CONSOLIDATED FINANCIAL STATEMENTS
V. Notes to the consolidated financial statements
V.1 General environment
V.1.1 REPORTING ENTITY
Mines de la Lucette SA (the “Company”) is domiciled in France. On 31 December 2006, the registered office of the Company was located at 61, rue de Monceau – 75008 Paris. It was transferred to 7, rue Scribe – 75009 Paris on 1 January 2007.
The consolidated financial statements of the Company for the year ended 31 December 2006 include the Company and its subsidiaries (collectively referred to as the “Group”). The Company’s consolidated financial statements were approved by the board of directors on 6 March 2007.
The Group’s primary business activities are the holding and management of commercial real estate assets, consisting mainly of offices and warehouses.
V.1.2 ACCOUNTING PRINCIPLES
In accordance with the EU Directive dated 19 July 2002, the Group’s consolidated financial statements have been prepared in accordance with the presentation, accounting and valuation principles of the IFRS standards as adopted by the European Union on 31 December 2006. International accounting standards include IFRS (International Financial Reporting Standards), IAS (International Accounting Standards), and their interpreta-tions (SIC and IFRIC).
The Group’s consolidated financial statements were prepared under IFRS, with comparative figures for 2005 prepared under the same accounting principles. The principles applied in the preparation of these financial statements comply with:
• all standards and interpretations adopted by the European Union as at 31 December 2006;
• applicable options and exemptions used.
The accounting policies adopted are consistent with those applied in the prior year, with the exception of the changes stated in notes V.1.2.a, V.1.2.b and V.1.2.c below.
V.1.2.a Application of new standards, amended standards and interpretations of current standards within the European Union as at 31 December 2006 and mandatory applicable at this date
New standards, IFRS amendments and the new IFRIC interpretations in force as at 31 December 2006 did not have an impact on the Group financial statements. These are as follows:
• amendment to IAS 19 “Treatment of actuarial gains and losses, group schemes and disclosures”,
• amendment to IAS 39 “Hedging of cash flow for future intercompany transactions”,
• amendment to IAS 39 “Fair value option”,
• amendment to IAS 39 and IFRS 4 “Financial guarantee agreements”,
• IFRIC 4 interpretation “Determining whether an arrangement contains a lease”.
The Group is not affected by the amendment to IAS 21 “Effects of changes in foreign exchange rates”, or by IFRS 6 “Exploration for and evaluation of mineral resources”, or by the IFRIC 5 interpretation “Rights in interests arising from decommissioning, restoration and environmental rehabilitation funds”, or by IFRIC 6 “Liabilities arising from participating in a specific market – waste electrical and electronic equipment”.
V.1.2.b Application of new standards, amended standards and interpretations of standards prior to the latest date for compulsory application
The Group has chosen not to apply any standard, amended standard or interpretation of a standard for which the latest compulsory date for application is after 31 December 2006.
Current standards of the European Union as at 31 December 2006 for which the latest deadline for application is after the Group’s balance sheet date and which are relevant (or may be relevant) are as follows:
• IFRS 7 “Financial instruments : disclosures”,
• amendment IAS 1 “Share capital disclosures”,
• interpretation IFRIC 8 “Scope of IFRS 2”,
• interpretation IFRIC 9 “Reassessment of embedded derivatives”.
Furthermore, standards issued by the IASB as at 31 December 2006 but not yet adopted by the European Union at this date, which are relevant for the Group, are as follows:
• interpretation IFRIC 10 “Interim financial reporting and impairment”,
• interpretation IFRIC 11 “IFRS 2 – Group and treasury shares transactions”,
• IFRS 8 “Operating segments”.
The Group is not affected by IFRIC 12 “Service concession arrangements”, which was published in November 2006 and must be adopted for all periods beginning with effect from 1 January 2008.
These standards and interpretations have no impact on the valuation and accounting of the transactions.
With regard to the other standards and interpretations mentioned above, the Group is currently conducting a review of their actual impact on the
V.1.2.c Options available under international accounting standards adopted by the Group
Some of the international accounting standards stipulate options for the valuation and accounting of assets and liabilities.
The options chosen by the Group are as follows:
• valuation of its investment properties at fair value, as allowed under IAS 40. The impact of this choice, taken in 2006, is detailed in paragraph V.1.4 below;
• capitalisation of interest incurred during the period of construction and acquisition of tangible and intangible assets as allowed under IAS 23
“Borrowing costs”.
V.1.3 BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements of the Company and those of its subsidiaries at 31 December every year. The financial statements of the subsidiaries are prepared for the same accounting period as those of the parent company and are based on the same accounting policies.
All intercompany balances and transactions as well as income, expenses and unrealised gains/ losses, which are included in the net book value of assets, which derive from intercompany transactions are fully eliminated.
Subsidiaries are consolidated with effect from the date of acquisition, which corresponds to the date on which the Group obtained control, and they continue to be consolidated until the date when the Group loses control. All companies held by Mines de la Lucette are wholly owned and are fully consolidated under the full consolidation method. There were no minority interests as at 31 December 2006.
Business combinations are accounted for in accordance with the acquisition method. This involves recording the identifiable assets (including intangible assets not previously recognised) and the identifiable liabilities (including contingent liabilities, with the exception of future restructuring charges) of the business acquired at fair value.
V.1.4 CHANGES IN ACCOUNTING POLICIES
V.1.4.a Change in policy
In 2006, and in accordance with the option offered by IAS 40, the Group has selected the fair value model for valuing investment properties. This model consists of stating investment properties at fair value and recording changes in value through the income statement. The balance sheet, income statement and cash flow statement for the year 2005 have been restated accordingly.
In the past, the Group applied the cost model to value its investment properties based on IAS 16.
V.1.4.b Changes in presentation
In order to better reflect its business, the Group adopted an income statement presentation for 2006 that breaks down costs by function rather than by expenditure type as previously presented. In order to ensure comparability, the 2005 income statement was restated in order to present costs broken down by function in a similar way.
The presentation of the cash flow statement was modified: it is still based on the indirect method but it now starts from the basis of operating profit rather than from net profit as in the past. In order to ensure comparability, the 2005 cash flow statement has also been restated.
V.1.4.c Impacts of changes
The adjustments and reclassifications between the published 2005 income statement stated by expense type using the cost model and the restated income statement stated by function at fair value are as follows:
In thousand euros 2005 Fair value impact 2005 restated
Net rent 3,938 0 3,938
Operating profit before changes in value (586) 1,802 1,217
Capital gains/ losses on sale of investment properties 516 (152) 364
Fair value changes on properties 3,013 3,013
Operating profit (69) 4,663 4,594
Net financial items (1,700) – (1,700)
Profit before tax (1,770) 4,663 2,893
Income tax 1,381 636 2,017
Net profit of the consolidated group (389) 5,299 4,911
Of which minority interests –
Of which net profit (group share) (389) 5,299 4,911
Average number of shares 1,568,353 1,568,353
Earnings per share (in euros) (0.25) 3.38 3.13
The main impacts are as follows:
• an increase in operating profit of 1.802 million euros due to a lack of depreciation charges;
• an increase in operating profit of 4.663 million euros due to fair value changes on sold and unsold properties;
• a deferred tax gain of 636 thousand euros arising from the release of the additional deferred tax to 2005 income at a rate of 34.33% from 1 January 2005 due to the change whereby properties are stated at fair value, following the introduction of SIIC status decided on 27 April 2005.
At 31 December 2005, the balance sheet impacts of the revised policy are as follows:
In thousand euros 2005 Fair value impact 2005 restated
ASSETS
Non current assets 116,548 6,953 123,501
Current assets 10,412 – 10,412
Total assets 126,960 6,953 133,913
LIABILITIES
Shareholders’ equity before net profit 26,174 1,655 27,829
Consolidated net profit (388) 5,299 4,911
Shareholders’ equity 25,786 6,954 32,740
Total non current liabilities 91,536 1 91,537
Total current liabilities 9,638 (2) 9,636
Total liabilities 126,960 6,953 133,913
The main impacts are as follows:
• an increase in the value of properties of 6,953 thousand euros;
• an equivalent increase in shareholders’ equity, of which 5,299 thousand euros relates to 2005 earnings.
V.1.5 ACCOUNTING VALUATION AND POLICIES
V.1.5.a Investment properties (IAS 40)
The Company has chosen the fair value model, which consists, in accordance with the option offered under IAS 40, of recording investment prop-erties at fair value and recording changes in value in the income statement.
Investment properties are initially stated at cost including transaction costs. The book value includes costs of improvements to the property when incurred, provided that these meet the accounting criteria. The book value does not include ongoing repair and maintenance costs for the invest-ment property. The investinvest-ment properties are subsequently stated at fair value.
Fair value
The fair value of an investment property is the price at which the asset could be sold between two informed and consenting parties on an arms length basis. It reflects actual market conditions and circumstances prevailing at the financial year-end date rather than at a past or future date, but does not reflect future capital expenditure that would improve the property nor future benefits generated by this future capital expenditure.
The fair value is established based on independent expert valuation reports including taxes, applying a discount rate of 6.2%, which corresponds to transfer tax and costs as at 31 December 2006 and 2005.
Changes in fair value are accounted under “Fair value changes on investment properties” and are determined as follows:
Change in fair value = market value at the end of the financial year – market value at the end of the prior year + amount of work and expenses capitalised for the year.
Valuation methodology
All properties in the Group’s portfolio were valued as at 31 December 2006 by two independent appraisers.
To value the offices portfolio, DTZ Eurexi uses the “Discounted Cash flows” method and the yield method.
The two methods are then compared in order to apply the most appropriate method to value the assets.
The discounted cash flow valuation method consists of establishing the value in use of a property by discounting its cash flows over a given future period to net present value.
The yield method (or income capitalisation) consists of capitalising an annual income including both existing rent and future income (e.g. rental value, rental increases), and the differences between actual rent and future rent is taken into account by lower income or items specific to each asset.
The entire Warehouses portfolio was valued by CB Richard Ellis using the income capitalisation method, and the result was compared with values per unit of surface area.
All other properties (mostly hotels) were valued by CB Richard Ellis using the income capitalisation method.
Market values are stated both “contracts concluded”, i.e. including all transfer fees and legal fees, and also as excluding transfer fees and legal fees.
Accounting policies
Investment properties are not depreciated.
Until the completion of a building in construction, renovation or refitting for future use as an investment property, IAS 16 applies. After completion of the work, the property is classified for accounting purposes as an investment property, subject to meeting the definitions of IAS 40.
Properties for which agents have been appointed for sale or a sale has been decided by the board of directors are reclassified in accordance with IFRS 5 as assets held for sale.
Changes in use
Properties are only transferred to the investment properties category if, and only if, there is a change in use, such as if the owner no longer occupies the property when it is rented to a third party or on completion of the construction or refitting of the property. Properties are only transferred from the investment properties category if, and only if, there is a change in use, such as if the owner begins to occupy the property or starts to fit it out in order to sell it.
V.1.5.b Properties held for sale
A property for which the sales process has been launched falls under the scope of IFRS 5. A property can be deemed to be available for sale if a formal decision to put it up for sale has been taken by the relevant management authority and the sale must be highly probable within twelve months.
These properties are valued at fair value and are stated on a separate line on the balance sheet.
There were no properties held for sale in the balance sheet as at 31 December 2006.
V.1.5.c Tangible assets (IAS 16)
In accordance with IAS 16, operating properties are valued at historical cost less accumulated depreciation and any impairment loss.
Properties under construction are first recorded at cost and are subject to impairment tests at each balance sheet date. Once a property under con-struction is completed, it is treated as an investment property (IAS 40) and stated at fair value; any variation in value is accounted as a change in fair value in the income statement.
V.1.5.d Intangible assets (IAS 38)
Assets treated as intangible assets may be separated, sold, transferred, ceded under licence, leased or exchanged, either individually or as part of a contract with a related asset or liability. These assets may also result from contractual rights or other legal rights regardless of whether these rights can be sold or separated. Once they are first recorded, intangible assets are stated at cost less accumulated depreciation and impairment.
Fixed assets with a finite useful life are depreciated on a straight line basis over the useful life. These useful lives are reviewed every year and an impairment test is performed once there is an indication of loss in value.
V.1.5.e Asset impairment (IAS 36)
In accordance with IAS 16, 36 and 40, tangible and intangible assets undergo impairment tests if, at the balance sheet date, indications of loss in value (indicators such as market value of the assets, changes in the use or the asset’s economic environment etc) have been identified.
A recoverable value is then established for each separate property by external appraisers.
In the event that the recoverable value is lower than the net book value, the Group may have to accrue for impairment affecting earnings.
V.1.5.f Financial assets and borrowings (IAS 32/39)
The application of IAS 32 and 39 requires the following accounting valuation principles and policies:
• Financial assets
Current financial assets comprise investment securities which are stated at fair value (i.e. likely realisable value) at each balance sheet date. The change in the difference between the net book value and the fair value brought forward and carried forward for each financial year is posted to “Net financial items”.
• Borrowings
All loans are initially recorded at cost (i.e. fair value, net of directly attributable costs). Subsequently, they are stated at amortised cost using effective interest rate. The change in the difference between the book value and the amotised cost brought forward and carried forward for each financial year is posted to “Net cost of debt”.
Deposits paid by tenants, for which expiry is constantly renewed, are not discounted.
• Accounting for hedging of future cash flows
The Group has adopted an interest rate risk management policy using derivative financial instruments such as collars and interest risk swaps.
These derivative financial instruments are recorded at fair value. Derivatives are accounted for as assets if the fair value is positive and as liabilities if the fair value is negative. The valuation of derivatives is based on generally accepted valuation models (e.g. discounted future cash flow method, Black and Scholes model).
The Group has opted to account for hedging transactions as specified under IAS 39. At the start of a hedging operation, the Group specifies and formally documents the hedging contract to which it seeks to apply hedge accounting. The Group expects the hedge to be effective in compen-sating for fluctuations in fair value or cash flow.
All gains and losses from changes in fair value of derivatives that are not classified as hedging instruments are posted directly to the income statement.
Profits or losses corresponding to the effective portion of the hedge are posted directly to shareholders’ equity, whereas the ineffective portion is taken to income.
V.1.5.g Taxation
Group companies which have opted for SIIC status as Listed Property Investment Companies are exempt from corporate income tax and capital gains tax.
Payables of exit tax for which the payment is spread over four years are discounted to present value. The impact of discounting is posted to “Net financial items”.
V.1.5.h Receivables from tenants
Amounts due from tenants are stated at face value and are systematically reviewed on a case by case basis. A bad debt provision is established for each balance owing based on any expected collection difficulties in respect of the amount considered to be at risk.
V.1.5.i Borrowing costs
The Group has chosen to apply the alternative method specified by IAS 23, which consists of capitalising borrowing costs within the related eligible assets.
V.1.5.j Earnings per share (IAS 33)
Basic earnings per share is calculated by dividing the parent company’s net profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year.
To calculate diluted earnings per share, the average number of shares in issue is adjusted to take into account of the conversion of all ordinary shares that may be issued in the future, notably due to stock options.
The dilution is calculated based on the “share buy-back method” specified under IAS 33. Under this method, the funds received following the exercise of share warrants or options are deemed to be allocated first to the share buy-back at market price. This market price corresponds to the average monthly share price weighted for volumes traded.
The theoretical number of shares that would be bought back at market price is then deducted from the total number of shares resulting from the exercise of the share warrants or options. The resulting number is then added to the average number of shares in issue which then constitutes the denominator of the equation.
The detailed calculation of the average number of shares before and after dilution from share warrants and stock options is as follows:
In thousand euros 2006 2005
Average number of shares 10,087,517 1,549,503
Adjustment for shares granted without consideration 18,850 18,850
Average number of shares restated 10,106,367 1,568,353
Impact of dilution from share warrants 330,747 –
Impact of dilution from stock options 3,164 –
Diluted average number of shares 10,440,277 1,568,353
V.1.5.k Share-based payments
Under IFRS 2, the impact of any transaction involving payment in shares must be posted to the income statement.
Compensation paid in the Company’s own equity instruments to employees after 7 November 2002 is valued at the fair value of the instruments as at the date granted.
The cost of the transactions paid in equity instruments is accounted for over the period during which the conditions for performance and/or services are met. This period finishes on the date when the employees obtain an unconditional right to the instruments (“the rights acquisition date”). The cumulative charge posted for these transactions at each year end until the rights acquisition date reflects the passing of this acquisition period based on the Group’s best estimate, as at this date, of the number of instruments that will be acquired. The charge or income recorded in the
The cost of the transactions paid in equity instruments is accounted for over the period during which the conditions for performance and/or services are met. This period finishes on the date when the employees obtain an unconditional right to the instruments (“the rights acquisition date”). The cumulative charge posted for these transactions at each year end until the rights acquisition date reflects the passing of this acquisition period based on the Group’s best estimate, as at this date, of the number of instruments that will be acquired. The charge or income recorded in the