1 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 CHAIRMAN’S STATEMENT Introduction 2010 has proved to be another significant year in the progress of the Company and as the economy and property market recovers from the traumas of 2008 we can see improvements in the years ahead. By the end of the year there were signs that the recovery in the real estate market was well established particularly in Moscow. Management believes there are once again good growth opportunities for experienced market operators. Market overview The Russian economy took time to recover from the global financial crisis and during Q3 2010, it was further hit by drought and wildfires, causing disruption across central Russia. As a result, GDP growth fell to 2.7% between July and September, down from 4.2% during the first six months of the year. However the economy has recently gained momentum again, pointing to higher GDP growth in 2011. Strong consumption and investment numbers, together with credit acceleration, suggest that, despite the Q3 slump, growth may reach 4% for 2010. Even a slightly lower outcome would mark a considerable turnaround from 2009’s 7.9% GDP contraction. As a highly cyclical sector that is closely correlated to macro-economic trends, real estate saw an encouraging recovery during 2010. In the residential market there have been positive signs across the board, from the elite to the economy market segments. In the elite housing segment, completed transactions increased by 35% against 2009 levels. In the economy class, the market is also experiencing growth with mortgage lending up and consumers who did not buy during the crisis now returning to the market. Residential pricing in Moscow improved in 2010 with a year on year increase of 14% according to VTB Capital and demand in Moscow remains the strongest due to inadequate supply. Prices are expected to continue to outstrip inflation in the medium term. Long-term supply problems in the residential market remain and in particular there continues to be a shortage of higher quality economy housing in Moscow. This ‘premium economy’ segment of the market is where we believe the greatest growth opportunity lies and it is where RGI has invested considerable resources during the last year. We are confident our business model is well placed to meet this growing demand. In retail we have seen completions in Moscow show a 4% increase over 2009 with total shopping center stock at 3 million m2. The volume of completions in 2011 and 2012 is expected to fall and then rise again in 2013 and beyond. This will drive rental values higher and in Moscow we saw an 8% increase in rental terms with the average price level now between $3,500 and $4,000 per m2. In the office market, vacancy rates in Moscow have fallen and there are signs that rental rates for offices are beginning to grow for the first time since before the crisis. However the available supply of offices still significantly outstrips demand and it is the Company’s current strategy not to re-enter the office market at the present time. 2010 Highlights The Company’s focus in 2010 has been on executing the Tsvetnoy department store project and the Kingston residential project. I am pleased to report that major milestones have been achieved for both. Tsvetnoy Central Market had its soft opening on 9th December 2010, opening with a mix of major brands trading from day one. Our strategy to focus on medium income consumers has resulted in sales to date growing every week since opening. We believe that the quality of the building is a major talking point in Moscow and the reaction from consumers has been positive. 2 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 On the Kingston project the final major approval of the construction permit for phase 1 was received and ground works began on Phase 1 at the beginning of March 2011, in line with previous guidance. Funding in the form of a bank loan has been received and signed to finance the first stage. This is a large project with 8 phases that for the first time will bring a new type of premium economy housing to the Moscow market. The project is due for completion in 2017. Share issue proceeds In 2010 the Group received the proceeds from share issue of $90m from Synergy Classic Limited (“Synergy”). The investment was made in two tranches in May and July 2010. The first consideration was for 1.8m shares for $9.0m followed by an option for a further 34.2m shares for $81.0m which was exercised. As a result of the investment RGI issued 36 million shares, representing 22.25% of the share capital of the Company to Synergy. Among the conditions for the proceeds from share issue were that $40m be used on current projects and $50m for new investment projects. No new projects were commenced in 2010 and as a result the Company’s cash balance remains at $55m as at 31st December 2010. Regrettably, at the date of the publication of this report, RGI was engaged in several legal disputes with Synergy, further details of which can be found in the Directors’ Report. Financial Summary The Company made a net profit for the year of $30m which is a welcome turnaround from the last two years when, after impairment adjustments, RGI made losses of $34m in 2009. In the run up to and during the financial crisis, RGI managed its balance sheet carefully and this, combined with the proceeds from share issue received in May and July 2010, has left the Company’s balance sheet in a sound position, with cash of $55m and an equity to loan ratio of 2.1 to 1. During the year, the Company invested $73m in projects compared to investments in 2009 of $35m. The value of our portfolio continues to grow and as per DTZ’s independent report dated 31 December 2010, the value of 100% ownership in RGI’s projects increased from $729m at 31st December 2009 to $840m at 31st December 2010. Move to the Main Market The Company is committed to using its best endeavors to obtain a listing on the Main Market of the London Stock Exchange. Substantial progress was made during the year, with much of the documentation required by the LSE taken to an advanced stage by the year–end. However, as announced on 18th February 2011, the ‘free float’ in the Company’s shares has now fallen below 25% of the Company’s total number of ordinary shares in issue. The Listing Rules require an applicant to the main market to have a minimum 25% of issued share capital in "public hands”. The Company remains committed to seeking admission of its shares to the Main Market, but admission will not be possible until such time as the Company is able to comply with "free float" eligibility requirement as required by the UKLA under the Listing Rules. We are continuing discussions in order to achieve a main listing. In the event that admission on the Main Market fails to take place by 30th June 2011, Synergy will, pursuant to the terms agreement and, subject to certain exceptions, have the right to sell back to the Company or any of its subsidiaries, up to a maximum of 36.0 million ordinary shares, for US$2.50 per ordinary share together with interest paid at a rate of 16% per annum, to be paid on or before 21 May 2012. This clause is not enforceable in 3 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 certain specific circumstances where the Company has used its best endeavors but has been prevented from achieving the full listing for reasons outside the Company’s control. Dividend Policy The Company has not paid any dividends since its incorporation. The Company’s developments have initially been highly capital intensive and will continue to be, given the early stage nature of the Company’s portfolio. It is the intention of the Company to pay a dividend as soon as sufficient profits and cash are generated from its projects. People It is the Board’s belief that the Company should invest in high calibre people according to the needs of the business and the prospects for the wider market in which it operates. The Board is of the view that the Company must now strengthen its operational resources in order to achieve its strategic goals. This process began with two important management appointments, a new Project Manager for its Kingston project and in 2011 the appointment of a new experienced CFO. There have been a number of changes to Board personnel during the year. In June 2010, I moved from an executive to a non-executive role as Chairman. Two non-executive directors, Rafael Eldor and Glenn Aaronson, resigned each after four years each of service. Petr Shura joined the Board in August 2010 in a non- executive capacity as the representative of Synergy. Since the year end Petra Shura has been removed from the Board by the directors the other board directors exercising their powers under the Articles of Incorporation of the Company. In addition, the Company has announced the appointment of two new independent non-executive directors. Reginald Webb, an experienced former partner at PricewaterhouseCoopers Central and Eastern Europe, has joined the Board. Mr. Webb now sits on the Nomination, Remuneration and Audit Committees, and has replaced Rafael Eldor in chairing the Audit committee. Mark Holdsworth, a private equity and real estate professional with previous experience as a managing director of ING Barings Russian, EMEA and Latin American equities businesss and current experience as a PLC board director, has also joined as a non-executive director. Mark Holdsworth has been appointed chairman of the Nominations and Remuneration committees. Further information on Board roles and responsibilities, together with a description of the Company’s corporate governance policies and structures, can be found in the Directors’ report Outlook The outlook for real estate turned a corner in 2010. Looking ahead to the current year and into 2012 a sustainable recovery is now in place, although different sectors of real estate will move at different speeds. With the economic picture improving, we see grounds for optimism for the retail sector and expect the completed Tsvetnoy department store to move into profitability by the end of the year. We expect residential to offer investors the best returns as the structural supply shortage in Moscow and the surrounding region begins to reassert itself and consumers feel more confident. Rising levels of mortgage approvals reinforce the picture of recovery in residential. RGI is very well placed to benefit from this recovery. In the Kingston development, it has a large-scale project that can tap into this demand, offering homebuyers something different to the standard economy class housing that is prevalent in Moscow. Pre-sales of the first phase of this development begins in Q4 and we are confident of substantial demand for the apartments. We are actively looking for new projects to build our pipeline but will continue to be prudent in assessing opportunities. 4 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 Chief Executive’s Review Market Update The real estate market in Russia and particularly Moscow has turned the corner into recovery phase during 2010. Investments in real estate are now approaching pre-crisis levels after dropping by approximately 50% in 2009. Investment is set to continue growing in 2011 with several economic forecasts predicting an increase of 30% over 2010 levels, mainly from domestic investors. Foreign investment is also set to increase in 2011, and on current trends is set to reach pre-crisis levels again by mid-2012. Capital is once again seeking out opportunities in a real estate market where a stable economy and fundamental supply-side shortages offer attractive growth. Residential sales will be a significant driver of this growth. Residential completions in Russia fell in 2010 by 2.9%1 but are expected to stay at the same level in 2011, thereafter increasing by 6 to 7% per annum. Moscow completions are expected to jump by 38% in 2010 and further in 2011. In the elite class of housing, sales transactions in the overall (primarily central) Moscow market increased by 35%. A big driver here has been the recovery in the mortgage market with mortgage deals in Moscow increasing 23%1. Mortgage rates have fallen to 10% interest rates with a 10% deposit qualification level, bringing more consumers within the demand pool for residential purchases. This increased availability of credit has allowed more consumers to enter the market increasing the available pool for residential purchasers. Reflecting this increase in demand, prices have also recovered in some segments of the market. The highest growth has been seen in the elite market, where space is now being valued at between $10,000 to $15,000 per sq. meter, taking valuations back above 2008 levels. In 2010 real disposable income increased by 4.2% versus a fall in 2009 of 2.8%. This improvement in real incomes will further support demand. VTB have calculated that 77% of the income base in Moscow earn between $1,844 and $2,604 per month which puts them in a position to afford to purchase an apartment. The average size of an apartment sold in 2010 was 81m2 with an average Ruble price of $4,321 per m2. The average purchase price was therefore $350,000 and this price level is expected to grow by 15% in 2011 then slow down over further years to inflationary levels. This income level and price range fits very well within RGI’s business model. RGI is well placed to take advantage of this growing market opportunity with the Kingston development where pre-selling is expected to begin by the last quarter of 2011. In the retail sector the market saw retailers absorbing 460,000 m2 of space in 2010 which is double the level in 2008 and 2009. There is a medium term undersupply which will enable retail rentals to be improved over the next 2 to 3 years. The office sector is also improving with reductions in vacancy rates and a more balanced market between supply and demand. Office rental rates are stable to growing. In Moscow rental rates are expected to grow higher than the market average in the short term but then gradually decreasing towards inflation levels. This segment is lagging the residential recovery and RGI will therefore stay out of this market in the near term. 1 Federal Service for State Registrations 5 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 RGI Strategy RGI was created to build on the track record of its management for developing real estate of outstanding quality capable of delivering superior returns to shareholders. The Company’s strategy upon its IPO was to complete the construction of five development projects and one pipeline project, representing a mix of residential, retail and office, while at the same time sourcing new projects for the future. With the onset of the financial crisis in 2008, the Company was forced to revise its strategy and align it to the new economic reality. Management moved quickly to significantly reduce RGI’s cost base and focus resources on two projects, the Tsvetnoy department store and the Kingston residential project. During the year under review, RGI was able for the first time since the crisis to plan further than the immediate short-term and re-orientate its strategy towards growth. This manifested itself in the raising of $90m in share issue proceeds to strengthen the Company’s balance sheet and provide additional funding for existing and new projects. During the second half of 2010, we completed the Tsvetnoy department store project and, with a tangible improvement in credit market conditions underway, moved ahead to the construction stage for the Kingston project. With a sustainable economic recovery now in place, the primary strategic objective of the Company is to develop projects in the residential sector, the economic fundamentals of which offer the most attractive returns for shareholders post the financial crisis. RGI will distinguish itself from other developers by building homes that offer a superior living experience, whether in the premium economy, elite or super elite segments of the market. In the first instance, this strategy will be pursued by advancing with the 77 hectare Kingston development, where construction work began in March 2011 and pre-sales will begin in the second half of 2011. RGI will also look to build a pipeline of new premium economy and elite residential projects; in February 2011 for example, the Company made its first land acquisition since the crisis, buying a site neighboring the Kingston development for approximately $9m. This project joins the Khilkov, Ostozhenka, Chelsea and Victory Park developments already in the Company’s residential pipeline. Management’s reputation was built on acquiring attractive land plots and developing and selling a series of elite class residential buildings in Moscow. It is this experience and unique skill base that will drive the Company’s success in the residential sector moving forward. In the retail sector, RGI took the decision during the financial crisis to complete the Tsvetnoy department store and operate it as a trading subsidiary, rather than selling the building at an unattractive valuation. The store opened in 2010 and management’s strategy is to continue operating the store during 2011, establishing it as a leading retail destination in Moscow generating revenue and EBITDA growth. The Company does not currently intend to develop any more standalone retail projects. RGI does not intend to pursue any developments in the office sector, where there continues to be excess capacity and management believes the recovery will be slow. Financial Strategy The Company’s financial strategy is to maintain a strong balance sheet and a cautious view on valuations in order to avoid any future impairment issues. The current debt/equity ratio is 1 to 2.1 and the Company will not allow this to deteriorate beyond a 1 to 2 debt to equity ratio. In addition the Company intends to maintain a healthy cash balance. 6 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 Portfolio Review Completed developments The Tsvetnoy Development Gross Area 36,522 sq.m. Gross Leasable Area 15,097 sq.m. Net Leasable Area 11,421 sq.m. Market Value $225m The Tsvetnoy Development (“Tsvetnoy”) is a retail development located at the historic site of the old market on Tsvetnoy Boulevard, in central Moscow. The Group has designed and is operating Tsvetnoy as a Western-style tenancy department store offering a varied shopping experience with high street and niche designer fashion, accessories, food hall, fresh market, cafés, bars and a rooftop restaurant with views of Moscow. RGI’s strategy for Tsvetnoy is to market it as a tenancy department store and to operate it through a self-owned management company. The Company’s vision for Tsvetnoy is to turn it into the central hub for shopping, culture, exploring, relaxing and a meeting destination in Moscow offering attractive and affordable product mix and inviting atmosphere. A key factor in Tsvetnoy’s strategy is to work closely with brands and operators to achieve a selection of the most relevant, exciting and innovative brands, both international and Russian. RGI has entered into two types of agreement with suppliers of the merchandise to be sold in the Tsvetnoy department store. The majority of the merchandise is sold pursuant to concession agreements entered into between RGI and individual suppliers ("Unit Operators"). Pursuant to the terms of such concession agreements, RGI provides the Unit Operators with retail space, centralized cash management services and facilities such as changing rooms and cash tills. The Unit Operators offer merchandise for sale in designated units within the Tsvetnoy department store and retain ownership of their own inventory until the point of purchase. At the point of purchase the relevant goods are legally transferred to RGI for sale to the customer. RGI then transfers the proceeds from such sales to the relevant unit operator after first deducting a fee-commission for the services it provides. A small number of operators, including Industria de Diseño Textil, S.A. ("Inditex"), the owner of the Zara fashion chain which is represented in the Tsvetnoy department store with its new accessories brand Uterque, and Ginza Project have subleased the retail space required to conduct their operations. Accordingly, these operators do not use the central cash management services provided to Unit Operators but instead operate their businesses within the Tsvetnoy department store separately pursuant to long term sublease agreements entered into with RGI. These subtenants sell their own inventory directly to customers and pay an additional turnover-linked fee. The Company intends that approximately 75% of the net sales rea in Tsvetnoy will be either allocated to third party Unit Operators under concession agreements or subleased to subtenants under long term sub lease agreements as set out above. The remaining retail space will be operated by RGI, which will offer its own inventory for sale. By operating within the Tsvetnoy department store, the Group retains the flexibility to adjust the mix of brands available within the store in response to consumer demand. In addition, such an approach allows the Group to offer a wider range of brands within the store than if it were to rely solely on independent Unit Operators and subtenants. The Tsvetnoy department store was opened to the public on 9 December 2010 although certain areas in the store, representing approximately 17% of the Net Sellable Area (‘NSA”) (including the Food Market and the All Saints store) opened later in December and early January and an additional area, representing approximately 18% of the NSA (including the restaurant on the 6th floor and the Mens’ store on the 4th floor), opened in March. Finally, the top floor restaurant/club with an approximately 1,000 sq. m of NSA is scheduled to open later in Q3 2011. 7 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 As of the date of this report, 77% of the NSA is occupied by Unit Operators and subtenants that fit our current merchandising criteria while 24% of the NSA is occupied by temporary/seasonal brands/products and 9% of the NSA is still not open to the public. The Group’s plan for 2011 is that by the end of the year, 98% of the NSA will be occupied by Unit Operators and subtenants that fit our merchandising criteria (including 25% that will be occupied by the Group). As part of managing the Tsvetnoy department store, the Group intends to continuously review the performance of the Unit Operators and subtenants against both performance criteria and overall merchandising strategy and adjust their location and NSA in the store accordingly. Financial Projections The DTZ valuation of $225m was arrived at by looking at the trading use of space by the different retail types, e.g. cosmetics, catering, food, fashion and assigning a market rental for the type of space used. The rental was adjusted to reflect the quality fit out undertaken by the landlord which is normally payable by the retailer. This was then discounted over the first two years to reflect the startup of the new concept and then adjusted in future years by inflation and discounted back to 2010 values. Developments under construction Kingston Gross Area 1,336,345 sq.m. Apartments 8,124 Parking Spaces 9,678 Market Value (100%) $398m Value on completion (100%) $2bn The Kingston development is currently the largest development within the RGI portfolio and is expected to generate revenue for the group from 2012 onwards. The project fits exactly with the Company strategy and meets growing demand from the consumer for more comfortable modern apartments suitable for families in a community with open spaces, shops, churches, kindergartens, schools and the security of a police station. It is in one of the most attractive parts of Moscow, near the MKAD and will have good access to major retail developments and hospitals for both adults and children. RGI’s current design for the Kingston Development involves the construction of a modern residential community with a gross buildable area of 1,336,345 sq. m comprising 629,983 sq. m of apartments, 89,951 sq. m of commercial space on the first and ground floors of buildings and two separate shopping centers and 9,678 parking spaces. The current value on completion as per DTZ is $2bn. The planning and layout of the apartments is one of the strongest competitive advantages of the project. The functionality of each apartment together with the small scale common areas forms a unique product for this market. Efficient space planning allows us to accommodate all necessary functions in a smaller space and to generate per apartment price lower than similar products from competitors. The project includes 4 types of apartments: 1-bedroom (36.4 / 38.0 m2), 2 bedrooms (58.1 / 63.9 m2), 3-bedrooms (74.6 / 75.9 m2) and 4- bedrooms (98.7 / 104.0 m2). The project will have a higher proportion of 2 and 3 bedroom apartments than any other comparable development as it is targeted at families. The target consumers are; · Young married couples who seek for reasonable prices and convenient small flats to start their life together. · Families with children who value convenient layout of apartments and effective use of space, intelligent infrastructure with schools, kindergarten, and recreation areas and entertainment. · Older people who seek the ability to live close to their children and grandchildren. 8 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 · Young and active people from the regions who will enjoy developed social infrastructure, easy access to transportation and possibility to keep their jobs in Moscow. Following the year end, $164m of financing was secured from Sberbank for the first of seven phases and construction commenced in March 2011. The first phase will comprise 1,193 apartments, which will be offered for sale by Q4 2011. The Company plans a substantial marketing campaign in Q3 2011 to support the pre-selling in Q4 2011. The marketing campaign is anticipated to be revolutionary in concept for Moscow with a mixture of PR events supported by digital marketing and a sales office opening on site in September with computer aided facilities to envisage the apartments and styles on offer never before seen in Moscow. Valuation The Kingston development is valued on the 31st December 2010 in the balance sheet at $298m and the current valuation by DTZ as at 31st December 2010 for 100% shareholding is $398m. Pipeline Projects Khilkov Building Type: Residential, ultra high-end apartments Gross Area: 27,258 m2 Year of Completion: 2013 Sale price for residential area $22,200 per m2 Sale price for retail area $14,000 per m2 Market Value (100%) $144m Value on completion (100%) $337m The Khilkov Development is a proposed ultra-high-end residential building located in the most exclusive residential neighborhood in the center of Moscow on Khilkov lane in the Ostozhenka area, commonly known as Moscow’s Golden Mile. Currently, the site comprises a small park and an old residential building which will be demolished as part of the redevelopment. There are three main tourist attractions nearby including the Cathedral of Christ the Savior, Gorky Park and the Kremlin, all within walking distance. RGI’s current design for the Khilkov Project entails a gross buildable area of 27,258 m2 including 13,000 m2 of residential and 1,470 m2 of retail space and 173 parking lots. The remaining area is expected to consist of common areas, ancillary and maintenance areas. Khilkov will have a high quality fit-out and finish with all materials and amenities being of the highest quality, and a unique modern architectural design unique among residential buildings in Moscow. The proposed development plan for Khilkov is based on RGI’s possession of an Investment Contract and ownership over the existing building. The investment contract expired on 31st January 2011 and the Company has applied for this to be reviewed. It is still awaiting a decision from the Moscow Government. The Company has recently completed buyout of the remaining apartments, the next step being approval of the City of Moscow for the General Plan of the Land Plot (GPZU) and a land lease agreement together with completing design Stage ‘P’ and passing MosGosExpertiza in 2011. The current Moscow administration has questioned the investment contract as it has done with over 700 investment contracts in Moscow. The Khilkov project has many social and infrastructure benefits and management believe that the project will still receive its GPZU. However, RGI can still deliver the planned project but some delay may been incurred. At worst the Company owns the current building and land and can develop this profitably if necessary at higher values than the current cost and market valuation. 9 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 The Chelsea Development Building Type: Residential, high-end apartments with some ground-level retail Gross Area: 5,473 m2 Year of Completion: 2014 Sale price for residential area $17,100 m2 Market Value $17m Value on completion $49m The Chelsea Development is a proposed mixed use development comprising residential and retail area. Chelsea is located to the east of Tsvetnoy Boulevard approximately 2 kilometers north of the Kremlin within the Garden Ring. The Sretenka district, in which the Chelsea Development is located, is part of the heart of the historical city-center and has a large number of quiet lanes and churches. The historical richness of one of the oldest districts in Moscow combined with modern development, both commercial and residential, make this area one of the most attractive in the city. RGI’s current design for the Chelsea Development entails the reconstruction of three existing buildings, the majority of which are owned by the Company. The project involves demolition of buildings occupying the site followed by construction of new multi-functional block with apartments and some retail space. The Company is currently working on completing design and obtaining permission for the development with a gross buildable area of 5,473 m2 comprising 2,103 m2 of residential space and 1,102 m2 of retail space and 33 parking lots. The current proposed development plan for the Chelsea Development is based on the Company’s development rights secured through ownership over the two non-residential existing buildings and the virtual completion of relocation and privatization process for the existing residential premises on the site with one apartment left to be relocated. The existing property is being rented out and forms a source of income for the Company. The Victory Park Development Building Type: 4-5 star hotel and residential apartments Gross Area: 25,000 m2 Year of Completion: 2013 Sale price for residential area $10,900 m2 Current Hotel ADR $145 Market Value $41m Value on completion $134m The Victory Park Development is a proposed high-end hotel and residential building located opposite to Victory Park across the river from Moscow City Development, a new major commercial district located approximately seven kilometers to the west of the Kremlin. The site of the Victory Park development itself is located in a high- end residential area. Victory Park is located close to one of the city’s main traffic routes, Kutuzovsky Prospect, which continues west directly to Moscow's most prestigious suburbs situated along Rublyovo-Uspenskoye and Mozhayskoe highways. 10 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 RGI’s current design for the Victory Park Development entails a new 10-storey hotel and residential building with a gross area of 25,000 m2, comprised of 200 hotel rooms and 8,000 m2 of sellable residential space with approximately 133 parking spaces. The current proposed development plan for Victory Park is based on RGI’s ownership of the building currently occupying the site and the possession of a long-term land lease. The project is currently in the pre-design stage. The Ostozhenka Development Building Type: Residential, ultra high-end single family townhouse Gross Area: 1,000 m2 Year of Completion: 2013 Sale price for residential area $25,000 m2 Market Value $13m Value on completion $25m The Ostozhenka Development is a proposed ultra-high-end single-family townhouse located in the most exclusive residential neighborhood in the center of Moscow at the intersection of Ostozhenka and Khilkov streets. The area is commonly known as Moscow’s Golden Mile. The site is located in a conservation area that has special construction requirements to ensure that new building developments blend in with existing structures in order to preserve the look and feel of the neighborhood. RGI’s current design for Ostozhenka has a gross area of 1,000 m2 comprising five levels, including two underground levels, and an attic. The lower underground floor would be used for a parking garage with four spaces, ancillary and technical facilities, and a home theatre. The upper underground floor would comprise an entrance hall, a swimming pool and a winter garden. A drawing room, a dining room and a study would be located on the first floor, with bedrooms on the second floor. The attic would contain a library and a studio and a terrace would be included on part of the roof. The proposed development plan for Ostozhenka is based on RGI’s ownership of the existing building on the site and the possession of a long-term land lease. The Company’s next step is to finalize and approve the concept design with the authorities. New Projects RGI will continue to seek new opportunities in major projects that will deliver significant profits in the future. Since the end of 2010 the Company has purchased an area of land next to its Kingston project which is 17.1 hectares for estimated construction of 150,000 m2 gross buildable area for $9.4m which we believe is an excellent investment for the Company. In addition the Company will seek new projects and joint ventures during 2011 to fit within the overall strategy of the Group. Boris Kuzinez Chief Executive Officer 11 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 Financial Review Highlights · Pre Tax profits of $36m versus loss in 2009 of $60m · Total Assets increased to $755m from $613m in 2009 whilst total liabilities rose by $115m. · Equity increases to $457m with an equity to debt ratio of 2.1 to 1 · Market value of development portfolio determined by DTZ, an independent valuer, is estimated to be higher than its carrying value by $118m. · Cash Balance of $55m available for new projects and working capital. Income Statement The income in 2010 derives from the net gain of $45.8m from fair value adjustments in respect of the Kingston Development in relation to the retail developments plus the revaluation gain on the Tsvetnoy project before it opened on the 9th December 2010. The residential apartments will be sold on completion and are treated as Properties developed for sale whilst the retail building in case of Tsvetnoy project are held as Property, plant and equipment and the retail premises in case of the Kingston project are held as Investment properties as at 31 December 2010. The other revenues consist of the confirmation by the court to repay construction costs of a previous investment $6.8m plus revenues from the sale of apartments previously held by the Company with a net gain of $2.09m General and administrative costs total $10.1m. The expenses also include the legal services associated with the proceeds from share issue of $90m from Synergy Classic Limited plus other legal costs incurred as a result of legal claims against the Company. Balance Sheet The total assets are $755m of which $55m relates to cash and the majority of the balance relates to property at various stages of development. During the year the Tsvetnoy Central Market was completed and commenced trading on the 9th December. The accounting treatment was therefore changed and the assets treated at as Property, Plant and Equipment. The total cost at 31st December 2010 was $217.9m of which $206.3m related to property and $11.6m related to Fixtures and Fittings. The DTZ valuation for the property is $225m at the 31st December 2010. The Kingston property treatment has also changed in 2010 as the construction permit was received and the value of the residential part of the development is now treated as Property developed for sale and totals $241.7m. The retail element is held as investment property under construction totaling $56.3m at the 31st December 2010. In addition the Company has a number of smaller investments held in the balance sheet under property development rights that total $64.5m plus it holds a 50% investment in the Khilkov development that is in the balance sheet at an investment of $60.5m. 12 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 The total Liabilities in the Balance Sheet are $297.5m of which the major part is the loan from Sberbank total $99.7m which is secured on the Tsvetnoy property and is repayable in March 2012. The other significant liability is the put option agreement debt $96.9m which is raised from proceeds from shares issue. The bonds issued in Israel of which certain re-purchases were made in 2010 as per Note 16 of the accounts and the total liability including accrued interest is $18.1m. Net Asset Value After two years of impairment reductions the market is now reversing the decline and the net asset value of the RGI portfolio has increased by approximately 2% to $562m. The table below specifies the Net Asset Value of the Company which includes Company’s shares in individual projects values based on DTZ valuation and net other assets: DEVELOPMENT Net Asset Value 31 31 DECEMBER 31 DECEMBER 2009 DECEMBER 2008 US$ m 2010 US$ m US$ m Developed properties Tsvetnoy 116.8 161.1 225.5 Properties held for development Kingston 191.1 299.4 326.6 Khilkov 75.8 65.3 72.3 Victory Park 40.0 39.6 40.6 Ostozhenka 14.3 14.8 13.4 Chelsea 131.6 17.6 17.3 Zemlianoy 16.2 N/A N/A Media City 12.4 N/A N/A Dream 34.4 N/A N/A Maya 10.8 N/A N/A Total Fair Value of properties 643.4 597.8 695.7 Add net other assets (51.6) (46.2) (133.7) Total NAV 591.8 551.6 562.0 No. of issued shares2 125,786,978 125,786,978 125,786,978 NAV per share in US$ 4.70 4.39 4.47 Further growth in Net Asset Value will occur particularly as the construction in Kingston gathers pace plus the other investments reach their construction phase. Cash Flow In 2010 $16m proceeds were generated from the sale of other assets. Further funding was provided by the proceeds from share issue of $90m and loans of $19m. A total of $73m was invested in current projects compared to $35m in 2009. The Company did re-purchase a number of bonds totaling $7.7m in the year. 2 No. of issued shares excludes shares hold by Synergy Classic Limited, which are treated as debt. 13 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 Financial Strategy The Company’s financial strategy is to maintain a strong balance sheet and a cautious view on valuations in order to avoid any future impairment issues. The current equity to debt ratio is 2.1 to 1 and the Company will not allow this to deteriorate beyond a 2 to 1 equity to debt ratio. In addition the Company has intention to healthy cash balance to protect itself from sudden liquidity crisis. The Company will only pursue projects that fit within its published strategy and will seek to deliver an above average margin. The Company’s reputation is to deliver quality projects at good margins and this will not be compromised to seek faster growth. In addition the Company has a reputation for completing projects and this is in demand in the Moscow market which will allow us opportunities which carry less debt risk. The Company currently has sufficient funding for its projects and working capital requirements but intends to seek new longer term funding in 2012. Proceeds from shares issue In the Company's Consolidated Statement of Financial Position, the investment by Synergy of $90m is recognized as debt. Under the subscription and option agreement entered into between the Company and Synergy on 21 May 2010 (the "SOA"), Synergy was granted a put option (the "Put Option") whereby, should the Company not achieve a standard listing on the Main Market of the London Stock Exchange by the 30th June 2011, Synergy may, under certain conditions, sell up to 36 million shares in RGI to a subsidiary of the Company at a price of $2.50 per share plus interest at 16% per annum. If the Put Option were to be successfully exercised, therefore, a subsidiary of the Company would be required to purchase up to 36 million shares for $90 million plus 16% interest per annum. RGI management is confident that the Company has taken, or will take, all reasonable steps required to comply with its obligations under the SOA such that the Put Option will not be exercisable. In addition, RGI's management is optimistic that if Synergy were successfully able to exercise the Put Option, RGI would be able to sell the relevant shares to other investors in due course. If Synergy were to exercise the Put Option and the Company chose to accept the Put Option as validly exercised, the Company has until 21 May 2012 to repay the amount due to Synergy. Managing Risk The Group’s activities expose it to a variety of financial risks: market risk (foreign exchange risk, fair value interest rate risk and cash flow interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. Group treasury identifies and evaluates financial risks in close co-operation with the Group’s operating units. The board provides principles for overall risk management, as well as instructions covering specific areas, such as foreign exchange risk, interest rate risk, credit risk and use of derivative financial instruments. 14 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 Market risk The functional currency of the Group is the Russian Ruble. Foreign exchange risk is the risk that the value of financial instruments will fluctuate due to changes in foreign currency exchange rates. At 31 December 2010, the Group was exposed to foreign exchange risks arising from currency exposures, primarily in respect of US dollars. A foreign exchange risk arises from recognized monetary assets and liabilities. The Group’s policy is not to enter into any currency hedging transactions in respect of these risks. However, since the majority of expenditure and revenues of the Group are denominated in both RUR and US dollars, the Directors allocate the Group’s cash resources based on the forecasted currency outflows. Alan Hibbert Chief Financial Officer 16 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2010 2009 NOTE USD’000 USD’000 Revenue from sale of Butikovsky Project - 76,815 Cost incurred on sale of Butikovsky Project - (23,501) Other operating income 19 10,797 85,962 Impairment loss on property development rights - (185,331) Net gain from fair value adjustment 5, 6 45,843 14,539 General and administrative expenses 20 (10,115) (17,661) Impairment of other assets available for sale 12 (265) (6,321) Operating profit/(loss) 46,260 (55,498) Finance income 21 16,473 30,532 Finance costs 21 (26,234) (28,672) Share in result of jointly controlled entity 8 (537) (6,318) Profit/(loss) before income tax 35,962 (59,956) Income tax (expense)/benefit 10 (6,228) 26,096 Profit/(loss) for the year 29,734 (33,860) Other comprehensive loss for the year: Currency translation difference (3,395) (21,621) Other comprehensive (loss)/profit for the year, net of tax (3,395) (21,621) Total comprehensive profit/(loss) for the year: 26,339 (55,481) Profit/(loss) is attributable to: - Owners of the Company 25,918 (24,732) - Non-controlling interest 3,816 (9,128) Profit/(loss) for the year 29,734 (33,860) Total comprehensive profit/(loss) is attributable to: - Owners of the Company 22,777 (39,917) - Non-controlling interest 3,562 (15,564) Total comprehensive profit/(loss) for the year 26,339 (55,481) Earnings per share for profit attributable to the owners of the Company during the year (expressed in USD per share): Basic and Diluted 22 0.18 (0.20) The notes on pages 19 to 64 are an integral part of these consolidated financial statements. 17 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ATTRIBUTABLE TO OWNERS OF THE COMPANY: NOTE SHARE SHARE SHARE-BASED RETAINED TRANSLATION TOTAL NON- TOTAL CAPITAL PREMIUM PAYMENT EARNINGS RESERVE CONTROLLING EQUITY INTEREST USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 Balance at 1 January 2010 1 456,524 810 91,235 (149,007) 399,563 31,342 430,905 Total comprehensive profit/(loss) for - - - 25,918 (3,141) 22,777 3,562 26,339 the year: Profit/(loss) for the year - - - 25,918 - 25,918 3,816 29,734 Other comprehensive loss - - - - (3,141) (3,141) (254) (3,395) Transactions with owners in their capacity as owners: - - 70 - - 70 - 70 Share based payment - - 70 - - 70 - 70 Balance at 31 December 2010 1 456,524 880 117,153 (152,148) 422,410 34,904 457,314 ATTRIBUTABLE TO OWNERS OF THE COMPANY: NOTE SHARE SHARE SHARE-BASED RETAINED TRANSLATION TOTAL NON- TOTAL CAPITAL PREMIUM PAYMENT EARNINGS RESERVE CONTROLLING EQUITY INTEREST USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 Balance at 1 January 2009 1 456,524 5,730 115,967 (133,822) 444,400 69,112 513,512 Total comprehensive loss for the - - - (24,732) (15,185) (39,917) (15,564) (55,481) year: Loss for the year - - - (24,732) - (24,732) (9,128) (33,860) Other comprehensive loss - - - - (15,185) (15,185) (6,436) (21,621) Transactions with owners in their - - (4,920) - - (4,920) (22,206) (27,126) capacity as owners: Share based payment - - (4,920) - - (4,920) - (4,920) Transactions with minority 19 - - - - - - (22,206) (22,206) shareholders Balance at 31 December 2009 1 456,524 810 91,235 (149,007) 399,563 31,342 430,905 The notes on pages 19 to 64 are an integral part of these consolidated financial statements. 18 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 CONSOLIDATED STATEMENT OF CASH FLOWS 2010 2009 NOTE USD’000 USD’000 Cash flows from operating activities before working capital changes Profit/ (loss) before income tax 35,962 (59,956) Revenue from sale of Butikovsky Project - (76,815) Costs incurred on sale of Butikovsky Project - 23,501 Impairment loss on property development rights - 185,331 Net gain from value adjustment 5, 6 (45,843) (14,539) Transactions with minority shareholders - (77,406) Share in result of jointly controlled entity 8 537 6,318 Other non-cash operating items 5,605 (971) Net cash outflow from operating activities before working capital changes (3,739) (14,537) Change in trade and other payables (5,253) 655 Change in receivables and prepayments (12,393) (1,366) Cash used in operations (21,385) (15,248) Income tax paid (60) (108) Net cash used in operating activities (21,445) (15,356) Cash flows from investing activities Investment in jointly controlled entity (3,183) (577) Investments in current projects (69,351) (34,632) VAT refunds 15,295 - Selling of other assets 16,017 27,448 Net cash used in investing activities (41,222) (7,761) Cash flows from financing activities Proceeds from issue of additional shares 18 90,000 - Repayment of bonds 16 (7,728) (578) Derivative payment (837) (639) Proceeds from construction loans 18,873 36,537 Interest paid, net (10,335) (7,777) Net cash generated from financing activities 89,973 27,543 Effect of exchange rate changes on cash and cash equivalents 514 (284) Net increase in cash and cash equivalents 27,820 4,142 Cash and cash equivalents, beginning of the year 27,490 23,348 Cash and cash equivalents, end of the year 14 55,310 27,490 The notes on pages 19 to 64 are an integral part of these consolidated financial statements. 19 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. THE R.G.I. INTERNATIONAL LIMITED GROUP These consolidated financial statements of R.G.I. International Limited (“RGI” or the “Company”) and its subsidiaries and the Group’s interest in a jointly controlled entity (together referred to as the “Group”) for the year ended 31 December 2010 were authorized for issue in accordance with a resolution of the directors on 22ndJune 2011. The Company was incorporated in Guernsey on 14 March 2006 as a limited liability company. The Company’s registered address is Frances House, Sir William Place, St. Peter Port, Guernsey, GY1 4HQ. The principal office of the Group’s Russian operations is Korobeynikov Lane, 1, Moscow 119034, Russia. The principal business activity of the Group is property development and property management in the Russian Federation, with its core business being the development and management of high-end office and retail business and luxury residential, mid-market family-oriented retail properties and economy class residential properties in central Moscow and the surrounding areas. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and with the requirements of the Companies (Guernsey) Law, 2008 under the historical cost convention, as modified by the revaluation of financial assets and liabilities at fair value through profit or loss and the revaluation of Investment property. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4. Changes in accounting policy and disclosures (a) New and amended standards adopted by the Group The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 January 2010. 20 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 § IFRS 3 (revised), ‘Business combinations’, and consequential amendments to IAS 27, ‘Consolidated and separate financial statements’, IAS 28, ‘Investments in associates’, and IAS 31, ‘Interests in joint ventures’, are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. The revised standard continues to apply the acquisition method to business combinations but with some significant changes compared with IFRS 3. For example, all payments to purchase a business are recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently remeasured through the statement of comprehensive income. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs are expensed. IAS 27 (revised) requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. IAS 27 (revised) has had no impact on the current period, as none of the non-controlling interests have a deficit balance; there have been no transactions whereby an interest in an entity is retained after the loss of control of that entity, and there have been no transactions with non-controlling interests. (b) New and amended standards, and interpretations mandatory for the first time for the financial year beginning 1 January 2010 but not currently relevant to the Group (although they may affect the accounting for future transactions and events). The following standards and amendments to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2010 or later periods, but the Group has not early adopted them. § IFRIC 17, ‘Distribution of non-cash assets to owners’ (effective on or after 1 July 2009). The interpretation was published in November 2008. This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. IFRS 5 has also been amended to require that assets are classified as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable. § IFRIC 18, ‘Transfers of assets from customers’, effective for transfer of assets received on or after 1 July 2009 (effective in EU for annual periods starting in or after 31 October 2009). This interpretation clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services (such as a supply of electricity, gas or water). In some cases, the entity receives cash from a customer that must be used only to acquire or construct the item of property, plant, and equipment in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services (or to do both). § IFRIC 9, ‘Reassessment of embedded derivatives and IAS 39, Financial instruments: Recognition and measurement’(not adopted by the European Union), effective 1 July 2009. This amendment to IFRIC 9 requires an entity to assess whether an embedded derivative should be separated from a host contract when the entity reclassifies a hybrid financial asset out of the ‘fair value through profit or loss’ category. This assessment is to be made based on circumstances that existed on the later of the date the entity first became 21 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. If the entity is unable to make this assessment, the hybrid instrument must remains classified as at fair value through profit or loss in its entirety. § IFRIC 16, ‘Hedges of a net investment in a foreign operation’ effective 1 July 2009. This amendment states that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may be held by any entity or entities within the group, including the foreign operation itself, as long as the designation, documentation and effectiveness requirements of IAS 39 that relate to a net investment hedge are satisfied. IAS 38 (amendment), ‘Intangible assets’, effective 1 January 2010. The amendment clarifies guidance in measuring the fair value of an intangible asset acquired in a business combination and permits the grouping of intangible assets as a single asset if each asset has similar useful economic lives. § IAS 1 (amendment), ‘Presentation of financial statements’. The amendment clarifies that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non-current. By amending the definition of current liability, the amendment permits a liability to be classified as non- current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time. § IAS 36 (amendment), ‘Impairment of assets’, effective 1 January 2010. The amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment, as defined by paragraph 5 of IFRS 8, ‘Operating segments’ (that is, before the aggregation of segments with similar economic characteristics). § IFRS 2 (amendments), ‘Group cash-settled share-based payment transactions’, effective from 1 January 2010. In addition to incorporating IFRIC 8, ‘Scope of IFRS 2’, and IFRIC 11, ‘IFRS 2 – Group and treasury share transactions’, the amendments expand on the guidance in IFRIC 11 to address the classification of group arrangements that were not covered by that interpretation. § IFRS 5 (amendment), ‘Non-current assets held for sale and discontinued operations’. The amendment clarificaties that IFRS 5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations. It also clarifies that the general requirement of IAS 1 still apply, in particular paragraph 15 (to achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty) of IAS 1. § Eligible Hedged Items – Amendment to IAS 39, Financial Instruments: Recognition and Measurement (effective with retrospective application for annual periods beginning on or after 1 July 2009). The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The amendment did not have a material impact on these consolidated financial statements. § IFRS 9, Financial Instruments Part 1: Classification and Measurement (not adopted by the European Union). IFRS 9 issued in November 2009 replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities. Key features of the standard are as follows: - Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortized cost. The decision is to be made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. 22 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 - An instrument is subsequently measured at amortized cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset’s contractual cash flows represent only payments of principal and interest (that is, it has only “basic loan features”). All other debt instruments are to be measured at fair value through profit or loss. - All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognize unrealized and realized fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument- by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment. - Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated as at fair value through profit or loss in other comprehensive income. While adoption of IFRS 9 is mandatory from 1 January 2013, earlier adoption is permitted. The Group is considering the implications of the standard, the impact on the Group and the timing of its adoption by the Group. § Disclosures - Transfers of Financial Assets – Amendments to IFRS 7 (issued in October 2010 and effective for annual periods beginning on or after 1 July 2011) (not adopted by the European Union). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. The amendment includes a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party yet remain on the entity's balance sheet. Disclosures are also required to enable a user to understand the amount of any associated liabilities, and the relationship between the financial assets and associated liabilities. Where financial assets have been derecognised but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclosure is required to enable the effects of those risks to be understood. The Group is currently assessing the impact of the amended standard on disclosures in its financial statements. § Recovery of Underlying Assets – Amendments to IAS 12 (issued in December 2010 and effective for annual periods beginning on or after 1 January 2012) (not adopted by the European Union). The amendment introduced a rebuttable presumption that an investment property carried at fair value is recovered entirely through sale. This presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. SIC-21, Income Taxes – Recovery of Revalued Non-Depreciable Assets, which addresses similar issues involving non-depreciable assets measured using the revaluation model in IAS 16, Property, Plant and Equipment, was incorporated into IAS 12 after excluding from its scope investment properties measured at fair value. The Group does not expect the amendments to have any material effect on its financial statements. 23 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 (c) New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2010 and not early adopted The Group assessment of the impact of these new standards and interpretations is set out below. § IFRS 9, ‘Financial instruments’ (not adopted by the European Union), issued in November 2009. This standard is the first step in the process to replace IAS 39, ‘Financial instruments: recognition and measurement’. IFRS 9 introduces new requirements for classifying and measuring financial assets and is likely to affect the Group’s accounting for its financial assets. The standard is not applicable until 1 January 2013 but is available for early adoption. However, the standard has not yet been endorsed by the EU. The Group is yet to assess IFRS 9’s full impact. § Revised IAS 24 (revised), ‘Related party disclosures’, issued in November 2009. It supersedes IAS 24, ‘Related party disclosures’, issued in 2003. IAS 24 (revised) is mandatory for periods beginning on or after 1 January 2011. Earlier application, in whole or in part, is permitted. However, the standard has not yet been endorsed by the EU. The revised standard clarifies and simplifies the definition of a related party and removes the requirement for government-related entities to disclose details of all transactions with the government and other government-related entities. The Group will apply the revised standard from 1 January 2011. When the revised standard is applied, the Group will need to disclose any transactions between its subsidiaries and its associates. § ‘Classification of rights issues’ (amendment to IAS 32), issued in October 2009. The amendment applies to annual periods beginning on or after 1 February 2010. Earlier application is permitted. The amendment addresses the accounting for rights issues that are denominated in a currency other than the functional currency of the issuer. Provided certain conditions are met, such rights issues are now classified as equity regardless of the currency in which the exercise price is denominated. Previously, these issues had to be accounted for as derivative liabilities. The amendment applies retrospectively in accordance with IAS 8 ‘Accounting policies, changes in accounting estimates and errors’. The Group will apply the amended standard from 1 January 2011. § IFRIC 19, ‘Extinguishing financial liabilities with equity instruments’, effective 1 July 2010. The interpretation clarifies the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability (debt for equity swap). It requires a gain or loss to be recognised in profit or loss, which is measured as the difference between the carrying amount of the financial liability and the fair value of the equity instruments issued. If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments should be measured to reflect the fair value of the financial liability extinguished. The Group will apply the interpretation from 1 January 2011, subject to endorsement by the EU. It is not expected to have any impact on the Group’s financial statements. § ‘Prepayments of a minimum funding requirement’ (amendments to IFRIC 14). The amendments correct an unintended consequence of IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’. Without the amendments, entities are not permitted to recognise as an asset some voluntary prepayments for minimum funding contributions. This was not intended when IFRIC 14 was issued, and the amendments correct this. The amendments are effective for annual periods beginning 1 January 2011. Earlier application is permitted. The amendments should be applied 24 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 retrospectively to the earliest comparative period presented. The Group will apply these amendments for the financial reporting period commencing on 1 January 2011. § IFRS 1, First-time Adoption of International Financial Reporting Standards (following an amendment in December 2008, effective for the first IFRS financial statements for a period beginning on or after 1 July 2009). The revised IFRS 1 retains the substance of its previous version but within a changed structure in order to make it easier for the reader to understand and to better accommodate future changes. The revised standard did not have a material impact on these consolidated financial statements. § Additional Exemptions for First-time Adopters – Amendments to IFRS 1, First-time Adoption of IFRS (effective for annual periods beginning on or after 1 January 2010). The amendments exempt entities using the full cost method from retrospective application of IFRSs for oil and gas assets and also exempt entities with existing leasing contracts from reassessing the classification of those contracts in accordance with IFRIC 4, 'Determining Whether an Arrangement Contains a Lease' when the application of their national accounting requirements produced the same result. The amendments did not have a material impact on these consolidated financial statements. § Improvements to International Financial Reporting Standards (issued in April 2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods beginning on or after 1 January 2010). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: clarification that contributions of businesses in common control transactions and formation of joint ventures are not within the scope of IFRS 2; clarification of disclosure requirements set by IFRS 5 and other standards for non-current assets (or disposal groups) classified as held for sale or discontinued operations; requiring to report a measure of total assets and liabilities for each reportable segment under IFRS 8 only if such amounts are regularly provided to the chief operating decision maker; amending IAS 1 to allow classification of certain liabilities settled by entity’s own equity instruments as non-current; changing IAS 7 such that only expenditures that result in a recognized asset are eligible for classification as investing activities; allowing classification of certain long- term land leases as finance leases under IAS 17 even without transfer of ownership of the land at the end of the lease; providing additional guidance in IAS 18 for determining whether an entity acts as a principal or an agent; clarification in IAS 36 that a cash generating unit shall not be larger than an operating segment before aggregation; supplementing IAS 38 regarding measurement of fair value of intangible assets acquired in a business combination; amending IAS 39 (i) to include in its scope option contracts that could result in business combinations, (ii) to clarify the period of reclassifying gains or losses on cash flow hedging instruments from equity to profit or loss for the year and (iii) to state that a prepayment option is closely related to the host contract if upon exercise the borrower reimburses economic loss of the lender; amending IFRIC 9 to state that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within its scope; and removing the restriction in IFRIC 16 that hedging instruments may not be held by the foreign operation that itself is being hedged. In addition, the amendments clarifying classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary published as part of the Annual Improvements to International Financial Reporting Standards, which were issued in May 2008, are effective for annual periods beginning on or after 1 July 2009. The amendments did not have a material impact on these financial statements. § Improvements to International Financial Reporting Standards (issued in May 2010 and effective from 1 January 2011). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: IFRS 1 was amended (i) to allow previous GAAP carrying value to 25 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 be used as deemed cost of an item of property, plant and equipment or an intangible asset if that item was used in operations subject to rate regulation, (ii) to allow an event driven revaluation to be used as deemed cost of property, plant and equipment even if the revaluation occurs during a period covered by the first IFRS financial statements and (iii) to require a first-time adopter to explain changes in accounting policies or in the IFRS 1 exemptions between its first IFRS interim report and its first IFRS financial statements; IFRS 3 was amended (i) to require measurement at fair value (unless another measurement basis is required by other IFRS standards) of non-controlling interests that are not present ownership interest or do not entitle the holder to a proportionate share of net assets in the event of liquidation, (ii) to provide guidance on acquiree’s share-based payment arrangements that were not replaced or were voluntarily replaced as a result of a business combination and (iii) to clarify that the contingent considerations from business combinations that occurred before the effective date of revised IFRS 3 (issued in January 2008) will be accounted for in accordance with the guidance in the previous version of IFRS 3; IFRS 7 was amended to clarify certain disclosure requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and quantitative disclosures about the nature and extent of financial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by clarifying that an entity should disclose the amount of foreclosed collateral held at the reporting date and not the amount obtained during the reporting period; IAS 1 was amended to clarify the requirements for the presentation and content of the statement of changes in equity (this amendment was early adopted by the Group); IAS 27 was amended by clarifying the transition rules for amendments to IAS 21, 28 and 31 made by the revised IAS 27 (as amended in January 2008); IAS 34 was amended to add additional examples of significant events and transactions requiring disclosure in a condensed interim financial report, including transfers between the levels of fair value hierarchy, changes in classification of financial assets or changes in business or economic environment that affect the fair values of the entity’s financial instruments; and IFRIC 13 was amended to clarify measurement of fair value of award credits. The Group does not expect the amendments to have any material effect on its financial statements. § Limited exemption from comparative IFRS 7 disclosures for first-time adopters - Amendment to IFRS 1 (effective for annual periods beginning on or after 1 July 2010) (not adopted by the European Union). Existing IFRS preparers were granted relief from presenting comparative information for the new disclosures required by the March 2009 amendments to IFRS 7, Financial Instruments: Disclosures. This amendment to IFRS 1 provides first-time adopters with the same transition provisions as included in the amendment to IFRS 7. The Group does not expect the amendments to have any effect on its financial statements. § Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters – Amendments to IFRS 1 (issued in December 2010 and effective for annual periods beginning on or after 1 July 2011) (not adopted by the European Union). The amendment regarding severe hyperinflation creates an additional exemption when an entity that has been subject to severe hyperinflation resumes presenting or presents for the first time, financial statements in accordance with IFRS. The exemption allows an entity to elect to measure certain assets and liabilities at fair value; and to use that fair value as the deemed cost in the opening IFRS statement of financial position. The IASB has also amended IFRS 1 to eliminate references to fixed dates for one exception and one exemption, both dealing with financial assets and liabilities. The first change requires first-time adopters to apply the derecognition requirements of IFRS prospectively from the date of transition, rather than from 1 January 2004. The second amendment relates to financial assets or liabilities where the fair value is established through valuation techniques at initial recognition and allows the guidance to be applied prospectively from the date of transition to IFRS rather than from 25 October 2002 or 1 January 2004. This means that a first-time adopter may not need to determine the fair value of certain 26 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 financial assets and liabilities at initial recognition for periods prior to the date of transition. IFRS 9 has also been amended to reflect these changes. The Group does not expect the amendments to have any effect on its financial statements. § IFRS 10, Consolidated financial statements (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), replaces all of the guidance on control and consolidation in IAS 27 “Consolidated and separate financial statements” and SIC-12 “Consolidation - special purpose entities”. IFRS 10 changes the definition of control so that the same criteria are applied to all entities to determine control. This definition is supported by extensive application guidance. § IFRS 11, Joint arrangements (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), replaces IAS 31 “Interests in Joint Ventures” and SIC-13 “Jointly Controlled Entities— Non-Monetary Contributions by Ventures”. Changes in the definitions have reduced the number of “types” of joint arrangements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. § IFRS 12, Disclosure of interest in other entities (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity; it replaces the disclosure requirements currently found in IAS 28 “Investments in associates”. IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity’s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including significant judgments and assumptions made in determining whether an entity controls, jointly controls or significantly influences its interests in other entities, extended disclosures on share of non-controlling interests in group activities and cash flows, summarized financial information of subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities. § IFRS 13, Fair value measurement (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), aims to improve consistency and reduce complexity by providing a precise definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the Group’s financial statements. 2.2 Consolidation (a) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred 27 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. The excess of the consideration transferred the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the statement of comprehensive income. Inter-company transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (b) Purchases and sales of non-controlling interests. The Group applies the economic entity model to account for transactions with owners of non-controlling interest. Any difference between the purchase consideration and the carrying amount of non-controlling interest acquired is recorded as a capital transaction directly in equity. The Group recognises the difference between sales consideration and carrying amount of non-controlling interest sold as a capital transaction in the statement of changes in equity. 2.3 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (CODM). The chief operating decision-maker who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer, who makes strategic decisions. 2.4 Foreign currency translation (a) Functional and presentation currency The Group operates in a Russian Ruble (“RUR”) economic environment. Accordingly, the functional currency of each of the Group’s entities is the RUR. The Group’s consolidated financial statements have been presented in US dollars (“USD”), as the Directors believe that this presentation is more appropriate for the users of these financial statements. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of income. 28 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the consolidated statement of comprehensive income within ‘finance profit/ (loss)’. (c) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: · assets and liabilities for each statement of financial position are translated at the closing rate at the end of the respective reporting period; · income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); · components of equity are translated at the historic rate and · all resulting exchange differences are recognized in other comprehensive income. When control over a foreign operation is lost, the previously recognized exchange differences on translation to a different presentation currency are reclassified from other comprehensive income to profit or loss for the year as part of the gain or loss on disposal. On partial disposal of a subsidiary without loss of control, the related portion of accumulated currency translation differences is reclassified to non-controlling interest within equity. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. At 31 December 2010, the principal rate of exchange used for translating foreign currency balances was USD1=RUR 30.4769 (At 31 December 2009 USD1=RUR 30.2442). The principal average rate of exchange used for translating income and expenses was USD1=RUR 30.3640 (2009: USD1=RUR 31.8256). 2.5 Property development rights and costs (a) Property development rights Property development rights represent the rights owned by the Group to either lease land plots, based on land lease contracts entered into with the Moscow City Government (“land use rights”) or where an investment contract or co-investment agreement has been entered into with the Moscow City Government providing the rights for the development of a project site (“investment contract”). Land use rights and investment contracts are stated at cost less provisions for impairment, where required. The cost of property development rights held by acquired subsidiaries or jointly controlled entities is recorded at fair value as at the date of acquisition of the subsidiary or jointly controlled entity. (b) Property development costs Property development costs represent capitalized costs directly attributable to the construction of properties, including interest and foreign currency movements on borrowings during the construction period to the extent they are regarded as an adjustment to interest, and other costs associated with the acquisition and development of real estate. Property development costs are carried at cost less provision for impairment where required and are not depreciated. Cost includes borrowing costs incurred on specific or general funds borrowed to finance 29 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 construction of qualifying assets. Property development costs are not depreciated until the asset is available for use. If any indication of impairment exists, the Directors estimate the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The impairment loss, if any, is recognized in the statement of comprehensive income in order to reduce the carrying amount to the recoverable amount. Upon determination of development concept of the project, property development rights and costs are transferred at their carrying amount to investment property, if the asset is intended to be held by the Group for capital appreciation or for rental; or to property developed for sale, if the asset is intended to be sold. 2.6 Investment property Property that is held for long-term rental yields or for capital appreciation or both, and that is not occupied by the companies in the consolidated Group, is classified as investment property. As from 1 January 2009, investment property also includes property that is being constructed or developed for future use as investment property. Investment property is measured initially at its cost, including related transaction costs and borrowing costs. Borrowing costs incurred for the purpose of acquiring, constructing or producing a qualifying investment property are capitalized as part of its cost. Borrowing costs are capitalized while acquisition or construction is actively underway and cease once the asset is substantially complete, or suspended if the development of the asset is suspended. After initial recognition, investment property is carried at fair value. Fair value is based on active market prices, adjusted, if necessary, for any difference in the nature, location or condition of the specific asset. If this information is not available, the Group uses alternative valuation methods, such as recent prices on less active markets or discounted cash flow projections. Valuations are performed as of the end of the reporting period by professional valuer who holds recognized and relevant professional qualifications and have recent experience in the location and category of the investment property being valued. These valuations form the basis for the carrying amounts in the financial statements. Investment property that is being redeveloped for continuing use as investment property or for which the market has become less active continues to be measured at fair value. Fair value measurement on property under construction is only applied if the fair value is considered to be reliably measurable. It may sometimes be difficult to determine reliably the fair value of the Investment property. In order to evaluate whether the fair value of an Investment property can be determined reliably, management considers the following factors, among others: • The provisions of the construction contract. • The stage of completion. • Whether the project/property is standard (typical for the market) or non-standard. • The level of reliability of cash inflows after completion. • The development risk specific to the property. • Past experience with similar constructions. • Status of construction permits. 30 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 The fair value of investment property reflects, among other things, assumptions about rental income from future leases in the light of current market conditions. The fair value also reflects, on a similar basis, any cash outflows that could be expected in respect of the property. Subsequent expenditure is capitalized to the asset’s carrying amount only when it is probable that future economic benefits associated with the expenditure will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are expensed when incurred. The fair value of investment property does not reflect the related future capital expenditure that will enhance the property and does not reflect the related future benefits from this future expenditure other than those a rational market participant would take into account when determining the value of the property. Changes in fair values are recognized in the consolidated statement of income. Investment properties are derecognised either when they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Where the Group disposes of a property at fair value in an arm’s length transaction, the carrying value immediately prior to the sale is adjusted to the transaction price, and the adjustment is recorded in the consolidated statement of income within net gain from fair value adjustment on investment property. Following the adoption of IAS 40 (revised), investment properties under construction have been transferred from property development rights and costs to investment properties at 1 January 2009 at their carrying amount. They have subsequently been fair valued at the reporting date. All fair value gains or losses, including those unrecognized fair value gains and losses (if the losses have not already been recognized through impairment) that arose prior to 1 January 2009, have been recognized in the profit or loss for the year as fair value gains or losses. If an investment property becomes owner-occupied, it is reclassified as property, plant and equipment. Its fair value at the date of reclassification becomes its cost for subsequent accounting purposes. If an item of owner-occupied property becomes an investment property because its use has changed, any difference resulting between the carrying amount and the fair value of this item at the date of transfer is treated in the same way as a revaluation under IAS 16. Any resulting increase in the carrying amount of the property is recognized in the profit or loss to the extent that it reverses a previous impairment loss, with any remaining increase recognized in other comprehensive income and increases directly to revaluation surplus within equity. Any resulting decrease in the carrying amount of the property is initially charged in other comprehensive income against any previously recognized revaluation surplus, with any remaining decrease charged to profit or loss. Where an investment property undergoes a change in use, evidenced by commencement of development with a view to sale, the property is transferred to inventories. A property’s deemed cost for subsequent accounting as inventories is its fair value at the date of change in use. 2.7 Investment in jointly controlled entities A jointly controlled entity is a joint venture that involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The entity operates in the same way as other entities, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity. 31 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 Investments in jointly controlled entities are accounted for using the equity method of accounting, based upon the percentage of ownership held by the Group. When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of the interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. Unrealized gains arising from transactions with jointly controlled entities are eliminated to the extent of the Group’s interest in the entity. 2.8 Acquisition of new projects (a) Acquisition of new projects through acquisition of subsidiaries Subsidiaries are those companies and other entities (including special purpose entities) in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are deconsolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries other than those acquired from parties under common control. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The Group measures non-controlling interest on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest's proportionate share of net assets of the acquiree. Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount (“negative goodwill”) is recognized in profit or loss, after management reassesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed and reviews appropriateness of their measurement. The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent consideration arrangements but excludes acquisition related costs such as advisory, legal, valuation and similar professional services. Transaction costs incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt are deducted from its carrying amount and all other transaction costs associated with the acquisition are expensed. Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated; unrealized losses are also eliminated unless the cost cannot be recovered. The Company and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies. Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Company. Non-controlling interest forms a separate component of the Group’s equity. 32 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 (b) Acquisition of new projects through acquisition of joint ventures The accounting policy for acquisition of subsidiaries representing businesses is also applied to the acquisition of jointly controlled entities, to the extent that the Group’s share of the separately identifiable assets, liabilities and contingent liabilities acquired is compared to the consideration paid to determine the goodwill or negative goodwill arising on the transaction. Such goodwill is included in the carrying value of the investments in the jointly controlled entities accounted for using the equity method. Negative goodwill is recognized immediately in the Group’s share in profit of the jointly controlled entity. 2.9 Property, plant and equipment Land and buildings comprise mainly retail outlets and offices. Land and buildings are shown at fair value, based on annual valuations by external independent valuer, less subsequent depreciation for buildings. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset, and the net amount is restated to the revalued amount of the asset. All other property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the consolidated statement of income during the financial period in which they are incurred. Increases in the carrying amount arising on revaluation of land and buildings are credited to other comprehensive income and shown as other reserves in shareholders’ equity. Decreases that offset previous increases of the same asset are charged in other comprehensive income and debited against other reserves directly in equity; all other decreases are charged to the consolidated statement of income. Each year the difference between depreciation based on the revalued carrying amount of the asset charged to the consolidated statement of income, and depreciation based on the asset’s original cost is transferred from ‘other reserves’ to ‘retained earnings’. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows: · Buildings 25-40 years · Machinery 10-15 years · Vehicles 3-5 years · Furniture, fittings and equipment 3-8 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. When revalued assets are sold, the amounts included in other reserves are transferred to retained earnings. 33 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 2.10 Accounts receivables and prepayments Accounts receivables are recorded inclusive of Value Added Tax (“VAT”) and are carried at amortized cost, net of provisions for impairment, if any. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of the provision is recognized in the consolidated statement of comprehensive income. Prepayments are carried at cost less provision for impairment. A prepayment is classified as non-current when the goods or services relating to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will itself be classified as non-current upon initial recognition. Prepayment to acquire assets are transferred to the carrying amount of the asset once the Group has obtained control of the asset and it is probable that future economic benefits associated with the assets will flow to the Group. Other prepayments are written off to the consolidated statement of comprehensive income when the goods or services relating to the prepayments are received. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognized in profit or loss for the year. Non-current receivables represent amounts of VAT related to development projects, which is either to be recovered in the future from the Government Budget or included in property development costs after completion of each projects, if such recovery is not deemed possible. Trade receivables are amounts due from customers for services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. 2.11 Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of inventories includes design costs, raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. 2.12 Property developed for sale Property developed for sale is defined as projects in which the Group participates as a contractor or as a promoter, and which include construction work with the intention to sell the entire building as a whole or parts thereof. Each project represents one building or a group of buildings. A group of buildings is considered one project when the buildings at the same building site are being constructed according to one building plan and under one building license, and are offered for sale at the same time. Property developed for sale includes cost of land or of rights to the land that constitutes the relative portion of the area, on which the construction work on projects is performed, plus the cost of the work executed on the projects as well as other costs allocated thereto, less the cumulative amounts recognized in profit or loss as cost of property developed for sale sold up to the end of the reported period. 34 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 Where the estimated expenses for a building project indicate that a loss is expected, an appropriate provision is set up. Buildings that are under construction are classified as Property developed for sale on the face of the statement of financial position. 2.13 Cash and cash equivalents In the consolidated statement of cash flows, cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Cash and cash equivalents are carried at amortized cost using the effective interest method. 2.14 Share capital Ordinary shares are classified as equity. Mandatorily redeemable preference shares are classified as liabilities. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s owners until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s owners. 2.15 Trade and other payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. 2.16 Loans and Borrowings Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the consolidated statement of income over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw- down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalized as a pre-payment for liquidity services and amortized over the period of the facility to which it relates. Preference shares, which are mandatorily redeemable on a specific date, are classified as liabilities. The dividends on these preference shares are recognized in the consolidated statement of income as interest expense. 35 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 2.17 Current and deferred income tax Income taxes have been provided for in the financial statements in accordance with legislation of Guernsey, Cyprus, Israel and the Russian Federation enacted or substantively enacted by the end of the reporting period. The tax expense for the period comprises current and deferred tax. Tax is recognized in the consolidated statement of income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the statement of end of the reporting period and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. 2.18 Bonds Bonds issued are recognized initially at fair value of the liability determined by proceeds from the issuance, net of transaction costs incurred. In subsequent periods, bonds are stated at amortized cost using the effective interest method; any difference between the amount at initial recognition and the redemption amount is recognized as interest expense over the period of the borrowings. 2.19 Share-based payment The Group operates an equity-settled share-based compensation plan under which the Group receives services from employees as consideration for equity instruments of the Group. The fair value of the employee services received in exchange for the grant of the equity instruments is recognized as an expense. The total amount to be expensed is determined on the grant date by reference to the fair value of the equity instruments granted, including the impact of the market performance vesting condition and excluding the impact of the non-market vesting condition. For compensation plans with the non-market vesting condition, this condition is included in 36 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 assumptions about the number of equity instruments that are expected to vest. The total amount expensed is recognized over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At each statement end of the reporting period, the Group revises its estimates of the number of equity instruments that are expected to vest based on the non-market vesting conditions, if any, in the consolidated statement of income, with a corresponding adjustment to equity. For compensation plans linked to the market performance vesting conditions, the assumption reflecting the probability of meeting this condition is incorporated in the initial valuation of the grant. The resulting expense is recognized over the vesting period, irrespective of whether the market condition is satisfied. 2.20 Provisions Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount. They are accrued when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. 2.21 Derivatives Derivative financial instruments are carried as trading assets and liabilities at their fair value. All derivative instruments are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of derivative instruments are included in consolidated statement of comprehensive income. The Group does not apply hedge accounting. 2.22 Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the group. The Group recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group’s activities as described below. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. (a) Sale of property developments Revenue from the sale of property developments is recognized at the point of transfer of risks and rewards of ownership and effective control. No revenues are recognized if there are significant uncertainties regarding recovery of consideration due, the cost incurred or to be incurred cannot be reliably measured, there is a risk of return, or there is continuing management involvement to the degree usually associated with ownership. Transfer of rights and rewards varies depending on the individual terms of the contract of sale. Deferred income is reflected in the statement of financial position as a receivable or, if paid in advance, as a liability. 37 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 (b) Sales of goods – retail Sales of goods are recognized when a Group entity sells a product to the customer. Retail sales are usually in cash or by credit card. (c) Sales of services Revenue from contracts for services is generally recognized in the period the services are provided, using a straight-line basis over the term of the contract. If circumstances arise that may change the original estimates of revenues, costs or extent of progress toward completion, estimates are revised. These revisions may result in increases or decreases in estimated revenues or costs and are reflected in income in the period in which the circumstances that give rise to the revision become known by management. (d) Interest income Interest income is recognized using the effective interest method. When a loan and receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loan and receivables are recognized using the original effective interest rate. 2.23 Employee benefits Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, awards in accordance with the Long Term Incentive Plan (“LTIP”), and non- monetary benefits (such as health services) are accrued in the year in which the associated services are rendered by the employees of the Group. The Group has no legal or constructive obligation to make pension or similar benefit payments beyond the unified social tax. 2.24 General and Administrative Expenses All General and Administrative expenses are recognized in the period when they are incurred. The expenses that are directly related to the Group activity in respect of the certain project are capitalized as the cost of the project. The expenses that are not attributable to the projects are reflected in the statement of comprehensive income. 2.25 Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognized amounts, and there is an intention to either settle on a net basis, or to realize the asset and settle the liability simultaneously. 2.26 Value added tax Output value added tax related to sales is payable to tax authorities on the earlier of (a) collection of receivables from customers or (b) delivery of goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases is recognized in the statement of financial position on a gross basis and disclosed separately as an asset and liability. Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT. 38 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 2.27 Earnings per share Earnings per share are determined by dividing the profit or loss attributable to owners of the Company by the weighted average number of participating shares outstanding during the reporting year. 2.28 Amendment of the consolidated financial statements after issue Any changes to these consolidated financial statements after issue require approval of the Board of Directors of the Group. 39 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 3. FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of financial risks: market risk (foreign exchange risk, fair value interest rate risk and cash flow interest rate risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Treasury department of the Group identifies and evaluates financial risks in close co-operation with the Group’s operating units. The Board of Directors provides principles for overall risk management, as well as instructions covering specific areas, such as foreign exchange risk, interest rate risk, credit risk and use of derivative financial instruments. Market risk Foreign exchange risk The functional currency of the Group is the Russian Ruble (“RUR”). Foreign exchange risk is the risk that the value of financial instruments will fluctuate due to changes in foreign currency exchange rates. At 31 December 2010, the Group was exposed to foreign exchange risks arising from currency exposures, primarily in respect of US Dollar (“USD”). A foreign exchange risk arises from recognized monetary assets and liabilities. The Group’s policy is not to enter into any currency hedging transactions in respect of these risks. However, since the majority of expenditure and revenues of the Group are denominated in both RUR and USD, the Directors allocate the Group’s cash resources based on the forecasted currency outflows. Had the US dollar exchange rate on 31 December 2010 changed by 10% the change in the carrying value of the dollar-denominated financial assets and liabilities and the impact on profit before tax and equity would be as follows: CARRYING CARRYING CARRYING AMOUNT AMOUNT AFTER AMOUNT AFTER 10% INCREASE IN 10% DECREASE IN USD EXCHANGE USD EXCHANGE RATE RATE USD’000 USD’000 USD’000 USD denominated financial assets 66,804 73,484 60,124 USD denominated financial liabilities* (215,127) (236,640) (193,614) USD denominated financial assets net (148,323) (163,156) (133,490) Net impact on profit and loss before tax (14,833) 14,833 Net impact on equity (11,866) 11,866 As at 31 December 2009: CARRYING CARRYING CARRYING AMOUNT AMOUNT AFTER AMOUNT AFTER 10% INCREASE IN 10% DECREASE IN USD EXCHANGE USD EXCHANGE RATE RATE USD’000 USD’000 USD’000 USD denominated financial assets 18,788 20,667 16,909 USD denominated financial liabilities* (109,595) (120,554) (98,636) USD denominated financial assets net (90,807) (99,887) (81,727) Net impact on profit and loss before tax (9,080) 9,080 Net impact on equity (7,264) 7,264 40 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 * Including New Israeli Shekels (“NIS”) denominated bonds linked to Israeli CPI in the amount of equivalent to USD 18,090,000 (2009: USD 26,343,000). Since the Group entered into cross-currency interest rate swap contracts (see Note 16) for the purposes of managing foreign exchange risk the Directors consider these bonds to be US dollar denominated liabilities. The table below summarizes the Group’s exposure to foreign currency exchange rate risk at the statement of end of the reporting period : 31 DECEMBER 2010 31 DECEMBER 2009 Net Net Monetary Monetary statement Monetary Monetary statemen financial financial of financial financial t of assets liabilities Derivatives financial assets liabilities Derivatives financial position position position position USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 Russian Rubles 37,764 (7,118) - 30,646 45,576 (4,478) - 41,098 US Dollars 66,804 (197,037) - (130,233) 18,788 (83,252) - (64,464) EUR 242 (100) - 142 4,050 (122) - 3,928 New Israeli Shekels 696 (18,133) (340) (17,777) 630 (26,439) (1,175) (26,984) 105,506 (222,388) (340) (117,222) 69,044 (114,291) (1,175) (46,422) Interest rate risk The Group’s interest rate risk arises from long-term borrowings and bonds. The Sberbank loan, issued at variable rates exposes the Group to cash flow interest rate risk. The Bonds issued expose the Group to fair value interest rate risk due to changes in CPI. The Group is also exposed to variations in interest rates in relation to the interest earned on cash deposits and loans issued. Reductions in interest rates would reduce the level of income earned by the Group on the surplus cash assets within the Group. The Group analyses its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. For the Sberbank loan the Group is exposed to changes in 6 month USD LIBOR. As at 31 December 2010 an increase of 100 basis points in 6 month USD LIBOR would result in insignificant increase in interest expense (2009: USD 838,000). Fair Value of Financial Instruments The Group’s financial assets consist of cash and cash equivalents and current and non-current receivables. The Group’s financial liabilities consist of bonds, loans, derivative instruments, liabilities under put option agreement and other payables. All of the Group’s financial assets and liabilities, except for the cross-currency swap contract (see Note 16), are measured at amortized cost which approximates fair value. The swap contract is presented at its fair value. The fair value for the swap contract was determined based on valuation techniques with inputs observable in markets. The fair value of other financial assets and liabilities approximates to their amortized value included in the consolidated statement of financial position. 41 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 Credit risk The Group is exposed to credit risk, which is the risk that a counterparty will not be able to pay all amounts in full when due. Financial assets, which potentially subject the Group to credit risk, consist principally of accounts receivable, long-term loans and cash and cash equivalents. The carrying amount of accounts receivable, loans and balances with banks represents the maximum amount that the Group is exposed to credit risk, which in 2010 was USD 100,752,000 (2009: USD 55,432,000). 54% of the above total credit exposure is related to cash and cash equivalents (2009: 50%). Cash and cash equivalents are placed in high credit quality financial institutions, which are considered at the time of the deposit to have a minimal risk of default. The Directors believe the risk of default of these institutions is low, but will continue to monitor future placing of deposits in order to minimize credit risk exposure. 60% of cash balances are held with Morgan Stanley Funds, 21% with UniCredit Bank, 10% with UBS AG Bank, 5% with ING Bank NV, 2% with Sberbank and 2% with First International Bank of Israel. (2009: 29% of cash balances are held with UniCredit Bank, 23% with UBS AG Bank, 21% with Morgan Stanley Funds, 14% with ING Bank NV and 13% with First International Bank of Israel). 29% of the above total credit exposure is related to the loans issued to the jointly controlled venture (see Note 8) (2009: 44%). The Directors consider the credit risk associated with this balance to be low since the Group is able to jointly control the joint venture. The remaining credit risk exposure is associated with trade and other receivables. Although collection of receivables could be influenced by economic factors, the Directors believe that there is no significant risk of loss to the Group beyond any provision already recorded. As at 31 December 2010 and 31 December 2009 there were neither past due or impaired financial assets. Though there are no formal objectives, policies and processes for management of credit risk at the level of the Company, credit risk is managed at the shareholder level. Liquidity risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Group is exposed to daily calls on its available cash resources. Management monitors monthly rolling forecasts of the Group’s cash flows. Management estimates that the liquidity portfolio comprising cash and bank deposits can be realized in cash in order to meet unforeseen liquidity requirements. The Group’s liquidity position is monitored and regular liquidity stress testing under a variety of scenarios covering both normal and more severe market conditions is performed by the management. The liquidity management of the Group requires considering the level of liquid assets necessary to settle obligations as they fall due; maintaining access to a range of funding sources; maintaining funding contingency plans; and monitoring statement of financial position liquidity ratios. 42 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 The maturity dates of the Group’s financial assets and liabilities at 31 December 2010 are presented below. The amounts disclosed in the table are contractual undiscounted cash flows. MATURITY DATE NOTE 2011 2012 NOT TOTAL DEFINED USD’000 USD’000 USD’000 USD’000 Financial assets: Input VAT 3,325 - 1,429 4,754 Loans to jointly controlled entity 8 - 29,284 - 29,284 Current receivables 10,691 - - 10,691 Cash and cash equivalents 14 55,310 - - 55,310 Total financial assets 69,326 29,284 1,429 100,039 Financial liabilities: Bonds 10,619 10,323 - 20,942 Loans 11,197 99,724 - 110,921 Put option agreement - 114,934 - 114,934 Trade and other payables 17 7,947 - - 7,947 Total financial liabilities 29,763 224,981 - 254,744 The maturity dates of the Group’s financial assets and liabilities at 31 December 2009 are presented below. The amounts disclosed in the table are contractual undiscounted cash flows. MATURITY DATE NOTE 2010 2011 2012 NOT TOTAL DEFINED USD’000 USD’000 USD’000 USD’000 USD’000 Financial assets: Input VAT 2,052 12,610 - 1,002 15,664 Loans to jointly controlled entity 8 3,595 - 20,971 - 24,566 Current receivables 454 - - - 454 Cash and cash equivalents 14 27,490 - - - 27,490 Total financial assets 33,591 12,610 20,971 1,002 68,174 Financial liabilities: Bonds 10,385 7,270 12,908 - 30,563 Loans and borrowings 7,255 7,255 86,653 - 101,163 Trade and other payables 17 8,516 - - - 8,516 Total financial liabilities 26,156 14,525 99,561 - 140,242 43 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated and are based on the Directors’ experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Directors also make certain judgments, apart from those involving estimations, in the process of applying the accounting policies. Judgments that have the most significant effect on the amounts recognized in the consolidated financial statements and which could cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: Valuation of the development rights and costs, property developed for sale and investment property The Group has obtained a report from an international valuation company, DTZ Debenham Zadelhoff Limited’s (“DTZ”), setting out the estimated market values for the Group’s development rights, investment property and property developed for sale (‘assets’) in their current state as at 31 December 2010, based on the assumption as to use of each property by a typical local developer in Russia. Had a different assessment been made of the assumptions underlying the valuation report the estimated fair values of the assets would have been higher or lower as at the above mentioned date. The development projects’ recoverable amount was determined based on reliable estimates of future cash flows, supported by the terms of any existing lease and other contracts and by external evidence such as current market prices for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows. Management has reviewed the appraisers’ assumptions underlying discounted cash flow models used in the valuation, and confirmed that factors such as the discount rate applied have been appropriately determined considering the market conditions at the end of the reporting period. Notwithstanding the above, management considers that the valuation of its investment properties under construction is currently subject to an increased degree of judgement and an increased likelihood that actual proceeds on a sale may differ from the carrying value. The principal assumptions underlying the market value of the Group’s development portfolio in respect of the Group’s five projects in course of development such as the Kingston Development, the Khilkov Development, the Victory Park Development, the Ostozhenka Development and the Chelsea Development taken at 100% of ownership are those related to current market level of: the projected sale and rent prices per square meter; the construction costs per square meter; the size of the projects; the developer profit required and the level of financing and other costs. The principal assumptions made, and the impact on the aggregate valuations by changing these assumptions is as follows: · sale prices from USD 3,100 to USD 25,000 per square meter and rent of USD 1,100 per square meter per annum. If these values were to differ by 10% from management’s estimates, the fair value of the development projects would be an estimated USD 180 million lower or higher; · construction costs, between USD 943 and USD 2,500 per square meter. If these values were to differ by 10% from management’s estimates, the fair value of the development projects would be an estimated USD 146 million lower or USD 144 million higher; · gross buildable area is assumed to be 1.4 million square meters. If this value was to differ by 10% from management’s estimates, the fair value of the development projects would be an estimated USD 50 million lower or higher; 44 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 · development profit, between 23% and 45% per project. If these values were to differ by 10% from management’s estimates, the fair value of the development projects would be an estimated USD 39 million lower or USD 40 million higher; · cost of finance approximates to 15%. If this value were to differ by 10% from management’s estimates, the fair value of the development projects would be an estimated USD 7 million lower or higher; · yield achieved on commercial or retail space of 12%. If this value was to differ by 10% from management’s estimate, the fair value of the development projects would be an estimated USD 0.6 million lower or USD 0.8 million higher; · completion dates of properties held for development between 2013 and 2017. A one year delay in completion across all properties held for development would result in an estimated decrease of the fair value of the development projects of USD 74 million. Significant management involvement in operations of Tsvetnoy project Management had a significant involvement in operations of entire Tsvetnoy project as at 31 December 2010 and has intention to keep the significant involvement at least for the period up to 31 December 2011 over the entire building. The operations of Tsvetnoy project includes the Group’s own retail operations, the third parties retail operations, restaurant business, gourmet business and underground parking. The degree of the Group’s management involvement depends on the type of business and is the highest in retail business, however is significant in other type of businesses. The nature of significant management involvement in the operations of Tsvetnoy projects relates to the daily involvement of management in monitoring activities of all parts of the businesses in accordance with the strategy developed by management for this project, such as design of premises, marketing and promotion actions, range of goods and services, customer relations, staff trainings and control, logistics and other areas. Valuation of the Tsvetnoy Development Property with the significant management involvement is stated at fair value based on reports prepared by the valuation company DTZ. The fair value of the property is estimated based on the income capitalization method, where the value is estimated from the expected market rental income streams and capitalization yields. The method considers net income generated by comparable property, capitalized to determine the value for property which is subject to the valuation. The principal assumptions underlying the estimation of the fair value are those related to the possible market rentals and appropriate discount rates. The impact on the aggregate valuations of reasonably possible changes in these assumptions, with all other variables held constant, is as follows: · discount rate of 12% for rental inflow and 20% for fit-out reimbursement. If these values differ by 10% from management’s estimates, the market value would be an estimated USD 16 million lower or USD 17 million higher; · yield of 11% to differ by 10% from management’s estimates would result in the market value an estimated USD 8 million lower or USD 9 million higher; · market rental rates were assumed to be from 900 to 5,000 USD per square meter per annum depending on the retail type. Should these rental rates differ by 10% from management’s estimates, the market value would be an estimated USD 22 million lower or higher. 45 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 Deferred income tax asset recognition The recognized deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded in the statement of financial position. Deferred income tax assets are recorded to the extent that realization of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on the current management expectations regarding the Group’s future performance. Going concern Management prepared these financial statements on a going concern basis. In making this judgment management considered the Group’s financial position, current intentions, profitability of operations and access to financial resources, and analyzed the potential impact of recent financial crisis on future operations of the Group. 46 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 5. PROPERTY DEVELOPMENT RIGHTS AND COSTS The Group is involved in the development of the following projects: NAME OF PROJECT TYPE OF PROJECT GROUP’S INTEREST 2010 2009 Jointly controlled Khilkov (1) Residential 50% 50% Consolidated Kingston (2) Residential 82% 82% Tsvetnoy (3) Retail 100% 100% Victory Park Mixed Use 100% 100% Chelsea Mixed Use 100% 100% Ostozhenka Residential 100% 100% (1) Refer to Note 8 for further information (2) Refer to Note 6, 13 for further information (3) Refer to Note 6, 9 for further information 47 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 In respect of the Group’s current development portfolio, the following property development rights and property development costs are held: KINGSTON TSVETNOY VICTORY PARK CHELSEA OSTOZHENKA OTHERS TOTAL USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 At 1 January 2009 261,730 114,084 39,978 131,625 9,740 95,106 652,263 Additions in property development costs 3,493 33,195 45 60 75 172 37,040 Reclassification from property development cost - - (1,069) (7,525) - - (8,594) (Note 12) Impairment of property development rights - - - (97,358) - (87,973) (185,331) Valuation gain - 14,539 - - - - 14,539 Reclassification to Investment property (Note 6) - (161,055) - - - - (161,055) Translation difference (7,293) (763) (1,196) (9,241) (272) (7,305) (26,070) At 31 December 2009 257,930 - 37,758 17,561 9,543 - 322,792 Additions in property development costs 15,693 - 95 - 117 - 15,905 Reclassification to investment property (Note 6) (29,987) - - - - - (29,987) Reclassification to property developed for sale (242,619) - - - (242,619) (Note 13) Translation difference (1,017) - (288) (254) (74) - (1,633) At 31 December 2010 - - 37,565 17,307 9,586 - 64,458 Management has utilized appraisal reports prepared by DTZ as at 31 December 2010 to support their assessment of the market value of these assets in order to perform the impairment tests. Refer to the Note 4 for assumptions used by management. There were no indicators of impairment identified during 2010. 48 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 The Group, through its Russian subsidiaries, has access to develop its projects through investment contracts with the Moscow City Government or through land use rights. The land lease agreements held are detailed below: ACQUISITION PERIOD OF THE DATE OF LEASE FROM NAME OF SUBSIDIARY THAT HAS ENTITLEMENT LAND USE THE DATE OF TO THE LEASE AGREEMENT RIGHTS ACQUISITION LLC Ostozhie – Ostozhenka Project 30 June 2006 19 years LLC Central Market –Tsvetnoy Project 30 June 2006 46 years LLC Jevosset – Kingston Project 27 June 2007 48 years LLC Tolling –Victory Park Project 19 March 2007 5 years LLC Forum – Chelsea Project (part) 22 February 2008 21 years 6. INVESTMENT PROPERTY The Tsvetnoy Development was re-classified from investment property to buildings (Note 9) as owner – occupied property held for use in supply of goods and services after its soft opening in December 2010. The Kingston Development was re-classified from property development rights and cost to Investment property in part of its commercial premises based on starting construction works and finishing the concept. The appraisal report prepared by DTZ as of December 2010 was used to support the management assessment of the fair value of the Investment property and to determine the retail part of the total project value. TSVETNOY KINGSTON USD’000 USD’000 At 1 January 2009 - - Re-classification from property development rights and costs (Note 5) 161,055 - At 31 December 2009 161,055 - Additional construction costs 46,617 - Reclassification to property, plant and equipment (Note 9) (225,540) - Reclassification from property development rights and costs (Note 5) - 29,987 Fair value adjustment 19,342 26,501 Translation difference (1,474) (209) At 31 December 2010 - 56,279 Interest capitalized into the development costs amounted to USD 8,064,846 in 2010 (USD 5,633,354 in 2009). 7. SEGMENT INFORMATION Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (CODM). The chief operating decision-maker who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer, who makes strategic decisions. With the opening of Tsvetnoy Project this property will be held as Property, Plant and Equipment and due to the nature of trading will be managed separately from the other activities. Tsvetnoy has its own management team who report to the CEO and have the objective of increasing rental and other revenues from the Tsvetnoy investment. In 2010, as the investment was opened on the 9th December, it is treated as Property, Plant and Equipment and the values are highlighted in Note 9. The trading performance from the 9th December was not significant and material to the results of RGI in 2010. In future years the revenues from Tsvetnoy are expected to be substantial and therefore Tsvetnoy will be reported as a separate business segment. 49 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 8. INVESTMENT IN JOINTLY CONTROLLED ENTITY The Group’s investment in a jointly controlled entity relates to its 50% interest in Lafar Management Limited, which holds a 100% interest in LLC Stolichnoe Podvorie, an entity involved in the development of a luxury residential development at 3 Khilkov Lane, Moscow, Russian Federation. The following table sets out the assets and liabilities of the joint venture, and the Group’s share thereof. In addition, the table presents the Group’s share of the results of the joint venture as presented for 2010 and 2009: 31 DECEMBER 31 DECEMBER 2010 2009 USD’000 USD’000 ASSETS Non-current assets Property development rights and costs 138,904 130,743 Receivables 18 22 Deferred income tax assets 1,365 1,298 Total non-current assets 140,287 132,063 Current assets Debtors and prepayments 347 336 Cash and cash equivalents 58 16 Total current assets 405 352 Total assets 140,692 132,415 LIABILITIES Non-current liabilities Deferred income tax liability 19,613 19,138 Borrowings 59,609 50,256 Total non-current liabilities 79,222 69,394 Current liabilities Trade and other payables 33 31 Total current liabilities 33 31 EQUITY Share capital 1 1 Retained earnings 74,225 86,861 Loss of current year (1,074) (12,636) Translation reserve (11,715) (11,236) Total equity 61,437 62,990 Total liabilities and equity 140,692 132,415 Investment in jointly controlled entity (50%) 30,719 31,495 Loans to jointly controlled entity 29,284 24,566 Additional investment in jointly controlled entity 539 428 Total investment in jointly controlled entity 60,542 56,489 SHARE OF RESULT OF JOINTLY CONTROLLED ENTITY (537) (6,318) The loss for the year of USD 1,074,000 in 2010 (2009: USD 12,636,000) includes expenses of USD 1,074,000 (2009: income USD 8,728,000 and expenses USD 21,364,000). 50 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 Loans to the jointly controlled entity at 31 December 2010 are detailed below: NOMINAL INTEREST 2010 OUTSTANDING ORIGINAL RATE REPAYMENT AMOUNT CURRENCY ON LOAN DATE 2010 BORROWER OF LOAN % USD’000 USD’000 LLC Stolichnoe Podvorie RUR 10 30 Sep 2012 3,281 Lafar Management Limited USD 6 31 Dec 2012 25,834 Lafar Management Limited USD - 31 Dec 2012 169 Total loans to jointly controlled entity 29,284 Loans to the jointly controlled entity at 31 December 2009 are detailed below: NOMINAL INTEREST 2009 OUTSTANDING ORIGINAL RATE REPAYMENT AMOUNT CURRENCY ON LOAN DATE 2009 BORROWER OF LOAN % USD’000 USD’000 LLC Stolichnoe Podvorie RUR CBR*1.1 31 Dec 2010 3,522 LLC Stolichnoe Podvorie RUR CBR*1.1 31 Dec 2012 15,974 Lafar Management Limited USD 6 31 Dec 2012 4,837 Lafar Management Limited USD - 31 Dec 2012 160 Lafar Management Limited USD 6 31 Dec 2010 73 Total loans to jointly controlled entity 24,566 9. PROPERTY, PLANT AND EQUIPMENT LAND AND FURNITURE, OFFICE OFFICE AND MOTOR TOTAL BUILDING FITTINGS PREMISES COMPUTER VEHICLES AND EQUIPMENT EQUIPMENT TSVETNOY USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 Cost at 1 January 2009 - - 11,204 653 381 12,238 Accumulated depreciation - - (496) (132) (168) (796) Carrying amount at 1 January 2009 - - 10,708 521 213 11,442 Disposals - - (478) (4) (67) (549) Depreciation - - (377) (48) (56) (481) Translation reserve - - (350) (18) (12) (380) Cost at 31 December 2009 - - 10,381 630 299 11,310 Accumulated depreciation - - (878) (179) (221) (1,278) Carrying amount at 31 December 2009 - - 9,503 451 78 10,032 Reclassification from investment property 225,540 - - - - 225,540 (Note 6) Additions - 11,638 3 93 122 11,856 Depreciation - - (428) (29) (95) (552) Translation reserve - - (71) (4) (1) (76) Cost at 31 December 2010 225,540 11,638 10,304 718 418 248,618 Accumulated depreciation - - (1,297) (207) (314) (1,818) Carrying amount at 31 December 2010 225,540 11,638 9,007 511 104 246,800 51 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 10. INCOME TAX Differences between IFRS and statutory taxation regulations in Russia and other countries give rise to temporary differences between the carrying amount of assets and liabilities for financial purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the rate of 20% (2009: 20%). In the context of the Group’s current structure, tax losses and current tax assets of different Group companies may not be offset against current tax liabilities and taxable profits of other Group companies and, accordingly, taxes may accrue even when there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity. The tax effect of the movements in the temporary differences for the year ended 31 December 2010 are: RECOGNIZED IN CONSOLIDATED STATEMENT OF INCOME 1 JANUARY VALUATION OTHER TRANSLATION 31 DECEMBER 2010 GAIN CHANGES DIFFERENCE 2010 USD’000 USD’000 USD’000 USD’000 USD’000 Tax effect of deductible temporary difference: Tax losses carried forward 3,537 - 1,802 (34) 5,305 Other 248 - (38) (2) 208 Gross deferred tax assets 3,785 - 1,764 (36) 5,513 Less deferred tax liability (248) - 38 2 (208) amount offset with deferred tax assets Recognized deferred tax 3,537 - 1,802 (34) 5,305 asset Tax effect of taxable temporary difference: Development projects (66,726) (5,300) (2,507) 540 (73,993) Investment in joint controlled (128) - - 1 (127) entity profit Other (613) - (217) 5 (825) Gross deferred tax liability (67,467) (5,300) (2,724) 546 (74,945) Less deferred tax liability 248 - (38) (2) 208 amount offset with deferred tax assets (as above) Recognized deferred tax (67,219) (5,300) (2,762) 544 (74,737) liability As at 31 December 2010 the Group had accumulated recognized potential deferred tax assets in respect of unused tax loss carry forwards of USD 26,525,000 (31 December 2009: USD 17,685,000). 52 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 The tax effect of the movements in the temporary differences for the year ended 31 December 2009 are: RECOGNIZED IN CONSOLIDATED STATEMENT OF INCOME 1 JANUARY VALUATION OTHER TRANSLATION 31 2009 IMPAIRMENT GAIN CHANGES DIFFERENCE DECEMBER 2009 USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 Tax effect of deductible temporary difference: Tax losses carried forward - - - 3,361 176 3,537 Other - - - 236 12 248 Gross deferred tax assets - - - 3,597 188 3,785 Less deferred tax liability - - - (236) (12) (248) amount offset with deferred tax assets Recognized deferred tax - - - 3,361 176 3,537 asset Tax effect of taxable temporary difference: Development projects (93,472) 26,851 (2,908) (1,063) 3,866 (66,726) Investment in joint (132) - - - 4 (128) controlled entity profit Other (65) - (522) (26) (613) Gross deferred tax (93,669) 26,851 (2,908) (1,585) 3,844 (67,467) liability Less deferred tax liability - - - 236 12 248 amount offset with deferred tax assets (as above) Recognized deferred tax (93,669) 26,851 (2,908) (1,349) 3,856 (67,219) liability The income tax expense comprises the following: 2010 2009 USD’000 USD’000 Current tax: Current tax charge on profits for the year 29 182 Adjustments in respect of prior years (61) (323) Total current tax (32) (141) Total deferred tax charge/(credit) 6,260 (25,955) Income tax/(credit) for the year 6,228 (26,096) The Group operates in four tax jurisdictions and the Company and its subsidiaries are subject to tax at the rates in force in their respective countries of tax residence, the Island of Guernsey, the Republic of Cyprus, the Russian Federation or Israel. The Company is a Guernsey incorporated entity, which is registered with the Administrator of Income Tax in Guernsey in order to obtain an exempt status. It is not anticipated that any income, other than bank interest income, will arise in Guernsey and therefore the Company will not be subject to tax in Guernsey. The tax rates for the Group’s subsidiaries are currently 10% in Cyprus, 20% in the Russian Federation and 26% in Israel (2009: 10% in Cyprus, 20% in the Russian Federation and 26% average in Israel). Under certain conditions for the Cypriot subsidiaries interest may be subject to defence contribution at the rate of 10%. In such cases 50% of the same interest will be exempt from corporation tax thus having an effective tax rate burden of approximately 15%. In certain cases dividends received from abroad may be subject to defence contribution at the rate of 15%. 53 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 A reconciliation between the expected and the actual taxation charge is provided below: 2010 2009 USD’000 USD’000 Profit/(loss) before taxation 35,962 (59,956) Theoretical tax charge at the applicable statutory rate of 20% 7,192 (11,991) Tax effect of items not deductible or assessable for taxation purposes: Loss earned in tax free jurisdictions 2,818 1,186 Income which is exempt from taxation: (5,238) (27,128) - Revenue from sale of Butikovsky Project - (10,663) - Fair value adjustments (3,868) - - Transactions with minority shareholders - (15,481) - Income from compensations related to written off projects (1,370) - - Share-based payment - (984) Non-deductible expenses: 1,456 11,837 - Impairment of property development costs - 9,309 - Unrealized financial losses 1,349 1,265 - Share in result of jointly controlled entity 107 1,263 Income tax charge/(credit) for the year 6,228 (26,096) 11. RECEIVABLES AND PREPAYMENTS 31 DECEMBER 31 DECEMBER 2010 2009 USD’000 USD’000 Written off project costs reimbursement 7,554 - Prepayments 5,467 870 Tax reimbursement 2,587 126 Receivables 550 328 Total receivables and prepayments 16,158 1,324 12. OTHER ASSETS AVAILABLE FOR SALE APARTMENTS OFFICE OTHERS TOTAL INVENTORIES USD’000 USD’000 USD’000 USD’000 At 1 January 2009 30,867 6,218 - 37,085 Transferred from property development costs 7,525 - - 7,525 Disposal through sale (20,630) (4,300) - (24,930) Impairment (4,272) (2,049) - (6,321) Translation difference 1,717 131 - 1,848 At 31 December 2009 15,207 - - 15,207 Additions - - 2,302 2,302 Disposal through sale (13,550) - (164) (13,714) Impairment (265) - - (265) Translation difference (65) - (9) (74) At 31 December 2010 1,327 - 2,129 3,456 This category is identical to the inventories category used previously by the Group. 54 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 13. PROPERTY DEVELOPED FOR SALE The Kingston project was re-classified as trading property under construction for part of its residential premises based on starting construction works after receiving Construction permit and finishing the concept. The reclassification was made in accordance with IAS 2 as for the property in the process of construction for future sale. KINGSTON USD’000 At 1 January 2010 - Re-classification from property development rights and costs (Note 5) 242,619 Translation difference (899) At 31 December 2010 241,720 14. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash in hand, current accounts and amounts placed on deposit, as detailed below: 31 DECEMBER 31 DECEMBER 2010 2009 USD’000 USD’000 Non-interest bearing accounts (in RUR) 1,401 175 Non-interest bearing accounts (mainly in USD) 2,689 271 Short-term deposit (in USD) 38,228 13,618 Short-term deposit (in EUR) 202 3,979 Short-term deposit (in NIS) 620 531 Short-term deposit (in RUR) 12,170 8,916 Total cash and cash equivalents 55,310 27,490 Current accounts held in RUR, and mainly in USD, are non-interest bearing accounts. Interest is earned on the amounts on deposit at market interest rates (at rates between 0.03% per annum on short term deposits in U.S. Dollar – 4% per annum on short term deposits in Russian Rubles). The Directors intend to continue placing surplus cash resources on deposits and with various money market funds with international financial institutions until such time as required by the business operations. 15. LOANS On 26 March 2008, the Group’s subsidiary LLC Central Market entered into a loan facility of USD 100,000,000 with JSC “Commercial Savings Bank of the Russian Federation” (“Sberbank”), the largest bank in Russia. The loan is secured against the proprietary rights to the Tsvetnoy Development, the share capital of LLC Central Market and the right of a long term land lease on which Tsvetnoy project has been built. The loan facility has no recourse to the Company. The loan is being used to fund the construction of the Tsvetnoy Project. 55 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 The loan agreement that is in place as at 31 December 2010 is set out below: LENDER ORIGINAL TOTAL NOMINAL REPAYMENT OUTSTANDING CURRENCY AMOUNT INTEREST DATE NOMINAL OF LOAN OF LOAN RATE AMOUNT FACILITY 2010 USD’000 USD’000 Sberbank USD 100,000 LIBOR+PREMIUM 25 March 2012 99,480 Total loans 99,480 As at 31 December the current portion of loan in amount of USD 2,490,000 includes interest payable of USD 270,000 (31 December 2009: current portion of loan is nil, interest payables is USD 214,000). The Loan’s fair value as at 31 December 2010 does not differ significantly from its carrying value. The loan agreement that was in place as at 31 December 2009 is set out below: LENDER ORIGINAL TOTAL NOMINAL REPAYMENT OUTSTANDING CURRENCY AMOUNT INTEREST DATE NOMINAL OF LOAN OF LOAN RATE AMOUNT FACILITY 2009 USD’000 USD’000 Sberbank USD 100,000 LIBOR+PREMIUM 25 March 2012 80,607 Total loans 80,607 16. BONDS During 2007 and 2008 the Group completed an unsecured private Series A Bonds (“the Bonds”) placement in Israel of NIS 180,681,000 (USD 48,520,639) and began repurchasing some of its Bonds. As at 31 December 2009, a total of NIS 88,231,000 (USD 23,071,582) of the Bonds were repurchased, for a total consideration of NIS 74,224,781 (USD 19,428,315). As a result of the repurchasing activity, the total outstanding CPI adjusted amount of the Bonds as at 31 December 2009 was NIS 101,337,000 (USD 26,343,000). On 29 November 2010 NIS 30,817,000 (USD 7,728,000) of the Bonds were repurchased. As a result of the repurchasing activity, the total outstanding CPI adjusted amount of the Bonds (including interest) as at 31 December 2010 was NIS 70,114,993 (USD 18,090,000). The Bonds are linked to the Israeli consumer price index (“CPI”). Accordingly, amortized cost is updated for the change in the CPI. The linkage difference is included in the consolidated statement of comprehensive income as finance cost. As at 31 December 2010 and 31 December 2009 there were cross-currency interest swap agreements with First International Bank of Israel in order to protect the Group from possible NIS/USD exchange rate fluctuations. As at 31 December 2010, the aggregate fair value of the cross-currency interest swap agreements was negative 340,000 (as at 31 December 2009: negative of USD 1,175,000). These amounts were included into trade and other payables (Note 17). 56 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 BONDS BONDS NIS’000 USD’000 At 1 January 2009 100,248 25,540 Total proceeds from the re-purchasing issue (2,240) (578) Discount (560) (138) Re-purchasing capital amount (2,800) (716) Consumer Price Index adjustments 3,889 1,036 Translation difference - 483 At 31 December 2009 101,337 26,343 Re-purchasing capital amount (30,817) (7,728) Consumer Price Index adjustments (929) (240) Translation difference - (420) At 31 December 2010 69,591 17,955 As at 31 December 2010, the CPI adjusted amount of accrued interest is NIS 524,000 (USD 135,000). As at 31 December 2009, the CPI adjusted amount of accrued interest is NIS 33,000 (USD 9,000). As at 31 December 2010, the current portion of CPI adjusted amount of Bonds is NIS 35,320,000 (USD 9,113,000). As at 31 December 2009, the current portion of CPI adjusted amount of Bonds was nil. 17. TRADE AND OTHER PAYABLES 31 DECEMBER 31 DECEMBER 2010 2009 USD’000 USD’000 Trade payables 5,694 4,286 Guarantee deposits 875 - Staff payables 343 2,430 Bonds interest accrued - 9 Cross - currency interest swap 340 1,175 Interest to Sberbank - 214 Tax payables 695 402 Total trade and others payables 7,947 8,516 18. SHARE CAPITAL Share capital The Company’s share capital is denominated in British pounds (“GBP”). The Company’s shares are stated at their par (nominal) value. NOMINAL CARRYING NUMBERS AMOUNT IN VALUE IN OF SHARES ACTUAL GBP USD Share capital as at 31 December 2008 125,786,978 0.51 1.01 Share capital as at 31 December 2009 125,786,978 0.51 1.01 Issued and fully paid ordinary shares with a nominal value of 36,000,000 0.14 0.22 0.000000004 GBP each during 2010 Share capital as at 31 December 2010 161,786,978 0.65 1.23 The share capital of the Company comprises only ordinary shares, all of which bear voting rights and the right to dividends as approved at the General Meeting of the Company. No other additional rights or preferences are attached to this class of shares. 57 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 The shareholding structure as at 31 December 2010 was as follows: OWNERSHIP TOTAL IN THE COMPANY SHAREHOLDERS SHARES HELD % D.E.S. Commercial Holdings Limited 65,063,393 40.22 Synergy Classic Limited 36,000,000 22.25 SSF III Fathers Holdings limited 10,675,599 6.60 Prosperity Capital Management Limited 9,120,561 5.64 Kensington Gore Limited 8,702,137 5.38 Lansdowne Partners International Limited 7,696,898 4.76 Other (none individually greater than 3%) 24,528,390 15.15 Total 161,786,978 100.00 The shareholding structure as at 31 December 2009 was as follows: OWNERSHIP TOTAL IN THE COMPANY SHAREHOLDERS SHARES HELD % D.E.S. Commercial Holdings Limited 65,063,393 51.73 SSF III Fathers Holdings limited 10,675,599 8.49 Kensington Gore Limited 8,702,137 6.92 Lansdowne Partners International Limited 5,849,094 4.65 Other (none individually greater than 3%) 35,496,755 28.21 Total 125,786,978 100.00 Share premium The share premium represents the excess of contributions received over the nominal value of the shares issued. During 2010, the Company issued 36,000,000 additional ordinary shares, which were acquired by Synergy, a company incorporated under the laws of the British Virgin Islands, for a total consideration of USD 90,000,000, which were paid fully in July 2010. In accordance with the Subscription and Option Agreement signed between Synergy and the Company, due to a number of conditions the amount received is recognized as liability. 2010 USD’000 Proceeds from issue of additional shares 90,000 Interest expenses during 2010 6,944 Total put option liability 96,944 19. OTHER OPERATING INCOME 2010 2009 USD’000 USD’000 Gain arising on cancellation of co-investment agreement and - 55,200 restructuring purchase consideration payable Transactions with minority shareholders - 22,206 Income from compensations related to written off projects 6,852 - Income from other assets available for sale 2,085 2,464 Rental income 1,035 1,103 Other operating income 825 4,989 Total other operating income 10,797 85,962 58 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 In 2010 the Group obtained a court decision regarding the rights for compensation from the government for part of the costs relating to cancellation of investment contract for the Dream project in 2009 in amount of USD 6,852,000. In 2009 gain arising on cancellation of co-investment agreement and restructuring purchase consideration payable is the result of releasing Group’s obligations to transfer 3,000 square meters of premises within the Chelsea Project. Transaction with minority shareholders for the same period is the result of transferring 9% of the issued share capital of Sucreti Holdings Limited. 20. GENERAL AND ADMINISTRATIVE EXPENSES 2010 2009 USD’000 USD’000 Wages and salaries 3,290 8,731 Consulting and other professional services 4,521 5,014 Representation and office consumables expenses 925 2,833 Property tax 507 521 Depreciation 138 481 Other 734 81 Total general and administrative expenses 10,115 17,661 21. FINANCE INCOME AND COSTS 2010 2009 Finance income USD’000 USD’000 Interest income 1,550 1,924 Foreign exchange gain 14,467 27,895 Bank interest 428 575 Gain on re-purchase of bonds - 138 Derivative transaction 28 - Total finance income 16,473 30,532 2010 2009 Finance costs USD’000 USD’000 Foreign exchange loss 15,937 24,990 Bank charges 220 318 Interest expenses 9,422 1,997 Derivative transaction - 331 Consumer Price Index adjustments on bonds 655 1,036 Total finance costs 26,234 28,672 22. EARNINGS PER SHARE The basic and diluted earnings per share have been calculated by dividing the net loss attributable to the owners of the Company by the weighted average number of ordinary shares outstanding during the period. 59 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 RESULT SHARES PER SHARE USD’000 USD Profit attributable to ordinary owners of the Company for the year ended 31 December 2010 25,918 Weighted average number of ordinary shares outstanding during the year ended 31 December 2010 142,594,721 Basic and diluted earnings per share for the loss attributable to the owners of the Company during the year (expressed in USD per share) 0.18 The basic and diluted earnings per share for 2009 are presented below: RESULT SHARES PER SHARE USD’000 USD Loss attributable to ordinary owners of the Company for the year ended 31 December 2009 (24,732) Weighted average number of ordinary shares outstanding during the year ended 31 December 2009 125,786,978 Basic and diluted earnings per share for the loss attributable to the owners of the Company during the year (expressed in USD per share) (0.20) 23. CONTINGENCIES, COMMITMENTS AND OPERATING RISKS Legal proceedings English court proceedings brought against Synergy Classic Limited ("Synergy"). In May 2010, the Company entered into a subscription and option agreement (the “SOA”) with Synergy Classic Limited (“Synergy”) pursuant to which Synergy subscribed for 36 million Shares between May and June 2010. In addition, Synergy entered into a shareholders’ agreement (the “SHA”) with D.E.S. Commercial Holdings Limited (“DES”), the Company’s largest shareholder. In October 2010, Mr Shura and Synergy issued a public announcement criticising the management of the Company. In particular, Mr Shura and Synergy criticised the Company’s corporate governance procedures and the influence of DES on the Company. Simultaneously, Synergy also sought to exercise a put option under the SOA pursuant to which Synergy claimed a right to sell 1.8 million Shares to a member of the Group for US$99 million as a result of an alleged breach of the SOA by the Company for failure to allot and issue certain Shares to Synergy by a required deadline. In turn, the Company and DES commenced litigation in the High Court of Justice (England and Wales) against Synergy on 29 October 2010 for a breach of the SOA and the SHA. In particular, the Company alleges that the purported exercise of the put option by Synergy is invalid and is seeking a declaration from the Court that no right to exercise such put option has arisen. In addition, both the Company and DES allege that Synergy has breached its obligations of confidentiality under the SOA and the SHA and may breach those obligations in the future and that Synergy has acted to impede Admission, through the disclosure of confidential information and through publicly questioning the Company’s plans for Admission. Specifically, the Company alleges that Synergy and Mr Shura have wrongfully disclosed confidential information, both to shareholders and to the press, causing harm to the perception, reputation and brand of the Company, its various business ventures and its interactions with banks, lenders, and other third parties. The reliefs sought are an injunction restraining any further breach of confidence, an injunction to restrain Synergy from any actions that would impede Admission, damages and an account of profits. Where damages are claimed these have not yet been quantified. In order to advance resolution of this matter, RGI has proposed to Synergy that the validity of the exercise of the put option be determined by the Court as a preliminary matter. However, Synergy has rejected this approach and the matter remains unresolved. By way of Defence and Counterclaim filed on 8 November 2010, Synergy pleaded that the exercise of the put option is valid (and Synergy is entitled to specific performance of the such put option) and that any breach of confidence was permitted and/or reasonably required. Synergy also denies impeding Admission. In addition, 60 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 Synergy has claimed that the Company has misapplied the proceeds of Synergy’s $90m investment, contrary to the terms of the SOA. Synergy is seeking damages for breach of contract in an unspecified amount, along with a declaration and an order restraining the Company, DES and additional defendants from misapplying the proceeds of Synergy’s investment in RGI. The Company has denied all of Synergy’ allegations and intends to proceed with its claims against Synergy and to defend the counterclaim made by Synergy. Having consulted extensively with internal and external legal counsel on this matter management has concluded that no material losses will be incurred and accordingly no provision has been made in these consolidated financial statements. Arbitration proceedings brought against Petr Olegovich Shura ("Mr Shura"). The Company commenced Arbitration proceedings, under the London Court of International Arbitration Rules, against Mr Shura on 29 October 2010. The seat of the Arbitration is London. As is the case with proceedings conducted under the London Court of International Arbitration Rules this matter is confidential to the parties. The proceedings concern alleged breaches of Mr. Shura’s letter of appointment as a non-executive Director of the Company. The proceedings are continuing, no defence has yet been filed by Mr. Shura and no hearing date has been set. From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and both internal and external professional advice, the Directors are of the opinion that no material losses will be incurred in respect of claims received. Tax legislation The Company has exempt tax status in Guernsey. The Directors manage the Group in such a manner that this is not expected to change. The Group also operates in the Cypriot, Israeli and Russian tax jurisdictions. Russian tax and customs legislation is subject to varying interpretations and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant authorities. The Russian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. Russian transfer pricing legislation that was introduced on 1 January 1999 allows the tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controllable transactions, provided that the transaction price differs from the market price by more than 20%. Controllable transactions include transactions with interdependent parties, as determined under the Russian Tax Code, all cross-border transactions (irrespective of whether they performed between related or unrelated parties), transactions where the price applied by a taxpayer differs by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time and barter transactions. There is no formal guidance as to how these rules should be applied in practice. The arbitration court practice in this respect is contradictory. Tax liabilities arising from intercompany transactions are determined using actual transaction prices. It is possible with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the changes in the approach of the Russian tax authorities, that such transfer prices could potentially be challenged in the future. 61 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 The Group considers it has met the organizational, legal, tax filing and other obligations of the countries in which the Company and its subsidiaries are incorporated. The Directors believe that their interpretation of the relevant legislation is appropriate and the Group tax, currency legislation and customs positions will be sustained. Accordingly, at 31 December 2010 no provision for tax liabilities was recorded. Capital expenditure commitments At 31 December 2010, the Group had contractual capital expenditure commitments in respect of property development totaling USD 25,268,039 (2009: USD 24,558,000). Guarantees During the reporting period the Group has not granted or provided collateral to third parties, except for the deal with Sberbank in relation to the Tsvetnoy Project (See Note 15). Insurance policies The Group holds insurance policies in relation to its assets, operations, or in respect of public liability or other insurable risk. The total insurance coverage is USD 76,811,310 (2009: USD 91,056,439). Environmental matters The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognized immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material. Under existing legislation, the Directors believe that there are no significant liabilities for environmental damage. Operating environment of the Group The Russian Federation displays certain characteristics of an emerging market, including relatively high inflation and high interest rates. The tax, currency and customs legislation within the Russian Federation are subject to varying interpretations and frequent changes, and other legal and fiscal impediments contribute to the challenges faced by entities currently operating in the Russian Federation. The recent global financial crisis has had a severe effect on the Russian economy and the financial situation in the Russian financial and corporate sectors significantly deteriorated since mid-2008. In 2010, the Russian economy experienced a moderate recovery of economic growth. The recovery was accompanied by a gradual increase of household incomes, lower refinancing rates, stabilisation of the exchange rate of the Russian Rouble against major foreign currencies, and increased liquidity levels in the banking sector. The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the government, together with tax, legal, regulatory, and political developments. Management is unable to predict all developments in the economic environment which could have an impact on the Group’s operations and consequently what effect, if any, they could have on the financial position of the Group. The market in Russia for many types of real estate has been severely affected by the volatile global financial markets. As such the carrying value of the property development portfolio has been updated to reflect market conditions at the end of the reporting period. However, in certain cases, the absence of reliable market-based data has required the Group to amend its valuation methodologies. Management is unable to reliably determine the effects on the Group’s future financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. Management believes it is taking all the 62 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 necessary measures to support the sustainability and growth of the Group’s business in the current circumstances. Management determined impairment provisions by considering the economic situation and outlook at the end of the reporting period. Provisions for trade receivables are determined using the ‘incurred loss’ model required by the applicable accounting standards. These standards require recognition of impairment losses for receivables that arose from past events and prohibit recognition of impairment losses that could arise from future events, no matter how likely those future events are. 24. RELATED PARTY TRANSACTIONS Parties are generally considered to be related if the parties are under common control or if one party has the ability to control the other party or can exercise significant influence or joint control over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The nature of the related party relationships for those related parties with whom the Group entered into significant transactions or had significant balances outstanding as of 31 December 2010 are detailed below: Loans Loans issued and related interest during 2010: LAFAR STOLICHNOE MANAGEMENT PODVORIE LIMITED LLC USD’000 USD’000 Total outstanding loans and accrued interest due from related parties on 1 January 2010 5,070 19,496 Loans issued to/repaid by related parties during the year 19,504 (16,164) Interest income during 2010 1,429 98 Translation difference - (149) Total outstanding loans and accrued interest due from related parties on 31 December 2010 26,003 3,281 Loans issued and related interest during 2009: LAFAR STOLICHNOE MANAGEMENT LIMITED PODVORIE USD’000 LLC USD’000 Total outstanding loans and accrued interest due from related parties on 1 January 2009 3,303 18,105 Loans issued to related parties during the year 1,574 76 Interest income during 2009 193 1,735 Translation difference - (420) Total outstanding loans and accrued interest due from related parties on 31 December 2009 5,070 19,496 Lafar Management Limited is a jointly controlled entity in which the Group holds an economic interest of 50%. Litonor Financial Limited holds the remaining 50% of the voting shares of Lafar Management Limited. Lafar Management Limited holds 100% of the share capital of its Russian subsidiary, LLC Stolichnoe Podvorie. Key management remuneration In the reporting period, the Directors of the Group received compensation in the form of salary and other benefits classified as short-term in accordance with IAS 19 “Employee Benefits”. The total remuneration and benefits accrued to the Directors was USD 4,515,220 (2009: USD 4,190,702). There are no other individuals who are not members of the Board of Directors who are considered to be key management in the Group. 63 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 DIRECTORS’ REMUNERATION AND BENEFITS 2010 2009 USD’000 USD’000 Boris Kuzinez, Chief Executive Officer 1,841 1,875 Jacob Kriesler, Non-Executive Chairman 1,602 1,250 Emanuel Kuzinez, Director 509 625 Yoram Evan, Chief Financial Officer 505 381 Timothy Fenwick, Non-Executive 29 30 Rafael Eldor, Non-Executive 29 30 Total remuneration and benefits accrued on 31 December2010 4,515 4,191 As at 31 December 2010 the remaining part of awards which were granted to executive Directors as a part of its Long Term Incentive Plan is 1,450,000 shares. The total executive Directors’ award value was estimated at USD 2,370,000, with the portion amortized in the 2010 year being USD 387,582. Other transactions with related parties during 2010: TRANSACTIONS OUTSTANDING VALUE BALANCES AT 31 DURING DECEMBER 2010 2010 USD’000 USD’000 Construction agreements (expenditure for the Group) - 357 Rent contracts (revenue for the Group) 8 - Service contracts (expenditure for the Group) 120 - All of the transactions listed above are with parties beneficially owned by the Group’s founder, Chief Executive and major shareholder, Boris Kuzinez. The amounts relate to rent and development services in accordance with rental, construction and design agreements between those entities and the Group. Transactions with related parties during 2009 were as follows: TRANSACTIONS OUTSTANDING VALUE BALANCES AT 31 DURING DECEMBER 2009 2009 USD’000 USD’000 Construction agreements (revenue for the Group) 174 - Construction agreements (expenditure for the Group) 64 355 Rent contracts (revenue for the Group) 13 - Service contracts (expenditure for the Group) 120 - 25. EVENTS SUBSEQUENT TO THE STATEMENT Acquisition of New Development Site On 1 February 2011 the Group acquired 100% of the shares in Naltadis Limited, Cyprus, for a purchase consideration of $9.39 million. At the acquisition date Naltadis Limited was the sole shareholder of LLC Kvazar, which held development rights for the newly acquired development site. The New Project is a proposed green field residential and retail development, comprising two land plots of 10 and 7.1 hectares, located in the Moscow region close to the Kingston Development. The aggregate permitted gross buildable area of the new project is estimated to be circa 150,000 sq.m., bringing the aggregate area of RGI's development portfolio to approximately 2,230,000 sq.m. RGI may act as sole developer of the site, using construction loans as the primary source of funding, or develop the project in partnership with a third party. RGI intends to develop the residential part of the 64 R.G.I. International Limited ANNUAL FINANCIAL REPORT 2010 development and will explore various possibilities regarding the retail part once the general design is completed. The acquisition is in line with RGI's strategy to acquire new development sites where there is an attractive economic opportunity to develop new residential and retail properties. The new project provides RGI with an excellent opportunity to enlarge the scale and potential returns from the premium economy residential model which is pioneering at the neighboring Kingston site. Khilkov Development The proposed development plan for Khilkov is based on RGI’s possession of an Investment Contract and ownership over the existing building. The investment contract expired on 31st January 2011 and the Group has applied for this to be reviewed. RGI is awaiting a decision from the Moscow Government. Financing obtained for Kingston development On 25 May 2011 the Group signed a loan agreement with Sberbank of Russia for RUR 4.922 m, approximately US$175m, to finance construction of the first phase of the Kingston residential community development. The loan was obtained with an interest rate of 12.5% p.a. and is repayable not later than 23 May 2014.