CONSOLIDATION PRINCIPLES

2.1. SUBSIDIARIES

GAGFAH S.A. applies IFRS 10, IFRS 11, IFRS 12 and IAS 28 (as revised in 2011) together with the Amendments to IFRS 10, IFRS 11 and IFRS 12 regarding the transitional guidance.

Management has to exercise judgment with regard to the consolidation of all entities. IFRS 10 regulates the consolidation of companies controlled by other companies. Every entity has to be consolidated by another company when it is controlled by that company from an economic perspective even if the company does not hold more than half of the entity’s shares. The application of the control concept requires judgment in each individual case with consideration of all relevant factors.

All subsidiaries over which control is exercised pursuant to IFRS 10.7 are fully consolidated. GAGFAH S.A. controls the subsidiaries if and only if it has:

• power over the investee

• exposure, or rights to variable returns from its involvement with the investee and

• the ability to use its power over the investee to affect the amount of the investor's returns.

In the light of the aforementioned factors, five of the Group companies (UC ACQ Ireland Limited, 12. CR Immobilien-Vermietungsgesellschaft mbH & Co. SÜDOST WOBA Striesen KG, Haus- und Boden-Fonds 37 and the two in 2013 established companies GERMAN RESIDENTIAL FUNDING 2013-1 LIMITED and GERMAN RESIDENTIAL FUNDING 2013-2 LIMITED) were included in the Consolidated Financial Statements according to IFRS 10, although GAGFAH has not the majority of shares.

Due to the narrow purpose of the GERMAN RESIDENTIAL FUNDING 2013-1 LIMITED and GERMAN RESIDENTIAL FUNDING 2013-2 LIMITED, the underlying CMBS structure and the corresponding contracts, GAGFAH GROUP has the ability to control the variable cash flows and the repayment of the junior tranche by own activities and bears substantial risks. Furthermore, GAGFAH GROUP had a significant role in the formation of the companies and the conclusion of the corresponding contracts. This leads to the assumption, that GAGFAH GROUP has control according to IFRS 10.5 ff. and GAGFAH GROUP had to fully consolidate the companies according to IFRS 10.

GAGFAH GROUP bears all risks and variable returns of 12. CR Immobilien-Vermietungsgesellschaft mbH & Co. SÜDOST WOBA Striesen KG due to an existing long-term leasing contract and therefore has control over this subsidiary as well.

Due to diverse cross connections within the combined business activities with UC ACQ Ireland Limited, GAGFAH GROUP also has control over this subsidiary.

CONSOLIDATED FINANCIAL STATEMENTS NOTES OTHER 111

GAGFAH S.A. CONSOLIDATED ANNUAL REPORT 2014

96 A. General Information

103 B. Consolidated Group and Consolidation Principles

114 C. Accounting Policies 144 D. Group Segment Reporting

148 E. Notes to the Consolidated Statement of Financial Position 209 F. Notes to the Consolidated Statement of Comprehensive Income 227 G. Notes to the Consolidated Statement of Cash Flows 229 H. Other Notes

Through the exercise of the fiduciary management, GAGFAH GROUP controls Haus- und Boden-Fonds 37 as a principal. Moreover, GAGFAH GROUP has the majority of shares in the remaining 3 HB Funds. The financial statements of the individual subsidiaries are included in the Consolidated Financial Statements in accordance with the IFRS using the uniform accounting policies stipulated by GAGFAH GROUP.

All business combinations reflected in the Consolidated Financial Statements took place before financial year 2008 with exception of the VITEX Group acquired in 2014, and had been recorded according to IFRS 3 as applicable at the acquisition date.

For the companies acquired, capital consolidation was performed using the purchase method in

accordance with IFRS 3, under which the acquisition costs of the investment is offset against the respective share in the net assets (in line with the Group’s interest) measured at fair value as of the acquisition date. The assets and liabilities of the relevant subsidiaries were remeasured at fair value as of the respective acquisition dates.

If the acquired share of the net assets of the subsidiary exceeds the cost of the investment, the share of the net assets and the acquisition costs are reassessed as prescribed by IFRS 3.32. Any excess remaining after this reassessment is recognized immediately as profit or loss.

All intercompany receivables and liabilities (and provisions), revenues, expenses and income as well as gains and losses are eliminated in accordance with IFRS 10.B86.

Subsidiaries are fully consolidated from the date of acquisition, i.e. the date on which the Group obtains control (IFRS 3.8 in conjunction with IFRS 3.15). Inclusion in the Consolidated Financial Statements ends as soon as the parent company ceases to have control (IFRS 10.25).

An adjustment item for non-controlling interests is recognized for shares in fully consolidated subsidiaries that do not belong to the parent company. Pursuant to IFRS 10.22, the adjustment item is disclosed under consolidated equity as a separate item from the equity of the parent company.

In accordance with IFRS 10.B94, the portion of non-controlling interests in consolidated net profit or loss is recorded separately as a “thereof” line item below net profit or loss in the Consolidated Statement of Comprehensive Income. Profit or loss and other comprehensive income are attributed to the non- controlling interests even if this results in a deficit balance of the non-controlling interests.

2.2. CHANGE IN CONTROLLING INTEREST

A change in ownership interest of a subsidiary without a change of control is accounted for as an equity transaction.

112 _{WHERE LIFE HAPPENS SHAREHOLDER INFORMATION DIRECTORS’ REPORT}

2.3. JOINT VENTURES

According to IFRS 11.5, a joint arrangement is defined as a contractual arrangement between two or more parties to undertake economic activities that are subject to joint control. A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement, is called "joint venture". The Group has interests in the following four joint ventures:

• Objekt Dresden GbR

• Grundstücksentwicklungsgesellschaft Oesselse “Langes Feld” GbR

• Wolmirstedt GbR

•

CONSOLIDATED FINANCIAL STATEMENTS NOTES OTHER 113

GAGFAH S.A. CONSOLIDATED ANNUAL REPORT 2014

96 A. General Information

103 B. Consolidated Group and Consolidation Principles

114 C. Accounting Policies 144 D. Group Segment Reporting

148 E. Notes to the Consolidated Statement of Financial Position 209 F. Notes to the Consolidated Statement of Comprehensive Income 227 G. Notes to the Consolidated Statement of Cash Flows 229 H. Other Notes