
The preparation of such as development costs
the fair value estimate on current construction prices,
and related disclosures sales prices and discount
involves subjective rates.
judgments or uncertainties,
which requires special Our sector experience:
audit consideration We used our own valuation
because of the likelihood specialist to evaluate the
and potential magnitude appropriateness of the valuation
of misstatements to methods used by the external
the valuation of the valuer engaged by the Company
financial instrument. and assumptions used, in particular
those relating to forecasted
In particular, Ukraine property sales prices and
has been subject to exposition period, construction
political and social and other costs and discount
unrest and regional rates.
tensions since 2013.
This situation has Sensitivity analysis:
adversely affected Performing sensitivity analysis
and could continue over the key inputs used for
to adversely affect calculation of the fair value
the Company's results and comparing the calculation
and financial position to the amounts disclosed in
in a manner not currently the financial statements.
determinable.
Assessing transparency: Considering
the appropriateness, in accordance
with relevant accounting standards,
of the disclosures in respect
of financial assets measured
at fair value.
----------------------------- -------------------------------------
Independent Auditors' Report to the Members of Dragon-Ukrainian
Properties & Development PLC (continued)
3 Our application of materiality and an overview of the scope of
our audit
Materiality for the financial statements as a whole was set at
US$415,000 (2017: US$480,000), determined with reference to a
benchmark of Company's total assets, of which it represents 1%
(2017: 1%).
Whilst our audit procedures are designed to identify
misstatements (including disclosure misstatements) which are
material to our opinion on the financial statements as a whole, we
nevertheless report any misstatements of lesser amounts to the
extent that these are identified by our audit work.
Under ISA 260, we are obliged to report omissions or
misstatements (including disclosure misstatements) other than those
which are 'clearly trivial' to those charged with governance. ISA
260 defines 'clearly trivial' as matters that are clearly
inconsequential, whether taken individually or in aggregate and
whether judged by any quantitative or qualitative criteria.
We agreed to report to the Board of Directors any corrected or
uncorrected identified misstatements exceeding US$20,000 (2017:
US$24,000) for the Company's financial statements, in addition to
other identified misstatements that warranted reporting on
qualitative grounds.
4 We have nothing to report on going concern
We are required to report to you if we have concluded that the
use of the going concern basis of accounting is inappropriate or
there is an undisclosed material uncertainty that may cast
significant doubt over the use of that basis for a period of at
least twelve months from the date of approval of the financial
statements. We have nothing to report in these respects.
5 We have nothing to report on the other information in the
Annual Report
The Directors are responsible for the other information
presented in the Annual Report together with the financial
statements. Our opinion on the financial statements does not cover
the other information and, accordingly, we do not express an audit
opinion or any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in
doing so, consider whether, based on our financial statements audit
work, the information therein is materially misstated or
inconsistent with the financial statements or our audit knowledge.
Based solely on that work we have not identified material
misstatements in the other information.
Independent Auditors' Report to the Members of Dragon-Ukrainian
Properties & Development PLC (continued)
6 Respective responsibilities
Directors' responsibilities
As explained more fully in their statement set out on page 19,
the Directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and fair
view; such internal control as they determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; assessing the
Company's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern; and using the going
concern basis of accounting unless they either intend to liquidate
the Company or to cease operations, or have no realistic
alternative but to do so.
Auditor's responsibilities
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue our
opinion in an auditor's report. Reasonable assurance is a high
level of assurance, but does not guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial
statements.
A fuller description of our responsibilities is provided on the
FRC's website at www.frc.org.uk/auditorsresponsibilities.
7 The purpose of our audit work and to whom we owe our
responsibilities
This report is made solely to the Company's members, as a body,
in accordance with Section 80(c) of the Isle of Man Companies Act
2006. Our audit work has been undertaken so that we might state to
the Company's members those matters we are required to state to
them in an auditor's report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's
members, as a body, for our audit work, for this report, or for the
opinions we have formed.
KPMG Audit LLC
Chartered Accountants
Heritage Court
41 Athol Street
Douglas
Isle of Man IM99 1HN
31 May 2018
Statement of financial position as at 31 December 2017
Note 31 December 2017 31 December 2016
(in thousands of USD)
Assets
Non-current assets
Financial assets at fair value through profit or loss 4 30,258 40,779
Total non-current assets 30,258 40,779
Current assets
Receivables from sale of Obolon Residences project 4(b)(ii) 3,999 -
Other accounts receivable 5 116 108
Cash and cash equivalents 6 9,202 7,771
Total current assets 13,317 7,879
Total assets 43,575 48,658
Equity and Liabilities
Equity
Share capital 7 2,187 2,187
Share premium 271,251 271,251
Accumulated losses (230,605) (225,752)
Total equity 42,833 47,686
Current liabilities
Other accounts payable 8 742 972
Total current liabilities 742 972
Total liabilities 742 972
Total equity and liabilities 43,575 48,658
These financial statements were approved by the board of
Directors (the Board) on 30 May 2018 and were signed on its behalf
by:
Non-executive Chairman Mark Iwashko
The statement of financial position is to be read in conjunction
with the notes to, and forming part of, the financial statements
set out on pages 28 to 65.
Statement of comprehensive income for the year ended 31 December
2017
Note 2017 2016
(in thousands of USD)
Net loss from financial assets at fair value through profit or loss 10 (2,955) (2,252)
Management fee 9 (1,204) (1,700)
Administrative expenses 11 (742) (492)
Other income 75 49
Other expenses (43) (80)
Performance fee 9 - (211)
Total operating loss (4,869) (4,686)
Finance income 16 9
Finance costs - (10)
Loss for the year (4,853) (4,687)
Net loss and total comprehensive loss for the year (4,853) (4,687)
Loss per share
Basic loss per share (in USD) 13 (0.04) (0.04)
Diluted loss per share (in USD) 13 (0.04) (0.04)
The Directors believe that all results are derived from
continuing activities.
The statement of comprehensive income is to be read in
conjunction with the notes to, and forming part of, the financial
statements set out on pages 28 to 65.
Statement of cash flows for the year ended 31 December 2017
Note 2017 2016
(in thousands of USD)
Cash flows from operating activities
Loss for the year (4,853) (4,687)
Adjustments for:
Net loss from financial assets at fair value through profit or loss 10 2,955 2,252
Finance income (16) (10)
Loans granted (112) (207)
Loans repaid 189 801
Interest received - 9
Proceeds from assignment of outstanding loans due to the Company 4(b)(ii) 991 -
Proceeds from assignment of outstanding loans due to the Company's
investees 4(b)(ii) 2,501 -
Operating cash flows before changes in working capital 1,655 (1,842)
Change in other accounts receivable 6 (50)
Change in other accounts payable (230) (236)
Cash flows from/(used in) operating activities 1,431 (2,128)
Cash flows from financing activities
Distribution to Shareholders 7 - (6,014)
Cash flows used in financing activities - (6,014)
Net change in cash and cash equivalents 1,431 (8,142)
Cash and cash equivalents at 1 January 7,771 15,912
Effect of foreign exchange fluctuation on cash balances - 1
Cash and cash equivalents at 31 December 9,202 7,771
The statement of cash flows is to be read in conjunction with
the notes to, and forming part of, the financial statements set out
on pages 28 to 65.
Statement of changes in equity for the year ended 31 December 2017
Share capital Share premium Accumulated losses Total
(in thousands of USD)
Balances at 1 January 2017 2,187 271,251 (225,752) 47,686
Total comprehensive loss for the
year
Net loss - - (4,853) (4,853)
Balances at 31 December 2017 2,187 271,251 (230,605) 42,833
Balances at 1 January 2016 2,187 277,265 (221,065) 58,387
Total comprehensive loss for the
year
Net loss - - (4,687) (4,687)
Transactions with owners of the
Company
Distribution to Shareholders (note
7) - (6,014) - (6,014)
Total transactions with owners of
the Company - (6,014) - (6,014)
Balances at 31 December 2016 2,187 271,251 (225,752) 47,686
The statement of changes in equity is to be read in conjunction
with the notes to, and forming part of, the financial statements
set out on pages 28 to 65.
Notes to the financial statements
1. Background
(a) Organisation and operations
Dragon - Ukrainian Properties & Development PLC (the
'Company') was incorporated in the Isle of Man on 23 February 2007.
The Company's registered office is 2nd Floor, St Mary's Court, 20
Hill Street, Douglas, Isle of Man, IM1 1EU and its principal place
of business is Ukraine.
On 1 June 2007 the Company raised USD 208 million through an
initial public offering on the AIM Market (AIM) of the London Stock
Exchange. On 29 November 2007, the Company completed a secondary
placing on AIM and raised USD 100 million.
The main activities of the Company are investing in the
development of its existing real estate properties in Ukraine. The
Company provides financing to its investees either through equity
or debt financing. On 17 February 2014 an Extraordinary Meeting of
Shareholders approved a new Investing Policy as defined by the AIM
Rules for Companies. Under this revised policy the Board will seek
to realise the Company's Properties in an orderly manner, such
realisations to be effected at such times, on such terms and in
such manner as the Board (in its absolute discretion) may
determine.
(b) Business environment
The Company's operations are primarily located in Ukraine. The
political and economic situation in Ukraine has been subject to
significant turbulence in recent years and demonstrates
characteristics of an emerging market. Consequently, operations in
the country involve risks that do not typically exist in other
markets.
In March 2014 Autonomous Republic of Crimea (Crimea) was annexed
by the Russian Federation and this annexation is not recognised by
the international community. This event resulted in a significant
deterioration of political and economic relationships between
Ukraine and the Russian Federation. Following the annexation of
Crimea, regional tensions have spread to the Eastern regions of
Ukraine, primarily to the parts of Donetsk and Lugansk regions. In
May 2014, unrest escalated into military clashes and armed conflict
between armed supporters of the self-declared republics of Donetsk
and Lugansk regions and the Ukrainian army forces. As at the date
these financial statements were authorised for issue part of
Donetsk and Lugansk regions is not controlled by the Ukrainian
authorities and as a result Ukrainian authorities are not currently
able to fully enforce Ukrainian laws in this territory. The economy
started to recover in 2016, following a deep slump in 2014-2015
caused by military tensions in Eastern Ukraine and economic
misbalances accumulated in previous years. Real GDP grew 2.4% y-o-y
in 2016 and 2.5% in 2017. Economic recovery was driven by domestic
demand, including revival of private investment. Investment in
fixed capital surged by +22% y-o-y in 2017, on top of 18% in 2016.
Investment growth was broad-based with industry, agriculture, trade
and real estate s contributing the most. Private consumption also
gained momentum in 2017 advancing by +7.8% y-o-y on the back of 19%
of real salaries growth and increase in pension spending.
Currency stabilization and prudent monetary and fiscal policy
helped to tame average consumer inflation from 49% in 2015 to 14%
in 2016 and 2017. The National Bank of Ukraine adopted an inflation
targeting regime and started to gradually relax the strict capital
and exchange restrictions imposed in 2014 and 2015, including
permission to pay dividends to a certain level and lowering the
requirement for converting of foreign currency proceeds. Owing to
conservative spending policy and energy sector reform, the broad
fiscal deficit (including Naftogas deficit) narrowed from 10% of
gross domestic product in 2014 to 2% of gross domestic product in
2015 and remained close to this level in 2016 and 2017, helping to
reduce debt-to-GDP ratio to 72% in 2017 from 81% in 2016. The
banking sector was cleaned from non-viable banks and the country's
largest private bank Privatbank was nationalized in December 2016.
As at 31 December 2017, 82 banks operated in Ukraine, compared to
180 as at 31 December 2013.
Ukraine's government progressed with structural reforms,
including those affecting business environment. The government
reduced payroll tax rate by almost twofold in 2016, from average
rate of over 40% to unified rate of 22%, introduced electronic
system of VAT refund to exporters, significantly reduced number of
permits and licensed activities, abolished the obsolete system of
mandatory certification of products and eliminated stamps as a
mandatory attribute of the legal entity. As a result, Ukraine
advanced in the World Bank Doing Business ranking to 76(th) rank
(2018 ranking based on 2017 data), from 112(th) four years ago.
In August 2017 Moody's upgraded Ukraine's credit rating to Caa2,
with a positive outlook, reflecting recent government reforms and
improved foreign affairs. Further stabilization of economic and
political environment depends on the continued implementation of
structural reforms and other factors.
Whilst the Directors believe they are taking appropriate
measures to support the sustainability of the Company's business in
the current circumstances, a continuation of the current unstable
business environment could negatively affect the Company's results
and financial position in a manner not currently determinable.
These financial statements reflect management's current assessment
of the impact of the Ukrainian business environment on the
operations and the financial position of the Company. The future
business environment may differ from management's assessment.
2. Basis of preparation
(a) Statement of compliance
These financial statements are prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the EU.
(b) Basis of measurement
The financial statements are prepared under the historical cost
basis, except for the following material items:
Items Measurement basis
--------------------------------------------------- -----------------
Investments at fair value through profit or loss Fair value
Loans receivable Fair value
(c) Functional and presentation currency
These financial statements are presented in thousands of US
dollars (USD), which is the Company's functional currency. All
amounts have been rounded to the nearest thousand, unless otherwise
indicated.
(i) Determination of functional currency
Functional currency is the currency of the primary economic
environment in which the Company operates. If indicators of the
primary economic environment are mixed, then management uses its
judgement to determine the functional currency that most faithfully
represents the economic effect of the underlying transactions,
events and conditions. The majority of the Company's investments
and transactions are denominated in US dollars. The expenses
(including management and performance fees, administrative
expenses) are denominated and paid in US dollars. Accordingly,
management has determined that the functional currency of the
Company is US dollar. All information presented in US dollars is
rounded to the nearest thousand unless otherwise stated
therein.
(d) Use of judgments, estimates and assumptions
The preparation of financial statements in conformity with IFRS
as adopted by the EU requires the Directors to make judgments,
estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets, liabilities, income
and expenses and the disclosure of contingent assets and
liabilities. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the
period in which the estimates are revised and in any future periods
affected.
As stated in note 1 (b) to these financial statements, the
political and business situation has deteriorated significantly.
This is a key factor in the estimation uncertainty and critical
judgements associated with applying the accounting policies in
these financial statements.
In particular, information about significant areas of estimation
uncertainty and critical judgments in applying accounting policies
that have the most significant effect on the amounts recognised in
the financial statements and could lead to significant adjustment
in the next financial year are included in the following notes:
-- Note 3 (a) - Determination of investment entity criteria;
-- Note 4 - Financial assets at fair value through profit or loss.
Measurement of fair values
A number of the Company's accounting policies and disclosures
require the measurement of fair values, for both financial and
non-financial assets and liabilities.
The Directors are responsible for overseeing all significant
fair value measurements, including Level 3 fair values. They review
and approve significant unobservable inputs and valuation
adjustments before they are included in the Company's financial
statements. To assist with the estimation of fair values the
Directors, when appropriate, engage with a registered independent
appraiser, having a recognised professional qualification and
recent experience in the location and categories of the assets
being valued.
When measuring the fair value of an asset or a liability, the
Company uses market observable data as far as possible. Fair values
are categorised into different levels in a fair value hierarchy
based on the inputs used in the valuation techniques as
follows:
-- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
-- Level 2: inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices).
-- Level 3: inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
If the inputs used to measure the fair value of an asset or a
liability might be categorised in different levels of the fair
value hierarchy, then the fair value measurement is categorised in
its entirety in the same level of the fair value hierarchy as the
lowest level input that is significant to the entire
measurement.
The Company recognises transfers between levels of the fair
value hierarchy at the end of the reporting period during which the
change has occurred.
Further information about the assumptions made in measuring fair
values is included in the following notes:
-- Note 4 - Financial assets at fair value through profit or loss.
(e) Going concern
These financial statements are prepared on a going concern
basis. In the year ended 31 December 2017 the Company incurred a
net loss of USD 4,853 thousand (31 December 2016: USD 4,687
thousand) and had positive cash flows from operating activities of
USD 1,431 thousand (31 December 2016: negative cash flows from
operating activities of USD 2,128 thousand). As at that date the
Company's current assets exceeded its current liabilities by USD
12,575 thousand (31 December 2016: USD 6,907 thousand) and its Net
Asset Value amounted to USD 42,833 thousand (31 December 2016: USD
47,686 thousand).
As described in note 3(a), the Company has a clear exit strategy
from its real estate projects under which no new investments are
planned. The Company expects to receive the returns from the
existing projects in its portfolio and intends to pass through
these returns to its shareholders via distribution. The Company
intends to continue operations until final realization of its
investment projects. The Directors believe that the Company
currently plans to continue operations for the foreseeable future
and that its existing cash resources are sufficient to meet the
Company's liabilities for at least several years and, therefore,
the going concern basis for preparing these financial statements is
appropriate.
3. Significant accounting policies
The Company has consistently applied the following accounting
policies to all periods presented in these financial
statements.
(a) Investment entity
The Company is an investment entity as defined by IFRS and
measures all of its investments at fair value through profit or
loss.
In determining whether the Company meets the definition of an
investment entity, management considered the following:
-- The Company raised funds on AIM (through the first and second
issue of shares) only for the purpose of making investments in the
development of new properties and the redevelopment of existing
properties in Ukraine.
-- The Company has a clear exit strategy from its real estate
projects (either through sale of the properties, or through sale of
shareholding rights in the entities, which own the properties).
This is stated in the Company's new investing policy that was voted
and approved by the general meeting of shareholders in February
2014. The full text of the current investing policy could be found
on the Company's website
http://www.dragon-upd.com/investor-information/important-information/business-strategy-and-investing-policy.
-- The Company measures and evaluates the performance of
substantially all of its investments on a fair value basis.
-- The Company's Directors (acting on behalf of the Company)
take only strategic decisions and approve overall direction of
investing activity in order to maximise the returns to
shareholders. At the same time, the Directors chose and appointed
DCM Limited as the Company's investment manager (see note 9). DCM
Limited's employees perform recurring management operating
activities in accordance with the Third Management Agreement and
within the strategic decisions of the Directors. There is no
separate substantial business activity beyond earning returns from
capital appreciation and investment income. The Directors seek to
return any surplus funds and net proceeds from property realisation
to shareholders when appropriate, in accordance with its investing
policy.
Considering the above, the Company's management determined that
the Company meets the definition of investment entity in accordance
with IFRS 10 Consolidated Financial Statements and, accordingly,
the Company has not consolidated its subsidiaries. The Company
measures its investments in subsidiaries at fair value through
profit and loss (note 3(b)). Such approach provides a fair and
transparent view on the Company to the Company's shareholders and
stakeholders.
The Company also elected to measure its investments in
associates and loans receivable from its investees at fair value
through profit or loss (notes 3(c) and 3(d)).
All these assets are presented within financial assets at fair
value through profit or loss in the Company's statement of
financial position.
(b) Subsidiaries
Subsidiaries are investees controlled by the Company. The
Company controls an investee when it is exposed to, or has right
to, variable returns from its involvement with the company and has
the ability to affect those returns through its power over the
investee.
Investments in subsidiaries are measured and accounted for at
fair value with gains or losses recognised in profit or loss (see
note 3(a)).
Unconsolidated subsidiaries and their grouping by investment in
respective projects are as follows:
Name Country of incorporation Project % of ownership
2017 2016
Glangate LTD Cyprus Kremenchuk 100% 100%
New Region LLC Ukraine Kremenchuk 100% 100%
Blueberg Trading Limited British Virgin Islands Green Hills 100% 100%
Capital Construction LLC Ukraine Green Hills - 100%
Grand Development LLC Ukraine Green Hills 100% 100%
J Komfort Neruhomist LLC Ukraine Green Hills 100% 100%
Korona Development LLC Ukraine Green Hills 100% 100%
Linkrose LTD Cyprus Green Hills 100% 100%
Landzone LTD Cyprus Avenue Shopping mall 100% 100%
Landshere LTD Cyprus Land Bank 90% 90%
Riverscope LTD Cyprus Land Bank 90% 90%
Z Development LLC Ukraine Land Bank 100% 100%
Z Neruhomist LLC Ukraine Land Bank 100% 100%
Development Invest LLC Ukraine Land Bank 100% 100%
K Zatyshna Domivka LLC Ukraine Land Bank 100% 100%
Closed investment fund "Development" Ukraine Obolon Residences - 100%
OJSC "Dom byta "Obolon" Ukraine Obolon Residences - 100%
Startide LTD Cyprus Obolon Residences - 100%
Bi Dolyna Development LLC Ukraine Riviera Villas 100% 100%
EF Nova Oselya LLC Ukraine Riviera Villas 100% 100%
Mountcrest LTD Cyprus None 100% 100%
Riviera Villas LLC Ukraine Riviera Villas 100% 100%
Stenfield Finance Limited British Virgin Islands Riviera Villas 100% 100%
Linkdell LTD Cyprus Sadok Vyshneviy 100% 100%
Komfort Oselya Obolon LLC Ukraine Obolon Residences - 100%
(c) Associates
Associates are those companies in which the Company has
significant influence, but not control, over the financial and
operating policies. Significant influence is presumed to exist when
the Company holds between 20% and 50% of the voting power of
another company. In certain cases when the Company has less than
20% of the voting power of another company, this company is still
accounted for as an associate on the basis of significant
influence.
Investments in associates are measured and accounted for at fair
value with gains or losses recognised in profit or loss (see note
3(a)).
Investment in associates comprise the investment in Hindale
Executive Investments Limited (part of investment in the Avenue
Shopping Centre project made through Landzone LTD investee which
holds 18.77% of interest in Hindale Ltd). The investment in Hindale
Executive Investments Limited was disposed by Landzone Ltd during
the year ended 31 December 2017 (see note 4(b)).
(d) Loans receivable from investees
In addition to equity financing to its investees, as a part of
structuring its investments the Company also provides debt
financing to its investees. As described in note 3(a), the Company
designates receivable from its investees at fair value through
profit or loss.
(e) Foreign currency
Transactions in foreign currencies are translated into US
dollars at exchange rates at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies
at the reporting date are translated to the functional currency at
the exchange rate at that date.
Non-monetary assets and liabilities denominated in foreign
currencies that are measured at fair value are translated into US
dollar at the exchange rate at the date that the fair value was
determined.
Foreign currency differences arising on retranslation are
recognised in profit or loss, except for those arising on financial
instruments at fair value through profit or loss, which are
recognised as a component of net gain/(loss) from investments at
fair value through profit or loss or net gain/(loss) from loans
receivable.
(f) Financial instruments
(i) Non-derivative financial assets
The Company initially recognises loans and receivables and
deposits on the date that they are originated. All other financial
assets are recognised initially on the trade date at which the
Company becomes a party to the contractual provisions of the
instrument.
The Company derecognises a financial asset when the contractual
rights to the cash flows from the asset expire, or it transfers the
rights to receive the contractual cash flows on the financial asset
in a transaction in which substantially all the risks and rewards
of ownership of the financial asset are transferred. Any interest
in transferred financial assets that is created or retained by the
Company is recognised as a separate asset or liability.
Financial assets and liabilities are offset and the net amount
presented in the statement of financial position when, and only
when, the Company has a legal right to offset the amounts and
intends either to settle on a net basis or to realise the asset and
settle the liability simultaneously.
The Company classifies non-derivative financial assets into the
following categories: financial assets at fair value through profit
or loss and other loans and receivables.
Financial assets at fair value through profit or loss
(FVTPL)
A financial asset is classified at fair value through profit or
loss category if it is classified as held for trading or is
designated as such upon initial recognition. Financial assets are
designated at fair value through profit or loss if the Company
manages such investments and makes purchase and sale decisions
based on their fair value in accordance with the Company's
documented risk management or investment strategy. Directly
attributable transaction costs are recognised in profit or loss as
incurred. Financial assets at fair value through profit or loss are
measured at fair value, and changes therein are recognised in
profit or loss.
Financial assets designated at fair value through profit or loss
comprise loans receivable from investees at fair value through
profit or loss, and equity investments at fair value through profit
or loss (see notes 3(b), 3(c) and 3(d)).
Other loans and receivables
Other loans and receivables are a category of financial assets
with fixed or determinable payments that are not quoted in an
active market. Such assets are recognised initially at fair value
plus any directly attributable transaction costs. Subsequent to
initial recognition loans and receivables are measured at amortised
cost using the effective interest method, less any impairment
losses.
Other loans and receivables comprise the following classes of
assets: other accounts receivable as presented in note 5 and cash
and cash equivalents as presented in note 6.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances, call deposits
and liquid investments with maturities at initial recognition of
three months or less.
(ii) Non-derivative financial liabilities
The Company classifies non-derivative financial liabilities in
the other financial liabilities category. Such financial
liabilities are recognised initially at fair value less any
directly attributable transaction costs. Subsequent to initial
recognition, these financial liabilities are measured at amortised
cost using the effective interest method.
Other financial liabilities comprise other payables as presented
in note 8.
Bank overdrafts that are repayable on demand and form an
integral part of the Company's cash management are included as a
component of cash and cash equivalents for the purpose of the
statement of cash flows.
(iii) Share capital
Ordinary shares
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of ordinary shares and share
options are recognised as a deduction from equity, net of any tax
effects.
Repurchase, disposal and reissue of share capital (treasury
shares)
When share capital recognised as equity is repurchased, the
amount of the consideration paid, which includes directly
attributable costs, net of any tax effects, is recognised as a
deduction from equity. Repurchased shares are immediately cancelled
and the total number of issued shares reduced by the purchase.
(g) Impairment
(i) Non-derivative financial assets
A financial asset not carried at fair value through profit or
loss is assessed at each reporting date to determine whether there
is any objective evidence that it is impaired. A financial asset is
impaired if objective evidence indicates that a loss event has
occurred after the initial recognition of the asset, and that the
loss event had a negative effect on the estimated future cash flows
of that asset that can be estimated reliably.
Objective evidence that financial assets (including equity
securities) are impaired can include default or delinquency by a
debtor, restructuring of an amount due to the Company on terms that
the Company would not consider otherwise, indications that a debtor
or issuer will enter bankruptcy, adverse changes in the payment
status of borrowers or issuers in the Company, economic conditions
that correlate with defaults or the disappearance of an active
market for a security. In addition, for an investment in an equity
security, a significant or prolonged decline in its fair value
below its cost is objective evidence of impairment.
Loans and receivables
The Company considers evidence of impairment for loans and
receivables at both a specific asset and collective level. All
individually significant loans and receivables are assessed for
specific impairment. All individually significant loans and
receivables found not to be specifically impaired are then
collectively assessed for any impairment that has been incurred but
not yet identified. Loans and receivables that are not individually
significant are collectively assessed for impairment by grouping
together loans and receivables with similar risk
characteristics.
In assessing collective impairment the Company uses historical
trends of the probability of default, timing of recoveries and the
amount of loss incurred, adjusted for the Directors' judgment as to
whether current economic and credit conditions are such that the
actual losses are likely to be greater or less than suggested by
historical trends.
An impairment loss is calculated as the difference between the
asset's carrying amount, and the present value of the estimated
future cash flows discounted at the asset's original effective
interest rate. Losses are recognised in profit or loss and
reflected in an allowance account against loans and receivables.
Interest on the impaired asset continues to be recognised. When a
subsequent event causes the amount of impairment loss to decrease,
the decrease in impairment loss is reversed through profit or
loss.
(h) Provisions
A provision is recognised if, as a result of a past event, the
Company has a present legal or constructive obligation that can be
estimated reliably, and it is probable that an outflow of economic
benefits will be required to settle the obligation. Provisions are
determined by discounting the expected future cash flows at a
pre-tax rate that reflects current market assessments of the time
value of money and the risks specific to the liability. The
unwinding of the discount is recognised as finance cost.
(i) Finance income and costs
Finance income comprises interest income on financial assets and
currency exchange gains. Finance costs comprise interest expense
and currency exchange losses.
Interest income and expense, including interest income from
non-derivative financial assets at fair value through profit or
loss, are recognised in profit or loss, using the effective
interest method. The effective interest rate is the rate that
exactly discounts the estimated future cash payments or receipts,
without consideration of future credit losses, over the expected
life of the financial instrument or through to the next market
based repricing date to the net carrying amount of the financial
instrument on initial recognition.
Interest received or receivable, and interest paid or payable,
are recognised in profit or loss as finance income and finance
costs, respectively, except for those arising on financial
instruments at fair value through profit or loss, which are
recognised as a component of net gain/(loss) from investments at
fair value through profit or loss or net loss from loans
receivable.
(j) Dividend income
Dividend income is recognised in profit or loss on the date on
which the right to receive payment is established. For quoted
equity securities, this is usually the ex-dividend date. For
unquoted equity securities, this is usually the date on which the
shareholders approve the payment of a dividend. Dividend income
from equity securities designated at fair value through profit or
loss is recognised in profit or loss in separate line item.
(k) Net gain/(loss) from financial assets at fair value through profit or loss
Net gain/(loss) from financial assets at fair value through
profit or loss includes all realised and unrealised fair value
changes, interest income and foreign exchange differences, but
excludes dividend income.
(l) Fees and administrative expenses
Fees and administrative expenses are recognised in profit or
loss as the related services are performed or expenses are
incurred.
(m) Segment reporting
An operating segment is a component of the Company that engages
in business activities from which it may earn revenues and incur
expenses, including revenues and expenses that relate to
transactions with any of the Company's other components.
The Directors determined that the sole segment in which the
Company operates is investing in property development in
Ukraine.
(n) Tax
Under the current tax legislation in the Isle of Man, the
applicable tax rate is 0% for the Company.
However, some dividend and interest income received by the
Company may be subject to withholding tax imposed in certain
countries of origin. Income that is subject to such tax is
recognised gross of the taxes and the corresponding withholding tax
is recognised as tax expense.
Further, as stated in note 12(b), the Company's investees
perform most of their operations in Ukraine and are therefore
within the jurisdiction of the Ukrainian tax authorities.
(o) Earnings per share
The Company presents basic and diluted earnings per share (EPS)
data for its ordinary shares. Basic EPS is calculated by dividing
the profit or loss attributable to ordinary shareholders of the
Company by the weighted average number of ordinary shares
outstanding during the year, adjusted for own shares held. Diluted
EPS is determined by adjusting the profit or loss attributable to
ordinary shareholders and the weighted average number of ordinary
shares outstanding, adjusted for own shares held, for the effects
of all dilutive potential ordinary shares, which comprise warrants
and share options.
(p) Changes in presentation
Certain comparative information in these financial statements
was amended to conform to the current year presentation.
(q) New standards and interpretations not yet adopted
A number of new standards, amendments to standards and
interpretations are not yet effective for the year ended 31
December 2017, and have not been applied in preparing these
financial statements. Of these pronouncements, potentially the
following will have an impact on the Company's financial
statements. The Company plans to adopt these pronouncements when
they become effective.
Estimated impact of the adoption of IFRS 9
The Company is required to adopt IFRS 9 Financial Instruments
from 1 January 2018. The Company has assessed the estimated impact
that the initial application of IFRS 9 will have on its financial
statements. The estimated impact of the adoption of this standard
on the Company's equity as at 1 January 2018 is based on
assessments undertaken to date. The actual impacts of adopting the
standard at 1 January 2018 may change because:
-- the new accounting policies are subject to change until the
Company presents its first financial statements that include the
date of initial application.
-- accounting processes and internal controls related to
implementation of new standard are not yet complete.
Based on assessment performed by the Company adoption of IFRS 9
is not expected to have a significant effect on the financial
statements.
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments sets out requirements for
recognising and measuring financial assets, financial liabilities
and some contracts to buy or sell non-financial items. This
standard replaces IAS 39 Financial Instruments: Recognition and
Measurement.
Classification - Financial assets and liabilities
IFRS 9 contains three principal classification categories for
financial assets: measured at amortised cost, fair value through
other comprehensive income (FVOCI) and fair value through profit or
loss (FVTPL). The classification of financial assets under IFRS 9
is generally based on the business model in which a financial asset
is managed and its contractual cash flow characteristics. The
standard eliminates the existing IAS 39 categories of
held-to-maturity, loans and receivables and available for-sale.
Under IFRS 9, derivatives embedded in contracts where the host is a
financial asset in the scope of the standard are not separated.
Instead, the whole hybrid instrument is assessed for
classification. Equity investments are measured at fair value.
IFRS 9 largely retains the existing requirements in IAS 39 for
the classification of financial liabilities.
Based on assessment performed by the Company, adoption of IFRS 9
is not expected to have an effect on classification of financial
assets and liabilities in the Company's financial statements.
Impairment - Financial assets and contract assets
IFRS 9 replaces the 'incurred loss' model in IAS 39 with an
'expected credit loss' model. The new impairment model applies to
financial assets measured at amortised cost and FVOCI and does not
apply to financial assets measured at FVTPL. The new impairment
model generally requires to recognise expected credit losses in
profit or loss for all financial assets, even those that are newly
originated or acquired. Under IFRS 9, impairment is measured as
either expected credit losses resulting from default events on the
financial instrument that are possible within the next 12 months
('12-month ECL') or expected credit losses resulting from all
possible default events over the expected life of the financial
instrument ('lifetime ECL'). Initial amount of expected credit
losses recognised for a financial asset is equal to 12-month ECL
(except for certain trade and lease receivables, and contract
assets, or purchased or originated credit-impaired financial
assets). If the credit risk on the financial instrument has
increased significantly since initial recognition, the loss
allowance is measured at an amount equal to lifetime ECL.
Financial assets for which 12-month ECL is recognised are
considered to be in stage 1; financial assets that have experienced
a significant increase in credit risk since initial recognition,
but are not defaulted are considered to be in stage 2; and
financial assets that are in default or otherwise credit-impaired
are considered to be in stage 3.
Measurement of expected credit losses is required to be unbiased
and probability-weighted, should reflect the time value of money
and incorporate reasonable and supportable information that is
available without undue cost or effort about past events, current
conditions and forecasts of future economic conditions. Under IFRS
9, credit losses are recognised earlier than under IAS 39,
resulting in increased volatility in profit or loss. It will also
tend to result in an increased impairment allowance, since all
financial assets will be assessed for at least 12-month ECL and the
population of financial assets to which lifetime ECL applies is
likely to be larger than the population with objective evidence of
impairment identified under IAS 39.
Based on assessment performed by the Company, adoption of IFRS 9
is not expected to result in significant additional impairment
losses in the Company's financial statements.
Disclosures
IFRS 9 will require extensive new disclosures, in particular
about credit risk and expected credit losses.
Transition
IFRS 9 is effective for annual reporting periods beginning on or
after 1 January 2018. Early adoption of the standard is permitted.
The Company does not intend to adopt the standard earlier.
The classification and measurement and impairment requirements
are generally applied retrospectively (with some exemptions) by
adjusting the opening retained earnings and reserves at the date of
initial application, with no requirement to restate comparative
periods.
Various Improvements to IFRSs
Various Improvements to IFRSs have been dealt with on a
standard-by-standard basis. All amendments, which result in
accounting changes for presentation, recognition or measurement
purposes, will come into effect not earlier than 1 January 2018.
The Company has not yet analysed the likely impact of the
improvements on its financial position or performance.
4. Financial assets at fair value through profit or loss
The Company has the following financial assets at fair value
through profit or loss as at 31 December:
Project 31 December 2017 31 December 2016
(in thousands of USD)
Equity investments at fair value through
profit or loss
Subsidiaries
Avenue Shopping
Landzone Ltd mall - 172
Stenfield Finance Ltd Riviera Villas - -
Mountcrest Ltd Riviera Villas - -
Linkdell Ltd Financing company - -
Glangate Ltd Kremenchuk - -
Blueberg Trading Ltd Green Hills - -
Riverscope Ltd Land Bank - -
Landshere Ltd Land Bank - -
Linkrose Ltd Green Hills - -
Startide Ltd Obolon Residences - -
- 172
Other equity investments
Arricano Real Estate plc
(note 4(a)) Arricano 6,528 3,025
6,528 3,197
Loans receivable at fair value through
profit or loss
Startide Ltd Obolon Residences - 12,391
Riverscope Ltd Land Bank 5,274 6,934
Linkdell Ltd* Financing company 7,035 7,060
Landshere Ltd Land Bank 3,966 3,698
Linkrose Ltd Green Hills 5,138 4,884
Stenfield Finance Limited Riviera Villas 1,126 1,346
Glangate Ltd Kremenchuk 340 431
Blueberg Trading Limited Green Hills 851 838
23,730 37,582
30,258 40,779
* Linkdell Ltd provides financing through issued loans on the
following projects:
31 December 31 December
2017 2016
(in thousands of USD)
Riviera Villas 2,028 2,281
Sadok Vyshneviy 2,224 2,300
Obolon Residences 1,520 1,288
Green Hills 1,199 1,113
Kremenchuk 64 78
7,035 7,060
(a) Investment in Arricano Real Estate PLC
The Company acquired a shareholding in Arricano Real Estate PLC
(Arricano) in 2010. In September 2013 the shares of Arricano were
admitted to trading on the AIM market of the London Stock
Exchange.
There was no active market trading in Arricano shares during
2017 and 2016. Therefore, management used the adjusted net assets
method to estimate the fair value of investment in Arricano. The
Company's management considers this to be the most appropriate
method to estimate the fair value of the Company's investment in
Arricano.
Fair value as at 31 December 2017 and 31 December 2016
The Company's management applied a valuation method under which
Arricano's net assets value as at 31 December 2017 (audited) and 31
December 2016 (audited) were multiplied by the Company's share in
Arricano's net assets.
Although management believes that its estimates of fair value
are appropriate, the use of different methodologies or assumptions
could lead to different measurements of fair value.
If Arricano's net assets were 10% lower than that used in the
valuation model, the fair value of the investment in Arricano as at
31 December 2017 would be USD 653 thousand lower (31 December 2016:
USD 302 thousand lower). If Arricano's net assets were 10% higher
than that used in the valuation model, the fair value of the
investment in Arricano as at 31 December 2017 would be USD 653
thousand higher (31 December 2016: USD 302 thousand higher).
(b) Investment in subsidiaries and associates (investees)
(i) Valuation technique and significant unobservable inputs
For the estimation of fair values of the Company's investments
the Company's management used the adjusted net assets method.
Management performed a detailed review of the investees' assets
and liabilities for the purpose of their fair value assessment:
-- Assets are mainly represented by real estate properties and
prepayments for properties (land). The fair value of these
properties and prepayments for properties was assessed by the
independent appraiser, CBRE Ukraine.
-- Liabilities are mainly represented by long-term loans payable due to the Company.
-- Trade receivables balance is mainly represented by long-term
receivables. Fair value of long-term receivables that carry no
interest is measured at present value of all future cash receipts
discounted using the prevailing market rate(s) of interest for a
similar instrument, with a similar credit rating.
-- Other assets and liabilities are short-term by nature and
their fair value approximates the carrying amount. Thus, no
additional adjustment is required.
The investees' net assets are adjusted for the non-controlling
interest based on the ownership percentage.
(ii) Investment in Obolon Residences project
In October 2017 the Company has announced the sale of the
Company's remaining interest in the Obolon Residences project to
Chariton Overseas Limited, an unrelated party that acquired the
right to develop phase 2 of Obolon Residences project in February
2015. Agreements related to sale of Obolon Residences project were
concluded during October 2017.
The sale of the Company's interest in Obolon Residences was made
through the sale of the rights and shares of certain companies that
own and manage the Obolon Residences project, including the unsold
inventory in relation to phase one, as well as assignment to
Cheriton Overseas Limited of all outstanding intercompany loans
balances that were due to the Company and the Company's
investees.
In accordance with the sale agreements concluded with respect to
sale of Obolon Residences project the Company is entitled to the
total consideration of USD 9,000 thousand to be payable in cash in
four instalments due by April 2018 and represented as follows:
-- sale of the rights and shares owned by the Company and
assignment of outstanding intercompany loans due to the Company in
the amount of USD 4,979 thousand (note 10);
-- sale of the rights and shares owned by the Company's
investees and assignment of outstanding intercompany loans due to
the Company's investees in the amount of USD 4,021 thousand (note
10).
The fair value of the Obolon Residences project as at 30 June
2017, which is the latest fair value assessment of the project
performed by an independent appraiser, was USD 15,322 thousand (31
December 2016: USD 13,679 thousand (note 4(b)(iii))). As such a
loss on disposal of USD 6,322 thousand is recognised in profit and
loss for the year ended 31 December 2017 (note 10).
As a result of sale of Obolon Residences project, the Company's
ownership in its unconsolidated subsidiaries was changed as
follows:
Name Country of incorporation Project % of ownership
2017 2016
Closed investment fund "Development" Ukraine Obolon Residences - 100%
OJSC "Dom byta "Obolon" Ukraine Obolon Residences - 100%
Startide LTD Cyprus Obolon Residences - 100%
Komfort Oselya Obolon LLC Ukraine Obolon Residences - 100%
Out of USD 4,979 thousand relating to the sale of the rights and
shares owned by the Company and assignment of outstanding
intercompany loans due to the Company mentioned above, USD 991
thousand were received in cash during the year ended 31 December
2017 and the remaining amount of USD 3,999 thousand was to be
received in April 2018 in two instalments. Subsequent to the
reporting date and before the date these financial statements were
authorised for issue, this remaining portion was settled to the
Company by Cheriton Overseas Limited.
Out of USD 4,021 thousand relating to the sale of the rights and
shares owned by the Company's investees and assignment of
outstanding intercompany loans due to the Company's investees
mentioned above, the Company received in cash USD 2,501 thousand
during the year ended 31 December 2017 and the remaining portion of
USD 1,520 thousand was received by the Company's investee in 2017
and retained by the Company's investee as cash and cash equivalents
as at 31 December 2017. Subsequently to the reporting date and
before the date these financial statements were authorised for
issue, this cash balance was transferred to the Company by the
Company's investee through settlement of the respective portion of
the intercompany loan.
(iii) Investment in Landzone Ltd (Avenue Shopping mall)
On 4 July 2017 the Board was informed by the Investment Manager
of the project that Promtek LLC has stopped paying lease payments
and it is very unlikely that it will be able to renew the lease
agreement for a land plot which expires in May 2018. Based on this
the Board decided to keep the investment in Landzone which holds
18.77% of interest in Hindale Ltd at zero value in the balance
sheet of the Company. On its subsequent meeting on 4 September 2017
the Board has approved the sale of the corporate rights of Hindale
Ltd to a third party. On 10 October 2017 Landzone Ltd has signed
share purchase agreement with Infinity REEF Ltd and sold Hindale's
shares for the consideration of USD 940.
As at 31 December 2017 the investment in Landzone Ltd is valued
at zero (31 December 2016: USD 172 thousand) and a respective fair
value loss in the amount USD 172 thousand is recognized in profit
or loss.
Summary of fair values of respective investment projects is as
follows as at 31 December 2017:
Obolon
Riviera Villas Green Hills Residences Sadok Vyshneviy Land Bank Kremenchuk Total
(in thousands
of USD)
Assets
Investment
properties 3,338 3,162 - - 1,410 400 8,310
Prepayments
for land - - - - 7,990 - 7,990
Property and
equipment 85 182 - - - - 267
Intangible
assets - 5 - - - - 5
Inventories 23 72 - 880 - - 975
Trade and
other
receivables 350 2,541 - 1,336 - - 4,227
VAT
recoverable 97 442 - - - - 539
Prepaid income
tax 1 - - 25 - - 26
Cash and cash
equivalents 237 1,409 1,520 60 13 8 3,247
Total assets 4,131 7,813 1,520 2,301 9,413 408 25,586
Deferred tax
liabilities - - - - 61 - 61
Intercompany
loans 25,899 34,466 1,520 16,934 241,741 12,935 333,495
Trade and
other
liabilities 977 625 - 77 112 4 1,795
Total
liabilities 26,876 35,091 1,520 17,011 241,914 12,939 335,351
Net
identifiable
assets and
liabilities (22,745) (27,278) - (14,710) (232,501) (12,531) (309,765)
Ownership 100% 100% - 100% 90% 100%
Fair value of
equity
investment - - - - - - -
Nominal amount
of loans
receivable 25,899 34,466 1,520 16,934 241,741 12,935 333,495
Fair value of
loans
receivable 3,154 7,188 1,520 2,224 9,240 404 23,730
Summary of fair values of respective investment projects as at
31 December 2016 are as follows:
Avenue
Riviera Obolon Sadok Shopping Rivne and
Villas Green Hills Residences Vyshneviy Centre Land Bank Kremenchuk Total
(in thousands
of USD)
Assets
Investment
properties 4,069 4,037 - - 1,240 7 500 9,853
Prepayments
for land - - - - - 10,707 - 10,707
Property and
equipment 45 136 43 - - - - 224
Intangible
assets 1 - 19 - - - - 20
Inventories 21 73 12,635 1,142 - - - 13,871
Trade and
other
receivables 132 1,453 3,667 1,096 12 - - 6,360
VAT
recoverable 101 497 1 - - - - 599
Prepaid income
tax 1 - - 22 - - - 23
Cash and cash
equivalents 230 1,161 481 112 86 3 12 2,085
Total assets 4,600 7,357 16,846 2,372 1,338 10,717 512 43,742
Deferred tax
liabilities - - 1,377 - 199 - - 1,576
Long-term
loans payable 24,936 32,970 40,989 17,349 5 230,172 12,390 358,811
Intercompany
loans - - - - 85 - - 85
Other
long-term
payables - - 4 - - - - 4
Trade and
other
liabilities 973 522 1,783 72 92 85 3 3,530
Income tax
payable - - 3 - - - - 3
Total
liabilities 25,909 33,492 44,156 17,421 381 230,257 12,393 364,009
Net
identifiable
assets
and
liabilities (21,309) (26,135) (27,310) (15,049) 957 (219,540) (11,881) (320,267)
Ownership 100% 100% 100% 100% 18.77% 90% 100%
Fair value of
equity
investment - - - - 172 - - 172
Nominal amount
of loans
receivable 24,936 32,970 40,989 17,349 5 230,172 12,390 358,811
Fair value of
loans
receivable 3,627 6,835 13,679 2,300 - 10,632 509 37,582
To assist with the estimation of fair value of investment
properties, prepayments for land and inventories (together "the
real estate projects") as at 31 December 2017 the Directors engaged
independent appraiser CBRE Ukraine, having a recognised
professional qualification and recent experience in the location
and categories of the projects being valued. As at 31 December 2016
the Directors engaged independent appraiser DTZ Kiev B.V.
The fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The valuation
is prepared in accordance with practice standards contained in the
Appraisal and Valuation Standards published by the Royal
Institution of Chartered Surveyors (RICS) or in accordance with
International Valuation Standards published by the International
Valuations Standards Council.
The fair value measurement, developed for determination of fair
value of the properties, is categorised within Level 3 of the fair
value hierarchy, due to the significance of unobservable inputs to
the measurement.
Investment properties
As at 31 December 2017 investment properties were represented by
Green Hills, Riviera Villas, Kremenchuk Retail Centres projects and
Land bank (82 ha).
In the absence of current prices in an active market, the
valuations are prepared under the income approach by converting
estimated future cash flows to a single current capital value.
The estimation of fair value was made using a net present value
calculation based on certain assumptions, which represent key
unobservable inputs, the most important of which as at 31 December
2017 are as follows:
-- monthly rental rates - which were based on estimated rental
rates ranging from USD 4 to USD 10 per sq. m.
-- development costs based on current construction prices
-- average cottage sales price ranging from USD 917 to USD 1,488 per sq. m.
-- discount rate - 22%
-- sales period - from 1 to 7 years
-- all relevant licenses and permits, to the extent not yet
received, will be obtained, in accordance with the timetables as
set out in the investment project plans.
As at 31 December 2016 the respective assumptions, which
represent key unobservable inputs for determination of fair value,
were as follows:
-- monthly rental rates - which were based on current rental
rates ranging from USD 3.4 to USD 32 per sq. m.
-- development costs based on current construction prices
-- average cottage sales price ranging from USD 834 to USD 1,537 per sq. m.
-- discount rate - from 22% to 24.5%
-- sales period - from 1 to 7 years
-- all relevant licenses and permits, to the extent not yet
received, will be obtained, in accordance with the timetables as
set out in the investment project plans.
Prepayments for land
Land plots for the land bank project with a total area of 481 ha
are currently registered for agricultural use, and the rezoning
process to change the purpose of the land plots to construction use
was in progress as at 31 December 2017 and 2016. Land plots with a
total area of 19.9 ha had been rezoned for construction use by the
end of 2012. The fair value of the land bank was determined using
agricultural and residential property comparatives according to
actual land plot zoning and discounting for the time period likely
to be required to sell the land plots.
However, the Ukrainian market for land plots zoned for
agricultural use is characterized by low liquidity and restrictions
related to disposal of such land. Therefore, although management of
the Company exercised the generally acceptable valuation approach
in such circumstances taking into account all available
information, significant uncertainties with regards to low
liquidity and legislation restrictions still exist as at 31
December 2017 and 31 December 2016.
The estimation of fair value of the underlying assets (the land
plots) was made based on certain assumptions, which represent key
unobservable inputs, the most important of which as at 31 December
2017 are as follows:
-- average market prices ranging from USD 43 thousand to USD 124 thousand per ha
-- discount rate of 23%
-- sales period - from 1 to 7 years
As at 31 December 2016 the respective assumptions were as
follows:
-- average market prices ranging from USD 28 thousand to USD 189 thousand per ha
-- discount rates ranging from 21.5% to 22.5%
-- sales period - from 1 to 7 years
Inventory
As at 31 December 2017 inventory was represented by the gated
community Sadok Vyshnevyi (15 constructed flats in townhouses and
relevant land plots).
The estimation of fair value was made using a net present value
calculation based on certain assumptions, which represent key
unobservable inputs, the most important of which as at 31 December
2017 are as follows:
-- average market price USD 430 per sq. m.
-- discount rate 20%
-- sales period - from 1 to 3 years
As at 31 December 2016 inventory was represented by the gated
community Sadok Vyshnevyi (20 newly constructed flats in townhouses
and relevant land plots) and the Obolon Residences project
(residential complex in Kyiv under construction).
The estimation of fair value was made using a net present value
calculation based on certain assumptions, which represent key
unobservable inputs, the most important of which as at 31 December
2016 are as follows:
-- average market prices ranging from USD 387 to USD 2,101 per sq. m.
-- discount rates ranging from 18.75% to 23%
-- sales period - from 1 to 3 years
Other assets and liabilities
Liabilities are mainly represented by the long-term loans
payable to the Company.
Trade receivables balance is mainly represented by long-term
receivables. Fair value of long-term receivables that carry no
interest is measured at present value of all estimated future cash
receipts discounted using the prevailing market rate(s) of interest
for a similar instrument, with a similar credit rating.
The financial instruments not measured at fair value comprise
other accounts receivable, cash and cash equivalents and other
accounts payable. The carrying amount of such instruments
approximates their fair value due to their short-term nature
(except for loans payable).
Sensitivity of fair value measurement to changes in unobservable
inputs - all real estate projects
Although management believes that its estimates of fair value
are appropriate, the use of different methodologies or assumptions
could lead to different measurements of fair value.
If sales prices and rental rates are 5% less than those used in
the valuation models, the fair value of the real estate projects as
at 31 December 2017 would be USD 2,723 thousand lower (2016: USD
3,743 thousand). If sales prices and rental rates are 5% higher,
then the fair value of the real estate projects as at 31 December
2017 would be USD 2,772 thousand higher (2016: USD 3,754
thousand).
If development costs are 5% higher than those used in the
valuation models, the fair value of the real estate projects as at
31 December 2017 would be USD 1,674 thousand lower (2016: USD 1,847
thousand). If development costs are 5% less, then the fair value of
the real estate projects as at 31 December 2017 would be USD 1,674
thousand higher (2016: USD 1,849 thousand).
If the discount rate applied is 1% higher than that used in the
valuation models, the fair value of the real estate projects as at
31 December 2017 would be USD 554 thousand lower (2016: USD 824
thousand). If the discount rate is 1% less, then the fair value of
the real estate projects as at 31 December 2017 would be USD 716
thousand higher (2016: USD 857 thousand).
Sensitivity of fair value measurement to changes in unobservable
inputs - specific real estate projects
Management has determined that two real estate projects, namely:
Riviera Villas and Land Bank are particularly sensitive to
unobservable inputs in valuation models and, therefore, are subject
to especially significant estimation uncertainty.
Taking into account lack of demand in recent years, which
resulted in low volume of sales, there is especially significant
uncertainty in assessing the sales period for Riviera Villas
project. Therefore the Company's management performed sensitivity
analysis for this assumption: if the sales period is 5 years longer
than that used in the valuation model, the fair value of Riviera
Villas project as at 31 December 2017 would be USD 1,418 thousand
lower (2016: USD 1,014 thousand).
Taking into account the significant extension of the original
timeline of development of Land Bank project, as well as the fact
that this project is still at the very early stage of development,
there is especially significant uncertainty in assessing the fair
value of the underlying land plots. The Company's management
performed sensitivity analysis for the sales price assumption: if
sales prices are 15% lower than used in the valuation model, the
fair value of real estate projects as at 31 December 2017 would be
USD 1,374 thousand lower (2016: USD 1,794 thousand).
The change in fair value of the real estate projects as a result
of different assumptions used in assessing the present value of
future cash flows as described above, will have no impact on the
fair value of the Company's equity investments due to significant
negative net assets of the investees. Thus, there is no impact on
the fair value of the Company's equity investments. However, the
above change in fair value of the real estate projects will
directly affect the fair value of loans receivable (see 4(c)).
(c) Loans receivable at fair value through profit or loss
The loans are denominated in USD, unsecured, interest free or
interest bearing (up to 11%) and represent an alternative to the
equity way of financing investments.
Loans receivable are designated at fair value through profit or
loss in accordance with IAS 39 Financial Instruments: Recognition
and Measurement and measured at fair value in accordance with IFRS
13 Fair value measurement as the present value of the expected
future cash flows, discounted using a market-related rate (see
notes 3(a) and 3(d)). Expected future cash flows are represented by
cash flows generated from the underlying assets for the loans (the
real estate projects). Therefore, sensitivity of the real estate
projects fair value (see note 4(b)) to different assumptions also
approximates sensitivity of loans receivable fair value to the same
assumptions.
5. Other accounts receivable
Other accounts receivable as at 31 December are as follows:
31 December 2017 31 December 2016
(in thousands of USD)
Other receivables 115 59
Prepayments made 1 49
____________ ____________
Total other accounts receivable 116 108
6. Cash and cash equivalents
Cash and cash equivalents as at 31 December are as follows:
31 December 2017 31 December 2016
(in thousands of USD)
Bank balances 1,502 7,771
Call deposits 7,700 -
Total cash and cash equivalents 9,202 7,771
The following table represents an analysis of cash and cash
equivalents based on Fitch ratings as at 31 December:
31 December 31 December
2017 2016
(in thousands of USD)
Bank balances
AA- 371 3,372
A+ 1,131 4,399
1,502 7,771
Call deposits
A - 3,000 -
+ 4,700 -
7,700 -
Total 9,202 7,771
7. Equity
Movements in share capital and share premium are as follows:
Ordinary shares Amount
Number of shares Thousands of USD
Issued as at 31 December 2007, fully paid 140,630,300 2,813
Issued during 2008 1,698,416 34
Own shares repurchased and cancelled during 2008 (8,943,000) (179)
Outstanding as at 31 December 2008, fully paid 133,385,716 2,668
Own shares repurchased and cancelled during 2009 (15,669,201) (314)
Outstanding as at 31 December 2009, fully paid 117,716,515 2,354
Outstanding as at 31 December 2010, fully paid 117,716,515 2,354
Own shares repurchased and cancelled during 2011 (8,355,000) (167)
Outstanding as at 31 December 2011, fully paid 109,361,515 2,187
Outstanding as at 31 December 2012, fully paid 109,361,515 2,187
Outstanding as at 31 December 2013, fully paid 109,361,515 2,187
Outstanding as at 31 December 2014, fully paid 109,361,515 2,187
Outstanding as at 31 December 2015, fully paid 109,361,515 2,187
Outstanding as at 31 December 2016, fully paid 109,361,515 2,187
Outstanding as at 31 December 2017, fully paid 109,361,515 2,187
The share capital of the Company consists of an unlimited number
of ordinary shares of GBP0.01 each. All ordinary shares rank
equally with regard to the Company's residual assets.
The holders of ordinary shares are entitled to receive dividends
as declared from time to time and are entitled to one vote per
share at meetings of the Company.
As part of an initial public offering on 1 June 2007 104,000,000
ordinary shares were sold to certain institutional investors at a
price of USD 2.00 per ordinary share, raising gross proceeds of USD
208,000 thousand. In addition 36,630,100 ordinary shares were sold
on 29 November 2007 at a price of USD 2.73 per ordinary share,
raising gross proceeds of USD 100,000 thousand. The difference
between net proceeds per share and par value is recognised as share
premium.
During 2008 the Company issued 1,698,416 new ordinary shares at
a price of USD 2.60 per ordinary share to settle 70 % of the
manager's performance fee for 2007 in the amount of USD 4,432
thousand.
Following the extraordinary general meetings of members of the
Company on 31 July 2008 and 1 December 2008, 11,948,000 of its own
shares were authorised for repurchase by the Company and were
annulled. The purchase price of repurchased shares ranged from USD
0.50 to USD 1.47 per share. The difference between the total price
paid and par value is recognised as a share premium decrease.
Following the extraordinary general meeting of members of the
Company on 29 May 2009, 12,664,201 of its own shares were
authorised for repurchase by the Company and were annulled. The
purchase price of repurchased shares ranged from USD 0.53 to USD
0.68 per share. The difference between the total price paid and par
value is recognised as share premium decrease.
Following the extraordinary general meetings of members of the
Company on 9 November 2011 and 12 December 2011, 8,355,000 of its
own shares were repurchased by the Company and were cancelled. The
purchase price of repurchased shares ranged from USD 0.48 to USD
0.63 per share. The difference between the total price paid and par
value is recognised as share premium decrease.
Distributions to Shareholders
On 24 December 2014 following the adoption of the new investing
policy in early 2014 and an assessment of the Company's working
capital requirements, the Board of Directors decided to declare a
dividend of USD 0.055 per Ordinary Share, which is in accordance
with its investing policy of distributing surplus funds to the
Company's shareholders.
On 29 January 2016 following review of the Company's performance
in 2015 and the re-assessment of the Company's working capital
needs, the Board of Directors of the Company decided to make
distribution of USD 6,014 thousand, or USD 0.055 per ordinary
share, to its shareholders.
On 22 March 2018 having reviewed the Company's performance in
2017, including the sale of the remaining interest in the Obolon
Residences project, the Board of Directors of the Company has
decided to make a distribution of USD 7,655 thousand, or USD 0.07
per Ordinary Share, to its shareholders. This decision is in
accordance with Company's Investing Policy, which states that
surplus capital will be returned to shareholders, and is made under
Article 127 of Company's Articles of Association.
The relevant record date for the distribution was 3 April 2018,
the corresponding ex-distribution date was 29 March 2018, and the
distribution was paid to shareholders on 17 April 2018.
On 27 April 2018 the Board of Directors of the Company has
decided to make additional distribution of USD 2,187 thousand, or
USD 0.02 per Ordinary Share, to its shareholders. This decision is
in accordance with Company's Investing Policy, which states that
surplus capital will be returned to shareholders and is made under
Article 127 of Company's Articles of Association.
The relevant record date for the distribution was 11 May 2018,
the corresponding ex-distribution date was 10 May 2018, and the
distribution was paid to shareholders on 16 May 2018.
8. Other accounts payable
Other accounts payable as at 31 December are as follows:
(in thousands of USD) 31 December 2017 31 December 2016
Management fees (note 9) 579 850
Other payables and accrued expenses 133 92
Advances received 30 30
Total other accounts payable 742 972
9. Management and performance fees
Management and performance fees for the years ended 31 December
are as follows:
2017 2016
(in thousands of USD)
Management fee 1,204 1,700
Performance fee - 211
Total management and performance fees 1,204 1,911
Unpaid management and performance fees as at 31 December 2017
amounted to USD 579 thousand (2016: USD 850 thousand) (note 8).
Initial Management Agreement
The Company entered into a management agreement dated 16 May
2007 (the Management Agreement) with Dragon Capital Partners Ltd
(the Manager) pursuant to which the latter has agreed to provide
advisory, management and monitoring services to the Company. The
Company may terminate the Manager's appointment on at least 6
months written notice expiring on or after the fifth anniversary of
admission to AIM, or without written notice subject to certain
criteria.
In consideration for its services thereunder, the Manager was
entitled to be paid an annual management fee of 1.5% of the gross
asset value of the Company at the end of the relevant accounting
period or part thereof plus value added tax or similar taxes which
may be applicable. In addition, the Manager was entitled to
performance fees based on the net asset value (NAV) growth.
Second Revised Management Agreement
On 23 April 2010 the Board approved changes to the Management
Agreement between the Manager and the Company effective as at 31
December 2009 (Second Revised Management Agreement). The
performance fee was divided into two parts. One is based on NAV
growth, and the second on share price growth. Therefore, prior to
the Second Revised Management Agreement the Manager was entitled to
an annual performance fee of 20% of the amount of such increase in
NAV growth in excess of 10%, and under the Second Revised
Management Agreement the Manager is entitled to 10% of the amount
of such increase in NAV growth in excess of 10%. The other
performance fee of 10% is calculated based on the amount by which
the final share price growth exceeds 10% from the base share price
set at GBP 1.085 per share.
Since 1 December 2011 the Second Revised Management Agreement
was subject to termination with six months' notice by either
party.
Third Management Agreement and Fourth Revised Management
Agreement
On 17 February 2014 an Extraordinary General Meeting of the
shareholders approved a revision of the Management Agreement (Third
Management Agreement) and accordingly the Company entered into a
new management agreement with DCM Limited (the company which
replaced Dragon Capital Partners Limited as the Manager).
On 16 November 2016 the Board announced certain modifications to
the existing management arrangement (the Fourth Revised Management
agreement). The Fourth Revised Management Agreement became
effective on 01 January 2017 and will expire on 31 December
2018.
The Directors (excluding Tomas Fiala who is a related party as
explained in detail in the note 15) believe that the proposed
changes incorporated into the Fourth Management Agreement will
continue to incentivise the Manager to:
-- maximise the disposal proceeds of the Company's properties;
and
-- achieve the best possible sales value for each property in
order to maximise the cash returns to shareholders that would
result in the Manager maximising the proposed performance fee
payable under the Third and Fourth Management Agreements.
The Fourth Management Agreement has changed certain provisions
on management fee of the Third Management Agreement and summary of
those changes is presented below:
Management fee
The management fee under the Third Management Agreement changed
from a fee of 1.5 per cent of Gross Asset Value to a fixed amount
as follows and Fourth Management Agreement modified the fees for
2017 and 2018:
-- 1 January 2013 - 30 June 2013: USD 1.25 million
-- 1 July 2013 - 31 December 2013: USD 1.25 million
-- 1 January 2014 - 31 December 2014: USD 2.5 million
-- 1 January 2015 - 31 December 2015: USD 2.1 million
-- 1 January 2016 - 31 December 2016: USD 1.7 million
-- 1 January 2017 - 31 December 2017: USD 1.25 million under the
terms of Fourth Management Agreement (reduced from USD 1.5 million
under the Third Revised Management Agreement).
-- 1 January 2018 - 31 December 2018: USD 1.0 million under the
terms of Fourth Management Agreement (reduced from USD 1.4 million
under the Third Revised Management Agreement).
As set out in the Fourth Management Agreement, as a result of
the sale of the Obolon Residences project, the management fee
payable to DCM Limited is reduced to US$ 1.0 million per annum, and
accordingly the management fee for the year ending 31 December 2017
was reduced on a pro rata basis from the date of project's
sale.
The management fee under the Fourth Management Agreements is
payable in cash, semi-annually in July and January of each year,
within 10 business days after the end of the relevant period.
Performance fee
The performance fee under the Third Management Agreement changed
from one which is calculated in two parts, being an increase in NAV
and also an increase in share price performance, to the following,
based on distributions to shareholders:
-- in relation to distributions up to threshold 1, a fee of 3.5
percent of such distributions;
-- in relation to distributions from threshold 1 to threshold 2,
a fee of 7 percent of such distributions; and
-- in relation to distributions in excess of threshold 2, a fee
of 10 percent of such distributions.
Thresholds 1 and 2 are equal to USD 50 million and USD 75
million respectively.
The Performance Fee in the Fourth Revised Management Agreement
cancelled all references to the threshold 1 and 2 and replaced it
with a fixed performance fee of 5 percent of all distributions to
Company's shareholders. Distributions will continue to include cash
dividends, share buy backs and other returns of capital, and also
in-specie distributions.
The performance fee under the Third and Fourth Management
Agreements is payable in cash (or in the case of a distribution
that is a distribution in specie, payable by the transfer to the
Manager of the appropriate proportion of the financial instrument
that is the subject of the distribution), simultaneously with the
distributions to which they relate.
The total management fee for the year ended 31 December 2017 is
USD 1,204 thousand (31 December 2016: USD 1,700 thousand). There is
no performance fee for the year ended 31 December 2017 that has to
be paid to the Company (2016: USD 211 thousand).
10. Net loss from financial assets at fair value through profit or loss
Net loss from financial assets at fair value through profit or
loss for the years ended 31 December is as follows:
2017 2016
(in thousands of USD)
Interest income 16,508 16,228
Loss from loans receivable at fair value through profit or loss (16,472) (19,360)
Net gain/(loss) from loans receivable at fair value through profit or loss 36 (3,132)
Gain on equity investments at fair value through profit or loss 3,331 880
Fair value of disposed Obolon Residences project as at 30 June 2017 (Note 4(b)(ii)) (15,322) -
Proceeds from disposal of Obolon Residences project (investees level)
(Note 4(b)(ii)) 4,021 -
Proceeds from disposal of Obolon Residences project (Company level)
(Note 4(b)(ii)) 4,979 -
Net realized loss (6,322) -
Net loss from financial assets at fair value through profit or loss (2,955) (2,252)
11. Administrative expenses
Administrative expenses for the years ended 31 December are as
follows:
2017 2016
(in thousands of USD)
Professional services 490 227
Audit fees 75 92
Directors' fees (note 15(a)) 98 88
Advertising 64 60
Insurance 5 18
Bank charges 4 5
Travel expenses 2 2
Other 4 -
Total administrative expenses 742 492
12. Contingencies
(a) Litigation
The Company is involved in various legal proceedings in the
ordinary course of business but Directors consider that none of
them require provisions or could result in material losses for the
Company.
(b) Taxation contingencies
The Company is not subject to any tax charges within Isle of Man
jurisdiction, however the Company's investees perform most of their
operations in Ukraine and are therefore within the jurisdiction of
the Ukrainian tax authorities. The Ukrainian tax system can be
characterised by numerous taxes and frequently changing
legislation, which may be applied retrospectively, be open to wide
interpretation and in some cases conflict with other legislative
requirements. Instances of inconsistent opinions between local,
regional, and national tax authorities and the Ukrainian Ministry
of Finance are not unusual. Tax declarations are subject to review
and investigation by a number of authorities that are empowered by
law to impose severe fines, penalties and interest charges. A tax
year remains open for review by the tax authorities during the
three subsequent calendar years, however under certain
circumstances a tax year may remain open longer. These facts create
tax risks substantially more significant than typically found in
countries with more developed systems.
The Directors believe that the Company has adequately assessed
tax liabilities based on its interpretation of tax legislation,
official pronouncements and court decisions for the purpose of
assessment of the Company's assets fair value. However, the
interpretations of the relevant authorities could differ and the
effect on the financial statements, if the authorities were
successful in enforcing their interpretations, could be
significant.
(c) Litigation with tax authorities
In 2015 the Company's investee Grand Development LLC (Green
Hills project) was involved in litigation with tax authorities with
respect to penalties of USD 437 thousand imposed as a result of tax
inspection. Respective provision for the full amount of penalties
has been recognised in the investee's accounts as at and for the
year ended 31 December 2015. During 2016 the Kyiv Administrative
Court ruled decision in favour of the company, Grand Development
LLC. Based on that fact recognized in 2015 provision was reversed
as at 31 December 2016.
(d) Insurance
The Company and its investees do not have full coverage for the
property, business interruption, or third party liability in
respect of property or environmental damage arising from accidents
on property or relating to the operations of the Company and its
investees. For the real estate projects, the Company uses
subcontractors who are responsible for insuring those risks until
the time the property is commissioned. Until the Company and its
investees obtain adequate insurance coverage, there is a risk that
the loss or destruction of certain assets could have a material
adverse effect on the Company's operations and financial
position.
13. Earnings per share
Basic earnings per share
The calculation of basic earnings per share for the financial
statements is based upon the net loss for the year ended 31
December 2017 attributable to the ordinary shareholders of the
Company of USD 4,853 thousand (2016: net loss of USD 4,687
thousand) and the weighted average number of ordinary shares
outstanding, calculated as follows:
2017 2016
(number of shares weighted during the period outstanding)
Shares issued on incorporation on 23 February 2007 2 2
Sub-division of GBP 1 shares into GBP 0.01 shares on 16 May
2007 198 198
Shares issued on 1 June 2007 104,000,000 104,000,000
Shares issued on 29 November 2007 36,630,100 36,630,100
Shares issued on 24 April 2008 1,698,416 1,698,416
Own shares buyback in 2008 (8,943,000) (8,943,000)
Own shares buyback in 2009 (15,669,201) (15,669,201)
Own shares buyback in 2011 (8,355,000) (8,355,000)
Weighted average number of shares for the year 109,361,515 109,361,515
Diluted earnings per share
As at 31 December 2017 and 2016 there were no options or
warrants in issue. Therefore, there was no dilution on the
Company's basic earnings per share.
14. Fair values and financial risk management
(a) Accounting classifications and fair values
The following table shows the carrying amounts and fair values
of financial assets and financial liabilities, including their
levels in the fair value hierarchy. It does not include fair value
information for financial assets and financial liabilities not
measured at fair value if the carrying amount is a reasonable
approximation of fair value. Management believes that fair value of
cash and cash equivalents, other accounts receivable and other
accounts payable approximates their carrying amount.
Carrying amount Fair value
Designated Other
(in thousands Note at fair Loans and financial Level Level
of USD) value receivables liabilities Total 1 2 Level 3 Total
31 December
2017
Financial
assets measured
at fair value
Financial
assets at fair
value through
profit or loss 4 30,258 - - 30,258 - - 30,258 30,258
30,258 - - 30,258 - - 30,258 30,258
Financial
assets not
measured
at fair value
Cash and cash
equivalents 6 - 9,202 - 9,202
Receivables
from sale of
Obolon
Residences
project - 3,999 3,999
Other accounts
receivable 5 - 116 - 116
- 13,317 - 13,317
Financial
liabilities not
measured at
fair value
Other accounts
payable 8 - - 742 742
- - 742 742
Carrying amount Fair value
Designated Other
Note at fair Loans and financial Level Level
value receivables liabilities Total 1 2 Level 3 Total
(in thousands
of USD)
31 December
2016
Financial
assets measured
at fair value
Financial
assets at fair
value through
profit or loss 4 40,779 - - 40,779 - - 40,779 40,779
40,779 - - 40,779 - - 40,779 40,779
Financial
assets not
measured
at fair value
Cash and cash
equivalents 6 - 7,771 - 7,771
Other accounts
receivable 5 - 108 - 108
- 7,879 - 7,879
Financial
liabilities not
measured at
fair value
Other accounts
payable 8 - - 972 972
- - 972 972
(b) Measurement of fair values
(i) Valuation techniques and significant unobservable inputs
The valuation techniques used in measuring Level 3 fair values,
as well as the significant unobservable inputs used for Level 3
fair values, are disclosed in the following relevant notes:
-- Note 4 - Financial assets at fair value through profit and loss
Reconciliation of Level 3 fair values
The following table shows a reconciliation from the opening
balances to the closing balances for Level 3 fair values.
Financial assets at
fair value through
Note profit or loss
(in thousands of USD)
Balance at 1 January 2016 43,625
Loss included in profit or loss
Interest income 10 16,228
Gain on investments at fair value through
profit or loss 10 880
Loss from loans receivable at fair value
through profit or loss 10 (19,360)
Loans granted (594)
Balance at 31 December 2016 40,779
Loss included in profit or loss
Interest income 10 16,508
Gain on investments at fair value through
profit or loss 10 3,331
Loss from loans receivable at fair value
through profit or loss 10 (16,472)
Fair value of disposed Obolon Residences
project as at 30 June 2017 4 (15,322)
Proceeds from disposal of Obolon Residences
project (investees level) 10 4,021
Loans repaid (2,587)
Balance at 31 December 2017 30,258
(c) Financial risk management
Exposure to credit, interest rate and currency risk arises in
the normal course of the Company's business. The Company does not
hedge its exposure to such risks. As stated in note 1(b) to these
financial statements the political and economic situation has
deteriorated significantly since 2014. Further deterioration could
negatively impact the results and financial position in a manner
not currently determinable.
(i) Risk management policy
The Board has assessed major risks and grouped them in a
register of significant risks. This register is reviewed by the
Board at least twice per year or more often if there are
circumstances requiring such a review.
(ii) Credit risk
Loans receivable
The Company issues loans to its subsidiaries. All these loans
are unsecured and are stated at fair value in these financial
statements. Recoverability of these loans receivable depends on
timely realisation of the real estate projects (see note 4). As at
31 December 2017, USD 9,240 thousand, or 39% of the total loans
receivable, are due from four counterparties, which further invest
in Land Bank projects (31 December 2016: USD 24,311 thousand, or
65% which further invest in the Obolon Residences and Land Bank
projects).
Other accounts receivable
The Company's exposure to credit risk is influenced mainly by
the individual characteristics of each counterparty.
The exposure to credit risk is approved and monitored on an
ongoing basis individually for all significant counterparties.
The Company does not require collateral in respect of other
accounts receivable.
The Company establishes an allowance for impairment that
represents its estimate of incurred losses in respect of other
accounts receivable. The main components of this allowance are a
specific loss component that relates to individually significant
exposures, and a collective loss component established for groups
of similar assets in respect of losses that have been incurred but
not yet identified. The collective loss allowance is determined
based on historical data of payment statistics for similar
financial assets. At the reporting date the Company had no such
collective impairment provision.
Exposure to credit risk
The carrying amount of financial assets represents the maximum
credit exposure. The maximum exposure to credit risk as at 31
December is as follows:
31 December 2017 31 December 2016
(in thousands of USD)
Loans receivable from investees 23,730 37,582
Cash and cash equivalents 9,202 7,771
Receivables from sale of Obolon Residences project 3,999 -
Other accounts receivable 116 108
37,047 45,461
(iii) Liquidity risk
Liquidity risk is the risk that the Company will encounter
difficulty in meeting the obligations associated with its financial
liabilities that are settled by delivering cash or another
financial asset. The Company's approach to managing liquidity is to
ensure, as far as possible, that it will always have sufficient
liquidity to meet its liabilities when due, under both normal and
stressed conditions, without incurring unacceptable losses or
risking damage to the Company's reputation.
The following are the contractual maturities of financial
liabilities as at 31 December 2017:
Contractual cash flows
Carrying Within More than
amount Total one year 2-5 years 5 years
(in thousands of USD)
Other accounts payable 742 742 742 - -
742 742 742 - -
The following are the contractual maturities of financial
liabilities as of 31 December 2016:
Contractual cash flows
----------------------------------------------
Carrying Within More than
amount Total one year 2-5 years 5 years
(in thousands of USD)
Other accounts payable 972 972 972 - -
972 972 972 - -
(iv) Market risk
Market risk is the risk that changes in market prices, such as
foreign exchange rates, interest rates and equity prices will
affect the Company's income or the value of its holdings of
financial instruments. The objective of market risk management is
to manage and control market risk exposures within acceptable
parameters, while optimising the return.
Interest rate risk
Fair value of loans receivable at fair value through profit or
loss depends on fair values of underlying real estate projects (see
note 4(b)), therefore fair values are not directly impacted by
change in interest rates.
Foreign currency risk
The majority of the Company's income, expenses, assets and
liabilities are denominated in US dollars. However, the underlying
cash flows of the Company's investees are denominated in Ukrainian
hryvnias. Though the Company attempts to peg its revenues to US
dollar in the depressed economy it is not always possible to
recover in full the effect of Ukrainian hryvnia devaluation.
Weakening of the Ukrainian hryvnia would have resulted in decrease
in fair value of loans receivable.
(d) Capital management
The Directors seek to maintain a sufficient capital base for
meeting the Company's operational and strategic needs, and to
maintain confidence of market participants. This is achieved by
efficient cash management and constant monitoring of investment
projects.
From time to time the Company purchases its own shares on the
market; the timing of these purchases depends on market prices. Buy
decisions are made on a specific transaction basis by the Board
within the limits approved by the Company's shareholders. The
Company does not have a defined share buy-back plan.
There were no changes in the Company's approach to capital
management during the year.
The Company is not subject to externally imposed capital
requirements.
15. Related party transactions
(a) Transactions with management and close family members
(i) Directors' remuneration
Directors' compensation included in the statement of
comprehensive income for the years ended 31 December is as
follows:
2017 2016
(in thousands of USD)
Directors' fees 98 88
Reimbursement of travel expense 1 2
Total management remuneration 99 90
(ii) Key management personnel and director transactions
The Directors' interests in shares in the Company as at 31
December are as follows:
2017 2016
Number of Ownership, Number of Ownership,
shares % shares %
Aloysius Johannes Van - - - -
der Heijden
Dragon Capital Group
(with Tomas Fiala as
principal shareholder
and managing director)
* 66,607,334 60.91 19,433,129 17.77
66,607,334 60.91 19,433,129 17.77
* Dragon Capital Group holds its shares in the Company through
nominal shareholder, Vidacos Nominees Limited as at 31 December
2017 and 31 December 2016.
Mr Tomas Fiala, one of the Company's directors, is the principal
shareholder and managing director of Dragon Capital Group which
acquired 6,831,500 shares (6.25%) of the Company during the first
(June 2007) and second (November 2007) share issues. Also Mr Tomas
Fiala is a director in Dragon Capital Partners which received
1,698,416 (1.55%) ordinary shares at a price of USD 2.60 per
ordinary share to settle 70% of the Manager's performance fee for
2007 in the amount of USD 4,432 thousand.
Through a series of market purchases in 2011 (totalling
1,274,153 ordinary shares) and 2012 (totalling 6,281,158 ordinary
shares) the holding of Dragon Capital Group in the Company has
increased to 16,085,227 ordinary shares or 14.71% of the Company's
issued shares as at 31 December 2012.
During 2013 the Dragon Capital Group made additional market
purchases of 2,842,595 shares in the Company, which resulted in a
total shareholding of 18,927,822 ordinary shares, or 17.31% of the
Company's issued share capital being the Dragon Capital Group
shareholding at the reporting date.
In 2016 Dragon Capital Group sold 71,251 and purchased 576,558
ordinary shares bringing its shareholding to 19,433,129 or 17.77%
of the issued share capital.
During 2017, as the result of series of market share purchases
Dragon Capital Group has acquired in total 47,174,205 ordinary
shares of the Company, which resulted in a total shareholding of
66,607,334 shares representing 60.91% of the issued share capital
of the Company.
(b) Transactions with subsidiaries
Outstanding balances with subsidiaries as at 31 December are as
follows:
2017 2016
(in thousands of USD)
Loans receivable 23,730 37,582
Other accounts receivable 213 281
Allowance for impairment of other accounts
receivable (213) (281)
23,730 37,582
Profit or loss transactions with subsidiaries during the years
ended 31 December are as follows:
2017 2016
(in thousands of USD)
Interest income 16,508 16,228
Loss from loans receivable at fair value
through profit or loss (16,472) (19,360)
Other income 32 -
68 (3,132)
(c) Other related parties transactions
Other related parties are represented by the Company's Manager,
DCM Limited (see note 9) and DTZ Kiev B.V.
Outstanding balances with DCM Limited as at 31 December are as
follows:
2017 2016
(in thousands of USD)
Management fee 579 850
579 850
Expenses incurred in transactions with DCM Limited as at 31
December are as follows:
2017 2016
(in thousands of USD)
Management fee 1,204 1,700
Performance fee - 211
2, 2,
------ ------
1,204 1,911
One of the Company's non-executive directors is also a Chairman
of DTZ Kiev B.V., the independent appraiser engaged by the
Directors to assist with the estimation of fair value of the real
estate projects as at 31 December 2016.
Outstanding balances with DTZ Kiev B.V. as at 31 December are as
follows:
2017 2016
(in thousands of USD)
Appraisal services - -
- -
Fees for services for the year ended 31 December are as
follows:
(in thousands of USD)
Appraisal services 3 23
2,
---- ---
3 23
16. Events subsequent to the reporting date
Having reviewed the Company's performance in 2017, including the
sale of the remaining interest in the Obolon Residences project,
the Board of Directors of the Company has decided to make a
distribution of USD 7,655 thousand or USD 0.07 per Ordinary Share,
to its shareholders. This decision is in accordance with Company's
Investing Policy, which states that surplus capital will be
returned to shareholders, and is made under Article 127 of
Company's Articles of Association. The relevant record date for the
distribution was 3 April 2018, the corresponding ex-distribution
date was 29 March 2018, and the distribution was paid to
shareholders on 17 April 2018.
On 27 April 2018 the Board of Directors of the Company has
decided to make an additional distribution of USD 2,187 thousand,
or USD 0.02 per Ordinary Share, to its shareholders. This decision
is in accordance with Company's Investing Policy, which states that
surplus capital will be returned to shareholders and is made under
Article 127 of Company's Articles of Association. The relevant
record date for the distribution was 11 May 2018, the corresponding
ex-distribution date was 10 May 2018, and the distribution was paid
to shareholders on 16 May 2018.
Subsequently to the reporting date and before the date these
financial statements were authorised for issue, receivables from
sale of Obolon Residences project amounting to USD 3,999 thousand
were fully settled to the Company by Cheriton Overseas Limited.
(1) Not including the sale of Obolon Residences to Cheriton
Overseas Limited for USD 9.0 million
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR EANKFEDFPEEF
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