2       Basis of preparation

General information and statement of compliance with International Financial Reporting Standards (IFRS)

The financial statements of the company and the consolidated financial statements of the group have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU), and in accordance with the Companies Act, Cap. 386. 

The financial statements have been prepared on the accrual basis and under the historical cost basis, except for the investment properties which are carried at fair value.

The financial statements are presented in euro (€), which is also the functional currency of the group and the company.

4.2    Basis for consolidation

The consolidated financial statements consolidate those of the parent company and its direct subsidiary (together referred to as the ‘group’). The subsidiary has a reporting date of 31 December.

Control exists when the company has power over the investee, is exposed or has rights to variable returns from it involvement with the investee and has the ability to use its power over the investee to affect the amount of its returns.  In assessing control, potential voting rights that give the company the current ability to direct the investee’s relevant activities are taken into account. 

The group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control.  Consolidation of a subsidiary begins when the group obtains control over the subsidiary and ceases when the group loses control of the subsidiary.  Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the group gains control until the date the group ceases to control the subsidiary.

Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance.  When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the group’s accounting policies.  All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transaction between members of the group are eliminated in full on consolidation.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.  If the group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, while any resultant gain or loss is recognised in profit or loss.  Any investment retained is recognised at fair value.

Intra-group balances, transactions and unrealised gains and losses on transactions between the group companies are eliminated on consolidation.  Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from the group perspective.  Amounts reported in the financial statements of the subsidiary have been adjusted where necessary to ensure consistency with the accounting policies adopted by the group.

Profit or loss and other comprehensive income of subsidiaries acquired or disposed during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable.

The consolidated financial statements have been prepared from the financial statements of the following companies comprising the group:

The registered office of the above-mentioned companies is situated at 2, St Georges Block A, St Augustine Street, St Julians STJ 3310, Malta.

4.3    Business combinations under common control

A business combination under common control is accounted for by applying the pooling of interests method (predecessor accounting).  Under this method, the group has two options of combining the financial statement items:

The group has opted to not restate the financial information for the prior periods.

4.4    Revenue recognition

Revenue pertains to rental income from the group’s and company’s investment properties.

To determine whether to recognise revenue, the group and company follow a 5-step process:

The following specific, recognition criteria must also be met before revenue is recognised.

Rental income

Rental income arising from operating leases is recognised in profit or loss as it is earned. When lease payments are entirely variable and calculated as a fixed percentage of the lessee’s revenue, rental income is recognised in the period in which the underlying revenue is generated by the lessee. As the lease payments are contingent on the lessee’s revenue, they are not subject to straight-line recognition.

The group and the company do not have any fixed or minimum lease payments under these arrangements.

Interest income

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.

4.5    Expense recognition

Expenses are recognised in the income statement upon utilisation of the service or at the date of their origin.

4.7    Intangible assets

An acquired intangible asset is recognised only if it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity and the cost of the asset can be measured reliably. An intangible asset is initially measured at cost, comprising its purchase price and any directly attributable cost of preparing the asset for its intended use.

Intangible assets including, patents, trademarks and other intellectual property rights that are acquired by the group and have finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses.

Amortisation is calculated to write off the cost of the intangible asset using the straight-line method over its expected useful life.

Amortisation is based on a useful life of 9 years and is charged to statement of profit or loss and other comprehensive income. Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.

4.8    Property, plant and equipment

Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditure that is directly attributable to the acquisition of the asset and any other costs directly attributable to bringing the assets to a working condition for their intended use, and the costs of dismantling and removing the items and restoring the site on which they are located.

Depreciation is charged to the statement of profit or loss and other comprehensive income on a straight-line basis over the estimated useful lives of items of property, plant and equipment, and major components are accounted for separately. The estimated useful lives are as follows:

Motor vehicles — 20% straight line

Improvements — 10% straight line

Electrical and plumbing — 6.67% straight line

Furniture and fixtures — 10% straight line

Gains and losses on the disposal or retirement of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount at the date of disposal. The gains or losses are recognised in the statement of profit or loss and other comprehensive income as other operating income or other operating costs, respectively.

4.9    Investment in subsidiary

Investment in subsidiary is included in the company’s statement of financial position at cost less any impairment loss that may have arisen.  Dividend income from investment in subsidiary is recognised to the extent of distributions received from the company from post-acquisition profits.  Distributions received in excess of such profits are regarded as a recovery of the investment and are recognised as a reduction of the cost of the investment.

At the end of each reporting period, the company reviews the carrying amount of its investment in subsidiary to determine whether there is any indication of impairment and, if any such indication exists, the recoverable amount of the investment is estimated.  An impairment loss is the amount by which the carrying amount of an investment exceeds its recoverable amount.  The recoverable amount is the higher of fair value less costs to sell and value in use.  An impairment loss that has been previously recognised is reversed if the carrying amount of the investment exceeds its recoverable amount.

An impairment loss is reversed only to the extent that the carrying amount of the investment does not exceed the carrying amount that would have been determined if no impairment had been previously recognised.  Impairment losses and reversals are recognised in the statement of profit or loss and other comprehensive income.

4.10   Investment property

Investment property is property held to earn rentals or for capital appreciation or both. Investment property is recognised as an asset when it is probable that the future economic benefits that are associated with the investment property will flow to the entity and the cost can be measured reliably. Investment property is initially measured at cost, including transaction costs. Subsequent to initial recognition, investment property is stated at fair value at the end of the reporting period. Investment property is revalued periodically with resulting gains or losses arising from changes in the fair value of investment property are recognised in profit or loss in the period in which they arise.

Investment property is derecognised on disposal or when it is permanently withdrawn from use and no future economic benefits are expected from its disposal. Gains or losses on derecognition represent the difference between the net disposal proceeds, if any, and the carrying amount and are recognised in profit or loss in the period of derecognition.

4.11   Financial instruments

Recognition and derecognition

Financial assets and financial liabilities are recognised when the group and company become a party to the contractual provisions of the instrument.

Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires.

4.12    Impairment testing on property, plant and equipment and investment property

All assets are tested for impairment, except for investment property measured at fair value. At the end of each reporting period, the carrying amount of assets is reviewed to determine whether there is any indication or objective evidence of impairment, as appropriate, and if any such indication or objective evidence exists, the recoverable amount of the asset is estimated.

An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.

In the case of assets tested for impairment, the recoverable amount is the higher of fair value less costs to sell (which is the amount obtainable from sale in arm’s length transaction between knowledgeable, willing parties, less the costs of disposal) and value in use (which is the present value of the future cash flows expected to be derived, discounted using a pre–tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset). Where the recoverable amount is less than the carrying amount, the carrying amount of the asset is reduced to its recoverable amount, as calculated. Impairment losses are recognised immediately in profit or loss.

In the case of assets tested for impairment, an impairment loss recognised in a prior year is reversed if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. Impairment reversals are recognised immediately in profit or loss.

4.13    Income taxes

Tax expense recognised in the income statement comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in equity.

Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting periods, that are unpaid at the reporting date. Current tax is payable on taxable profit, which differs from profit or loss in the financial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period.

4.14   Cash and cash equivalents

Cash and cash equivalents comprise demand deposits with bank.

4.15   Equity

Share capital is determined using the nominal value of shares that have been issued.

4.16   Provisions

Provisions are recognised when present obligations as a result of a past event will probably lead to an outflow of economic resources from the group and amounts can be estimated reliably. Timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive commitment that has resulted from past events; for example, product warranties granted, legal disputes or onerous contracts. Restructuring provisions are recognised only if a detailed formal plan for the restructuring has been developed and implemented, or management has at least announced the plan’s main features to those affected by it. Provisions are not recognised for future operating losses.

Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Provisions are discounted to their present values, where the time value of money is material.

All provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.

In those cases where the possible outflow of economic resources as a result of present obligations is considered improbable or remote, no liability is recognised.

4.17   Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

For financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the group and company determines when transfers are deemed to have occurred between Levels in the hierarchy at the end of each reporting period.