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SP FINANCE P.L.C.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31st DECEMBER 2021
Company No. C- 89462
SP FINANCE P.L.C.
CONTENTS
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PAGE
Report of the directors
1 to 5
Statement of compliance with the principles of good corporate governance
6 to 9
Statement of profit or loss and other comprehensive income
10
Statement of financial position
11 to 12
Statement of changes in equity
13
Statement of cashflows
14 to 15
Notes to the financial statements
16 to 55
Independent auditors’ report
56 to 63
SP FINANCE P.L.C.
REPORT OF THE DIRECTORS
_____________________________________________________________________________________________
______________________________________________________________________________________________________
6
Key Risks
The key risks that apply to the Company and the Group are those inherent in the operation of a hospitality business and include both risks arising from competitive pressures from similar establishments located in Malta as well as risks arising from Malta’s general attractiveness as a holiday destination.
Since February 2020, the Group has faced an additional risk emanating from the travel disruptions caused by the COVID-19 pandemic. The impact of COVID-19 and the associated additional risks for the Company and the Group are discussed in detail in the next paragraph.
COVID-19 and Statement pursuant to Capital Markets Rule 5.62
The COVID-19 pandemic that impacted the world since the beginning of 2020 has had severe repercussions on global economies.  The tourism industry was particularly badly hit due to travel restrictions imposed by governments acting on health authorities’ advice.  In Malta, tourist arrivals which totalled 2.77 million in 2019, decreased to 660k in 2020, representing a decrease of 76%.  In 2021, tourism figures bounced back by 47% to reach 969k, which however still represents only 35% of the tourist arrivals in the record year of 2019.  It is significant to note that the latest figures for January and February 2022 indicate that during these two months, tourist arrivals are at approximately 42% of the tourist arrivals in the pre-pandemic period of January and February 2020.
As in previous years, the Group generates its revenue almost exclusively through the operation of two hotels.  It does not have, and is not expected to have in the foreseeable future, any alternative sources of revenue that can mitigate the negative effects brought about by a general downturn in the travel industry, such as the one caused by COVID-19.  Its financial performance is therefore inextricably linked to the general performance of the Maltese tourism sector.
In this regard, it is encouraging to note that in 2021 the Group’s revenue reached €2.025 million, representing a 71% increase over the 2020 revenue of €1.181 million.  This result indicates that the Group managed to grab a proportionately larger share of the country’s tourist numbers, which as stated above, increased by 47% between 2020 and 2021.
It is also significant that during a year in which tourism figures were still at 35% of pre-pandemic levels, the Group managed to register a gross profit of €396k compared to a gross loss of €14k in 2020.
Within the context of the dire situation the tourism sector is still in, these results are encouraging and are testimony to the significant efforts made by management and staff during the last couple of years to survive the difficult period which arose from circumstances beyond their control and be well placed on the market to take advantage of the upturn in tourism that is expected in the coming months and years.
It is pertinent to acknowledge that various measures introduced by the authorities were crucial to the Group’s survival during the several months when the hotels were closed for business. Among the most important measures were:
-The Wage Supplement Scheme, without which the Group would have had to lay off most of its workers;
-Deferment of taxes, which was crucial to maintain adequate levels of working capital;
-The COVID-19 Guarantee Scheme operated by the Malta Development Bank, through which it obtained additional funds of €2.1m to finance its working capital;
 
In view of the long-term duration of the COVID-19 pandemic, the directors have made a thorough evaluation of its short- to medium-term likely impact on the Group’s finances, especially with a view to determine the probability that the Group will continue with its operations in the foreseeable future.
As noted above, in 2021 the Group managed to increase its gross revenue by 71% over 2020 and register a gross profit of just under €400k.  This, in the directors’ view, clearly points to a situation whereby the Group’s hotel operations and consequently its financial results are set to pick up at a pace which at least equals and most probably exceeds the recovery pace of Malta’s tourism sector.  In turn, such recovery clearly depends on how the COVID-19 pandemic evolves and how the authorities respond through the relaxation of travel and assembly restrictions.
Impairment of financial assets
In terms of IFRS 9, the Group and the Company applies an expected credit loss (“ECL”) model as opposed to an incurred credit loss model under IAS 39. As from 1 January 2018, the Group and the Company has to assess on a forward-looking basis the expected credit loss associated with its debt instruments carried at amortised cost and fair value through other comprehensive income.
For trade and other receivables, the Group and the Company applies the simplified approach and recognises lifetime ECL. The ECLs on these financial assets are estimated using a provision matrix based on the respective Companies’ historical credit loss experience based on the past due status of the debtors, adjusted for factors that are specific to the debtors, general economic conditions of the industry in which the debtors operate and an assessment of both the current as well as the forecast direction of conditions at the reporting date. The impact on the Group and the Company of this change in the impairment model is not significant in view of the high quality of the counterparties to which the Group and the Company is exposed to credit risk, and the loss allowance is not material.
For all other financial instruments, the Company uses the general approach, which requires an assessment as to whether the counterparty has experienced a significant increase in credit risk since initial recognition. This assessment forms the basis as to whether lifetime ECL should be recognised and is based on significant increases in the likelihood or risk of a default occurring since initial recognition instead of on evidence of a financial asset being credit-impaired at the reporting date or an actual default occurring. As at reporting date, the credit risk on the Group’s and the Company’s financial instruments has not increased significantly since initial recognition and consequently the Group and the Company measures the loss allowance at an amount equal to 12-month ECL (‘12m ECL’).
Hospitality
Revenue from hospitality includes revenue from accommodation and other ancillary services. The substantial majority of services are provided to customers during their stays in the Group’s hotels, and, depending on the type of booking, some services, would generally be amalgamated into one ‘contract’ (for example, bed and breakfast).
Each of the services rendered is assessed to be a distinct performance obligation, and if applicable, the Group allocates the transaction price to each of the services rendered to the customer on a relative basis, based on their stand-alone selling price. Revenue from such operations is recognised over time since the customer benefits as the Group is performing; the majority of revenue relates to accommodation (i.e., the amount allocated to such performance obligation is recognised over the customer’s stay at the respective hotel).
Dividends received
Dividends income from investment is recognised when the shareholders’ right to receive payment has been established.
Management services
The Company provides management services to its subsidiaries. Such services have been assessed to fall within scope of the IFRS 15 series guidance such that they are recognised as one performance obligation over time during the contract term.
Borrowing costs
Borrowing costs include the costs incurred in obtaining external financing. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised from the time that expenditure for these assets and borrowing costs are being incurred and activities that are necessary to prepare these assets for their intended use or sale are in progress. Borrowing costs are capitalised until such time as the assets are substantially ready for their intended use or sale. Borrowing costs are suspended during extended periods in which active development is interrupted. All other borrowing costs are recognised as an expense in profit or loss in the period in which they are incurred.
Leases
Where the Group is a lessee, with the exception of short-term leases and leases of low value assets, the Group recognises a right-of-use asset and a corresponding liability at the date at which a leased asset is available for use by the Group. Further details on the Group’s accounting policy, and a summary of its leasing arrangements as a lessee is described in note 12.
The Group has applied COVID-19-Related Rent Concessions – Amendment to IFRS 16. The Group applies the practical expedient allowing it not to assess whether eligible rent concessions that are a direct consequence of the COVID-19 pandemic are lease modifications. The Group applies the practical expedient consistently to contracts with similar characteristics and in similar circumstances. For rent concessions in leases to which the Group chooses not to apply the practical expedient, or that do not qualify for the practical expedient, the Group assesses whether there is a lease modification.
Lease income from operating leases where the Group or the Company is a lessor is recognised in income on a straight-line basis over the lease term. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the underlying asset and recognised as expense over the lease term on the same basis as lease income. The respective assets leased out under operating leases are included in investment property in the balance sheet.
Modifications to operating leases where the Group is the lessor are accounted for as a new lease from the effective date of the modification, considering any prepaid or accrued payments relating to the original lease as part of the lease payments for the new lease.
SP FINANCE P.L.C.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
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26
Principal accounting policies (continued)
Taxation
Current and deferred tax is recognised in profit or loss, except when it relates to items recognised in other comprehensive income or directly in equity, in which case the current and deferred tax is also dealt with in other comprehensive income or in equity, as appropriate.
Current tax is based on the taxable result for the period. The taxable result for the period differs from the result as reported in profit or loss because it excludes items which are non-assessable or disallowed and it further excludes items that are taxable or deductible in other periods. It is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. However, deferred tax is not accounted for if it arises from the 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 tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
The deferred tax liability in relation to investment property that is measured at fair value is determined assuming the property will be recovered entirely through sale.
Deferred tax in relation to the revaluation of land and buildings is charged or credited to other comprehensive income (to the extent that the revaluation is recognised in other comprehensive income). For buildings, deferred tax is recognised on the basis that the tax will be recovered through use (i.e., the corporate rate of tax in Malta), whilst land is expected to be recovered through sale. Deferred income tax on the difference between the actual depreciation on the property and the equivalent depreciation based on the historical cost of the property is realised through the income statement.
Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets, including deferred tax assets for unused tax losses and unused tax credits carried forward, are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences (or the unused tax losses and unused tax credits) can be utilised to the period when the asset is realised or the liability is settled based on the tax rates that have been enacted by the balance sheet date. Deferred tax assets and liabilities are offset when the Group’s companies have a legally enforceable right to settle its current tax assets and liabilities on a net basis.
Foreign currencies
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Euro, which is the Company’s functional and presentation currency. Transactions denominated in currencies other than the functional currency are translated at the exchange rates ruling on the date of transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are re-translated to the functional currency at the exchange rate ruling at year-end. Exchange differences arising on the settlement and on the re-translation of monetary items are recognised in profit or loss. Non-monetary assets and liabilities denominated in currencies other than the functional currency that are measured at fair value are re-translated using the exchange rate ruling on the date the fair value was determined. Non-monetary assets and liabilities denominated in currencies other than the functional currency that are measured in terms of historical cost are not re-translated. Exchange differences arising on the translation of non-monetary items carried at fair value are included in profit or loss for the period.
SP FINANCE P.L.C.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
_____________________________________________________________________________________________
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27
Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker (“CODM”).
The board of SP Finance PLC, (“the Board”) assess the financial performance and position of the Group and make strategic decisions. The Board has been identified as being the CODM.
Related parties
Related parties are those persons or bodies of persons having relationships with the Company as defined in International Accounting Standard No. 24.
Government grants
Grants from government are recognised at their fair value when there is a reasonable assurance that the grant will be received, and the Group will comply with all attached conditions.
Government grants related to income are recognised in profit or loss over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis. Such grants are presented as part of profit or loss.
Government grants related to assets are presented in the statement of financial position by deducting the grant in arriving at the carrying amount of the asset. The grant is recognised as income over the life of the depreciable asset by way of a reduced depreciation charge.
3.Critical accounting estimates and judgements
Estimates and judgements are continually evaluated and based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances.
In the opinion of the Group’s directors, except as follows, the accounting estimates and judgements made in the course of preparing these financial statements are not difficult, subjective or complex to a degree which would warrant their description as critical in terms of the requirements of IAS1 (revised).
Fair value measurement and valuation processes
The Group’s property, plant and equipment and investment property are measured at fair value. In estimating the fair value of these assets, the Group uses the market comparison approach which obtains market-observable data to the extent that it is available. The Group engages third party qualified valuers to perform the valuation.
i.Amounts recognised in the balance sheet
The balance sheet shows the following amounts relating to leases:
Group
2021
2020
€
€
 
Right-of-use assets
Land and buildings
3,596,455
4,090,095
Equipment
189,079
213,102
Furniture & fittings
305,871
346,656
4,091,405
4,649,853
ii.Amounts recognised in the statement of profit or loss
The statement of profit or loss shows the following amounts relating to leases:
Group
2021
2020
€
€
Depreciation charge of right-of-use assets
Land and buildings
493,640
574,888
Equipment
24,025
24,025
Furniture & fittings
40,782
40,784
558,447
639,697
Interest expense (included in finance cost)
299,451
313,113
Modification gain on financial liabilities
(11,111)
(177,780)
--
The total cash outflow for leases in 2021 was €541,613 (2020: €408,278).
iii.The Group’s leasing activities and how these are accounted for
The Group leases land, buildings, equipment and furniture. The Group’s rental contracts are for fixed periods of 5 to 10 years, but may have extension options as described in (v) below.
Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes.
Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:
•Fixed payments (including in-substance fixed payments), less any lease incentives receivable;
•Variable lease payments that are based on an index or a rate, initially measured using the index or rate as at the commencement date;
•Amounts expected to be payable by the Group under residual value guarantees;
•The exercise price of a purchase option if the Group is reasonably certain to exercise that option; and
•Payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.
Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.
SP FINANCE P.L.C.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
_____________________________________________________________________________________________
______________________________________________________________________________________________________
37
11.Leases (continued)
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is the case for leases in the Group except for furniture leases and some equipment leases, the lessee’s incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.
To determine the incremental borrowing rate, the Group:
•Where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third party financing was received; and
•Makes adjustments specific to the lease, e.g., term and security.
Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Right-of-use assets are measured at cost comprising the following:
•The amount of the initial measurement of lease liability; and
•Any lease payments made at or before the commencement date less any lease incentives received.
Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. While the Group revalue its land and buildings that are presented within property, plant and equipment, it has chosen not to do so for the right-of-use land and buildings held by the Group.
Payments associated with short-term leases and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less.
COVID-19-related rent concessions
The Group negotiated rent concessions with its landlord for property used as San Pawl Hotel as a result of the severe impact of the COVID-19 pandemic during the year. The Group applied the practical expedient for COVID-19-related rent concessions consistently to eligible rent concessions. The amount recognised in profit or loss for the reporting period to reflect changes in lease payments arising from rent concessions to which the Group has applied the practical expedient for COVID-19-related rent concessions is €55,557 (2020: €133,335).
iv.Variable lease payments
The Group’s leases do not contain variable payment terms.
v.Extension and termination options
Extension and termination options are included in the Group’s property leases. These are used to maximise operational flexibility in terms of managing the assets used in the Group’s operations. The extension and termination options held are exercisable only by the Group and not by the respective lessor.
The Group has an option to extend the present leases of land and building for an additional 5 years, however, this has not been reflected in the right-of-use asset or in the lease liability since the Group is currently not reasonably certain that the option for this extension will be exercised. When the Group determines that it is reasonably certain that the option will be exercised, the right-of-use asset and corresponding lease liability will be adjusted for in the Group financial statements.
SP FINANCE P.L.C.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
_____________________________________________________________________________________________
______________________________________________________________________________________________________
38
12.Investment property
Group
Group
Company
Company
2021
2020
2021
2020
€
€
€
€
At the beginning of the year
6,004,491
5,974,491
-
-
Additions
-
30,000
-
-
Revaluation
-
-
-
-
At the end of the year
_________
6,004,491
_________
_________
6,004,491
_________
_________
-
_________
_________
-
_________
Investment property is valued annually on 31 December at fair value comprising open market value approved by the directors on the basis of a professional valuation prepared by an independent architect. Fair value disclosures are included in note 10.
Valuation of these assets has been reassessed after the balance sheet date following the spread of the COVID-19 pandemic and the resulting implication on the Group’s operations.
i.Amounts recognised in profit or loss for investment properties
Group
Group
Company
Company
2021
2020
2021
2020
€
€
€
€
  Rental income from lease
27,552
42,188
-
-
_________
_________
_________
_________
ii.Lease arrangements
The Group’s investment properties are leased to tenants with rentals payable on a monthly or quarterly basis. Lease payments for some contracts include fixed annual increases, but there are no variable lease payments that depend on an index.
The future minimum operating lease payments under non-cancellable leases are as follows:
Group
Group
Company
Company
2021
2020
2021
2020
€
€
€
€
Within one year
132,058
131,308
-
-
Between 1 – 2 years
132,058
132,058
-
-
Between 2 – 3 years
104,500
132,058
-
-
Between 3 – 4 years
104,500
104,500
-
-
Between 4 – 5 years
88,750
104,500
-
-
Later than 5 years
219,000
307,750
-
-
_________
780,866
_________
_________
912,174
_________
_________
-
_________
_________
-
_________
SP FINANCE P.L.C.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
_____________________________________________________________________________________________
______________________________________________________________________________________________________
39
13.Investment in subsidiary
On 28 November 2018, the Company acquired 100% of the share capital of SP Investments Limited through an exchange of shares for a consideration of 10,000 100% paid up Ordinary shares of €1 each with a premium of €17,750,000.
Company
Shares in subsidiary
Total
€
€
         
At 1 January 2021
19,097,783
19,097,783
Additions
-
-
At 31 December 2021
_________
19,097,783
_________
_________
19,097,783
_________
The investment in subsidiary is accounted for using the reorganisation method of accounting and therefore reflects the Net Asset Value of the pre-existing assets and liabilities acquired. Refer to note 1 and 24.
 
All subsidiary undertakings are included in the consolidation and are accounted for on the basis of direct equity interest and are stated at cost less any accumulated impairment losses.
Valuation of these assets has been reassessed after the balance sheet date following the spread of the COVID-19 pandemic and the resulting implication on the Company’s operations.
Shares in subsidiaries represent the following investments:
Company
Registered address
Principal Activity
2021
2020
% Holding
%
Holding
SP Investments Limited
89, The Strand, Sliema
Holding Company
100%
100%
Sea Pebbles Limited
89, The Strand, Sliema
Hospitality operations
100%
100%
Pebbles Resort Limited
89, The Strand, Sliema
Hospitality operations
100%
100%
Pebbles St Julians Limited
89, The Strand, Sliema
Non-Operating
100%
100%
14.Financial assets at amortised costs
Group
Group
Company
Company
2021
2020
2021
2020
€
€
€
€
Non-Current
Redeemable preference shares
Note i
-
-
12,000,000
12,000,000
_________
-
_________
_________
-
_________
_________
12,000,000
_________
_________
12,000,000
_________
SP FINANCE P.L.C.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
_____________________________________________________________________________________________
______________________________________________________________________________________________________
40
14.Financial assets at amortised costs (continued)
i.Redeemable preference shares
This investment represents 100% holding of the 4.1% non-voting, cumulative redeemable preference shares. These preference shares are redeemable within a period of up to 30 years of their allotment. The subsidiary has the right to redeem all or part of the said preference shares on any date it chooses within the aforesaid thirty-year period with the mutual consent of the Company. Provided that the directors of each of the issuer and the subsidiary have undertaken that the redemption of any of the preference shares is to occur subject to the proceeds thereof being held by the Company.
15.Other financial assets at amortised costs
Group
Group
Company
Company
2021
2020
2021
2020
€
€
€
€
Non-Current
Amounts due by commonly controlled entities
Note i
-
631,997
-
-
_________
-
_________
_________
631,997
_________
_________
-
_________
_________
-
_________
i.Amounts due by commonly controlled entities
Amounts due by commonly controlled entities are unsecured and interest free.
16.Trade and other receivables
Group
Group
Company
Company
2021
2020
2021
2020
€
€
€
€
Trade receivables
163,992
14,179
-
-
Other receivables
73,538
53,677
-
-
VAT refundable
23,213
58,250
-
-
Amounts owed by subsidiary
Note i
-
-
80,176
298,534
Amounts due by commonly controlled entities
Note ii
689,893
265,000
-
-
Prepayments and accrued income
28,259
68,511
1,872
1,872
_________
978,895
_________
_________
459,617
_________
_________
82,048
_________
_________
300,406
_________
i.Amounts owed by subsidiary
Amounts owed by subsidiary are unsecured, interest free and repayable on demand.
The Group and the Company assess whether any loss allowance is required on its financial assets as set out in the accounting policies and note 29.
Market risk
Market risk is the risk that changes in market prices, such as interest rates, and quoted prices, will affect the Group’s income or financial position. The objective of the Group’s market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.
Cash flow and fair value interest rate risk
The Group’s interest rate risk arises on its interest-bearing borrowings and deposits held with banks. Borrowings issued at variable rates, comprising bank borrowings, expose the Group to cash flow interest rate risk. The Group’s bank borrowings are subject to an interest rate that varies according to revisions made to the Bank’s Base Rate and three-month Euribor. The directors monitor the level of floating rate borrowings as a measure of cash flow risk taken on.
The Group has adopted a cautious risk policy with regards to interest rate fluctuation through the issue of a €12,000,000 ten-year bond incurring interest of 4%. Debt securities issued at fixed rates and bank deposits expose the Group to fair value interest rate risk.
Bank deposits and borrowings are carried at amortised cost. Accordingly, a shift in interest rates would not have an impact on profit or loss.
A shift in interest rates on borrowings at variable rates will however have an impact on profit or loss. The directors consider the potential impact on the Group’s profit or loss of a defined interest rate shift of 1%, that is reasonably possible, at the end of the reporting period keeping all other variables constant, to amount to +/- €26,000 (2020: +/- €17,000).
Credit risk
Credit risk arises from cash and cash equivalents, deposits with banks and credit risk exposures to customers, including outstanding receivables and committed transactions. The carrying amount of the financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
Group
Group
Company
Company
2021
2020
2021
2020
€
€
€
€
Carrying amounts
Financial assets at amortised cost
-
-
12,000,000
12,000,000
Other financial assets at amortised cost
689,893
896,997
-
-
Trade and other receivables
289,002
194,617
82,048
300,406
Cash at bank and in hand
333,461
115,872
278,149
2,743
_________
1,312,356
_________
_________
1,207,486
_________
_________
12,360,197
_________
_________
12,303,149
_________
Financial assets at amortised cost comprise of investment in preference shares in subsidiary company as described in note 14. These loans are secured and the failure of the related undertaking could have an impact on the Company’s results.
The Group’s Companies bank only with local financial institutions with high quality standing or rating. The Group has no concentration of credit risk that could materially impact on the sustainability of its operations. However, in common with similar business concerns, the failure of specific large customers could have a material impact on the Group’s results.
The Group assesses the credit quality of its customers taking into account financial position, past experience and other factors. Standard credit terms are in place for individual clients, however, wherever possible, new corporate customers are analysed individually for creditworthiness before the Group’s standard payment and service delivery terms and conditions are offered. The Group’s review includes external credit worthiness databases when available.
Impairment of financial assets
The Group and the Company have three types of financial assets that are subject to the expected credit loss model:
•Trade receivables and accrued income relating to the provision of services;
•Financial assets at amortised cost for Company, comprising investment in preference shares in subsidiary undertaking;
•Other financial assets at amortised costs comprising loans receivable from related parties outside the group; and
•Cash and cash equivalents.
Trade receivables and accrued income
The Group applies the IFRS 9 simplified approach to measure expected credit losses which uses a lifetime expected loss allowance for all trade receivables and accrued income.
To measure the expected credit losses, trade receivables and accrued income have been grouped based on shared credit risk characteristics and the days past due. The Group has concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the accrued income since they have substantially the same characteristics.
Where the counterparties’ financial position suggests that it does not have sufficient liquid assets at balance sheet date to repay the loan if this is demanded, the probability of default is deemed to be 100%. Given that the related party relationships of such balances are between entities under common control, the directors assess the loss given default of the balance by analysing recovery strategies that the Group would allow, taking cognisance of such related party relationship. These recovery strategies typically include a projection of the net cash flows emanating from allowing the counterparty to operate, incorporating multiple forward-looking scenarios that take into account all reasonable and supportable information available to the Group. In response to the COVID-19 pandemic, the directors adjusted the expected net cash flows emanating from recovery strategies by stressing the cash flows to take into account the impact of loss of business due to COVID-19 related closures or declines in business. The assessment also considered the possibility of refinancing and the value of properties owned by the Group with specific emphasis on the properties held by virtue of the Security Trust Deed dated 24 April 2019. In making this analysis, the Group also takes into account any support of shareholders in place.
Liquidity risk
The Group is exposed to liquidity risk in relation to meeting future obligations associated with its financial liabilities, which comprise principally trade and other payables and interest-bearing borrowings disclosed in note 20. Prudent liquidity risk management includes maintaining sufficient cash and committed credit lines to ensure the availability of an adequate amount of funding to meeting the Group’s obligations.
The directors monitor liquidity risk by means of cash flow forecasts on the basis of expected cash flows over a twelve-month period, in order to ensure that adequate funding is in place in order for the Group to be in a position to meet its commitments as and when they will fall due. In response to the possible future liquidity constraints arising from the COVID-19 pandemic, the directors and the Group’s senior management undertook a number of measures. The impact of these measures on the consolidated financial statements include:
-The Wage Supplement Scheme, without which the Group would have had to lay off most of its workers;
-Deferment of taxes, which was crucial to maintain adequate levels of working capital;
-The COVID-19 Guarantee Scheme operated by the Malta Development Bank, through which it obtained additional funds of €2.1m to finance its working capital.
As at 31 December 2021, the Group is in a net current liability position of €1.8m. Following this detailed assessment, the directors concluded that if the Group is unable to generate sufficient financial resources through its operations as a consequence of the global pandemic, it is very likely it will be able to access adequate external financial resources, including from related companies, as to permit it to continue in operational existence for the foreseeable future.
Accordingly, based on the outcome of the cash flow projections in a prudent scenario as referred to, the Directors consider the going concern assumption in the preparation of the Group’s financial; statements as appropriate as at the date of authorisation for issue of the 2021 financial statements.
Report on the Audit of the Financial Statements
Opinion
We have audited the consolidated and stand-alone parent company financial statements of SP Finance p.l.c. set out on pages 10 to 55 which comprise the consolidated and parent company statement of financial position as at 31 December 2021, and the consolidated and parent company statement of profit and loss and comprehensive income, changes in equity and cashflow for the year then ended including a summary of significant accounting policies.
In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Group and the Company as at 31 December 2021, and of their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU and have been prepared in accordance with the requirements of the Companies Act (Cap. 386), enacted in Malta.
Our opinion is consistent with our additional report to the audit committee.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Material uncertainty relating to going concern as a result of COVID-19
We draw attention to Note 1 to these financial statements, which describes the directors’ assessment of the estimated impacts of COVID-19 on the Group’s projected financial results, cash flows and financial position, taking cognisance of the unprecedented nature of the adverse economic conditions experienced. These events or conditions, along with other matters as set forth in Note 1, indicate the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Independence
We are independent of the Group and the Parent Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in accordance with the Accountancy Profession (Code of Ethics for Warrant Holders) Directive issued in terms of the Accountancy Profession Act (Cap. 281) in Malta, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code.
To the best of our knowledge and belief, we declare that non-audit services that we have provided to the Group and the Company are in accordance with the applicable law and regulations in Malta and that we have not provided non-audit services that are prohibited under Article 18A of the Accountancy Profession Act (Cap. 281).
The non-audit services that we have provided to the Group and the Company are disclosed in note 7 to the financial statements.
Our Audit Approach
Overview
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all
our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
Materiality
The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedure and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
The forecasting of future cash flows has been based on various assumptions such as long-term growth rate, the rate used to discount future cash flows, and assumptions around economic recovery of the industry in a post Covid-19 environment. The remaining balance amounting to €28m of the assets held by the Group were valued by a third-party professional valuer using the comparison market approach applying the expected sales price per square meter. Furthermore, the assets tested for impairment represent more than 93% of the Group’s total assets.
Valuation and impairment of property, plant and equipment, investment property and right-of-use asset
How the scope of our audit responded to the risk
The Group’s property comprises 2 hotels; one owned and one leased and investment property which comprises mainly of two outlets and a guest house property that are held for long term rental yields or for capital appreciation. The valuation of the Group’s property portfolio is inherently subjective due to, among other factors, the individual nature of each property, its location and the expected future returns.
Management have carried out a re-assessment, using a professional valuer, for its owned properties classified as investment property amounting to €6m and classified within property, plant and equipment amounting to €22m, to determine whether a material shift in fair value would have occurred during 2021. The valuation reports by the third-party valuer as at 31 December 2020 and 2021 are computed using the comparison market approach and Level 3 inputs of the fair valuation hierarchy.
The second hotel operated by the Group is held under an operating lease and therefore classified as Right-of-use asset (ROU). The ROU asset amounting to €4.1m and its improvements and movables amounting to an additional €5.2m classified within property, plant and equipment were assessed for impairment using discounted cashflows (DCF). In light of the uncertainty as a result of COVID-19, the Directors applied a DCF analysis using multiple cash flow projections taking into consideration assumed probabilities of different future events and/or scenarios instead of a single cash flow scenario. For each scenario, management assigned probability weights, based on their expectations of the achievable outcomes. The most significant judgements relate to the projected cash flows, the discount rate and growth rates.
-Considered the objectivity, independence, competence and capabilities of the external valuer.
-Reviewed the methodologies used by the external valuer and by the directors to estimate the fair value.
-Considered the appropriateness of the fair values estimated by the external valuers based on our knowledge of the industry.
-Assessed the key inputs in the calculations of the DCF presented such as revenue growth and discount rate, by reference to management’s forecasts, data external to the Group and our own expertise.
-Testing the mathematical accuracy of the calculations derived from each model.
-Reviewed the appropriateness of the disclosures in the financial statements in connection with the impairment assessment.
INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF
SP FINANCE P.L.C.
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Significant Financing Transactions
Risk Description
The principal activity of the Company, SP Finance p.l.c.  is to raise financial resources from the capital market to finance the capital projects of the companies forming part of SP Group. These debt securities are guaranteed by the subsidiary, Sea Pebbles Limited. The funds received from the debt securities in issue have been invested in €12m cumulative redeemable preference shares in SP Investments Limited. The recoverability of the financial asset at amortised cost and the debt servicing thereon is dependent on the generation of profits from the operating subsidiaries of SP Investments Limited.
Recoverability of Parent Company bond proceeds invested in its Subsidiary Company SP Investments Ltd
How the scope of our audit responded to the risk
Financial assets at amortised costs includes proceeds from the bond issue which were invested through cumulative redeemable preference shares in the subsidiary SP investments Limited.  Investment in preference shares as at 31 December 2021 amounted to €12 million.
The eventual redemption of this investment of €12m will be used to repay the principal amount of the bond, which is why we have given additional attention to this area. On an annual basis the Company is principally dependent on the receipt of dividend payments from this financial asset to maintain its debt financing.
Both the businesses of Sea Pebbles Ltd “the Guarantor” and Pebbles Resort Ltd “the Group Company” operate in the hospitality sector and were therefore severely impacted by the spread of the COVID-19 pandemic to Europe in 2020. The directors have assessed the recoverability of the Company’s investment in its subsidiary companies.
The assessment was based on four scenarios which were weighted in line with management’s expectations and were used to assess the possible extent of the impact on the recoverability of the financial asset held at amortised cost. The assessment also considered the possibility of refinancing and the value of properties owned by the Group.
The financial asset at amortised cost is subject to impairment testing in accordance with the expected credit loss model in terms of IFRS9.
We have agreed the terms of its financial asset to supporting documentation.
We have assessed the financial situation of Sea Pebbles Ltd “the Guarantor” and Pebbles Resort Ltd “the Group Company”.  In doing this, we made reference to the latest audited financial statements, cash flow projections, forecasts and other prospective information made available to us. We performed additional audit work on the assumptions, conditions and relevant risk assessments used by the directors to model the weighted scenarios due to the pandemic. We reviewed the forecasted financial position of the Group for the possibility of refinancing. We assessed the fair value of the properties owned by the Group with specific emphasis on the properties held by virtue of the Security Trust Deed dated 24 April 2019.
At the date of this report the pandemic’s ongoing effects are still subject to uncertainty with the full range of possible effects unknown.
INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF
SP FINANCE P.L.C.
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Other Information
The directors are responsible for the other information. The other information comprises the directors’ report and the Statement of Compliance with the Principles of Good Corporate Governance. Except for our opinions on the directors’ report in accordance with the Companies Act (Cap.386) and on the Corporate Governance Statement of Compliance in accordance with the Capital Markets Rules issued by the Maltese Financial Services Authority, our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
With respect to the Directors’ Report, we also considered whether the Directors’ Report includes the disclosures required by Article 177 of the Maltese Companies Act (Cap. 386). Based on the work we have performed, in our opinion:
-the information given in the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
-the directors’ report has been prepared in accordance with the Maltese Companies Act (Cap.386).
In addition, in light of the knowledge and understanding of the Group and the Company and its environment obtained in the course of the audit, we are required to report if we have identified material misstatements in the directors’ report. We have nothing to report in this regard.
Responsibilities of the Directors and those charged with governance for the financial statements
The directors are responsible for the preparation of the financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group and the Company or to cease operations, or has no realistic alternative but to do so.
The directors have delegated the responsibility for overseeing the Group’s and the Company’s financial reporting process to the Audit Committee.
Auditor’s Responsibilities for the Audit Committee
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF
SP FINANCE P.L.C.
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As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:
-Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
-Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
-Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
-Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s and the Company’s ability to continue as a going concern. In particular, it is difficult to evaluate all of the potential implications that COVID-19 will have on the Group’s and Company’s business and the overall economy.
-Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the financial statements of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF
SP FINANCE P.L.C.
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62
Report on Other Legal and Regulatory Requirements
Report on compliance with the requirements of the European Single Electronic Format Regulatory Technical Standard (the “ESEF RTS”), by reference to Capital Market Rule 5.55.6
We have undertaken a reasonable assurance engagement in accordance with the requirements of Directive 6 issued by the Accountancy Board in terms of the Accountancy Profession Act (Cap. 281) - the Accountancy Profession (European Single Electronic Format) Assurance Directive (“the ESEF Directive 6”) on the Annual Financial Report of SP Finance p.l.c. for the year ended 31 December 2021, entirely prepared in a single electronic reporting format.
Responsibilities of the directors
The directors are responsible for the preparation of the annual financial report, including the consolidated financial statements and the relevant mark-up requirements therein, by reference to Capital Markets Rule 5.56A, in accordance with the requirements of the ESEF RTS.
Our responsibilities
Our responsibility is to obtain reasonable assurance about whether the annual financial report including the consolidated financial statements and the relevant electronic tagging therein comply in all material respects with the ESEF RTS based on the evidence we have obtained. We conducted our reasonable assurance engagement in accordance with the requirements of ESEF Directive 6.
Our procedures included:
-Obtaining an understanding of the entity’s financial reporting process, including the preparation of the annual financial report, in accordance with the requirements of the ESEF RTS.
-Obtaining the annual financial report and performing validations to determine whether the annual financial report has been prepared in accordance with the requirements of the technical specifications of the ESEF RTS.
-Examining the information in the annual financial report to determine whether all the required tagging therein have been applied and whether, in all material respects, they are in accordance with the requirements of the ESEF RTS.
 
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
In our opinion, the annual financial report for the year ended 31 December 2021 has been prepared, in all material respects, in accordance with the requirements of the ESEF RTS.
Report on Corporate Governance Statement of Compliance
The Capital Markets Rules issued by the Malta Financial Services Authority require the directors to prepare and include in their Annual Report a Statement of Compliance providing an explanation of the extent to which they have adopted the Code of Principles of Good Corporate Governance and the effective measures that they have taken to ensure compliance throughout the accounting period with those Principles.
The Capital Markets Rules also require the auditor to include a report on the Statement of Compliance prepared by the directors.
We read the Statement of Compliance and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements included in the Annual Report.  Our responsibilities do not extend to considering whether this statement is consistent with any other information included in the Annual Report.
INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF
SP FINANCE P.L.C.
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We are not required to, and we do not, consider whether the Board’s statements on internal control included in the Statement of Compliance cover all risks and controls, or form an opinion on the effectiveness of the Company’s corporate governance procedures or its risk and control procedures.
In our opinion, the Statement of Compliance set out on pages 6 to 9 has been properly prepared in accordance with the requirements of the Capital Markets Rules issued by the Malta Financial Services Authority.
We also have responsibilities:
•Under the Maltese Companies Act (Cap. 386) we are required to report to you if, in our opinion:
-We have not received all the information and explanations we require for our audit.
-Adequate accounting records have not been kept, or that returns adequate for our audit have not been received from branches not visited by us.
-The financial statements are not in agreement with the accounting records and returns.
•Under the Capital Markets Rules to review the statement made by the directors that the business is a going concern together with supporting assumptions or qualifications as necessary.
We have nothing to report to you in respect of these responsibilities.
Appointment
We were first appointed as auditors of the Group and the Company for the financial period ended 31 December 2019. Our appointment has been renewed by shareholders resolution representing a total period of uninterrupted appointment of 3 years.
This copy of the audit report has been signed by:
MICHAEL CURMI
for and on behalf of 
VCA CERTIFIED PUBLIC ACCOUNTANTS
29 April 2022