2 Summary of significant accounting policies (continued)

2.3 New standards, interpretations and amendments to published standards

The Group did not adopt any standard at earlier date. It plans to adopt at it its effective date.

Standards and interpretations that are not yet effective and are relevant for the Group’s financial statements, adopted by the EU

Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets: Onerous Contracts - Cost of Fulfilling a Contract (applicable for annual periods beginning on or after 1 January 2022); adopted by the EU in July 2021

In determining costs of fulfilling a contract, the amendments require an entity to include all costs that relate directly to a contract.  Paragraph 68A clarifies that the cost of fulfilling a contract comprises both: the incremental costs of fulfilling that contract and an allocation of other costs that relate directly to fulfilling contracts.

Amendments to IFRS 3 Business Combination – Reference not the Conceptual Framework (applicable for annual periods beginning on or after 1 January 2022); adopted by the EU in July 2021

The changes in the Amendments to IFRS 3 Reference to the Conceptual Framework:

·          update IFRS 3 so that it refers to the 2018 Conceptual Framework instead of the 1989 Framework;

·          add to IFRS 3 a requirement that, for transactions and other events within the scope of IAS 37 or IFRIC 21, an acquirer applies IAS 37 or IFRIC 21 (instead of the Conceptual Framework) to identify the liabilities it has assumed in a business combination; and

·          add to IFRS 3 an explicit statement that an acquirer does not recognise contingent assets acquired in a business combination.

Annual Improvements to IFRS Standards 2018–2020 (applicable for annual periods beginning on or after 1 January 2022); adopted by the EU in July 2021

Amendment to IFRS 9 Financial Instruments

The improvements clarify that, when assessing whether an exchange of debt instruments between an existing borrower and lender are on terms that are substantially different, the fees to include together with the discounted present value of the cash flows under the new terms include only fees paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other's behalf.

Amendments to IFRS 16 Leases: Covid-19-Related Rent Concessions beyond 30 June 2021 (issued on 31 March 2021 and effective for annual periods beginning on or after 1 April 2021)

The amendments permit a lessee to apply the practical expedient related to COVID-19 related rent concessions to rent concessions for which any reductions in lease payments affects only payments originally due on or before 30 June 2022 (rather than only payments originally due on or before 30 June 2021).

Amendment to Illustrative Examples accompanying IFRS 16 Leases

The improvements remove from illustrative Example 13 accompanying IFRS 16 reference to a reimbursement by the lessor to the lessee for leasehold improvements as well as an explanation of a lessee’s accounting for such reimbursement.

2 Summary of significant accounting policies (continued)

2.3 New standards, interpretations and amendments to published standards (continued)

Standards and interpretations that are not yet effective and are relevant for the Group’s financial statements, adopted by the EU (continued)

Amendments to IAS 8 – Definition of Accounting Estimate (applicable for annual periods beginning on or after 1 January 2023); adopted by the EU in March 2022

Based on the amendment, the definition of a change in accounting estimates is replaced with a new definition of accounting estimates. Under the new definition, accounting estimates are “monetary amounts in financial statements that are subject to measurement uncertainty”.

Entities develop accounting estimates if accounting policies require items in financial statements to be measured in a way that involves measurement uncertainty.

The Board clarifies that a change in accounting estimate that results from new information or new developments is not the correction of an error. In addition, the effects of a change in an input or a measurement technique used to develop an accounting estimate are changes in accounting estimates if they do not result from the correction of prior period errors.

 A change in an accounting estimate may affect only the current period’s profit or loss, or the profit or loss of both the current period and future periods. The effect of the change relating to the current period is recognised as income or expense in the current period. The effect, if any, on future periods is recognised as income or expense in those future periods.

Amendments to IAS 1 and IFRS Practice Statement 2 (applicable for the annual periods beginning on or after 1 January 2023); adopted by the EU in March 2022

Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) amends IAS 1 in the following ways:

·          An entity is now required to disclose its material accounting policy information instead of its significant accounting policies;

·          several paragraphs are added to explain how an entity can identify material accounting policy information and to give examples of when accounting policy information is likely to be material;

·          the amendments clarify that accounting policy information may be material because of its nature, even if the related amounts are immaterial;

·          the amendments clarify that accounting policy information is material if users of an entity’s financial statements would need it to understand other material information in the financial statements;

·          the amendments clarify that if an entity discloses immaterial accounting policy information, such information shall not obscure material accounting policy information; and

·          In addition, IFRS Practice Statement 2 has been amended by adding guidance and examples to explain and demonstrate the application of the ‘four-step materiality process’ to accounting policy information in order to support the amendments to IAS 1.

None of these amendments is expected to have significant impact on Group´s consolidated financial statements except for possible formal changes in the presentation of consolidated financial statements connected to Amendment to IAS 1 and IFRS Practice Statement 2.

2 Summary of significant accounting policies (continued)

2.3 New standards, interpretations and amendments to published standards (continued)

Standards and interpretations that are not yet effective and are relevant for the Group’s financial statements, not adopted by the EU  (continued)

Amendments to IAS 1 Presentation of Financial Statements – Classification of Liabilities as Current or Non - current (Effective date January 2023)

The amendments aim to promote consistency in applying the requirements by helping companies determine whether, in the statements of financial position, debt and other liabilities with an uncertain settlement date should be classified as current or non – current.

The Group is currently assessing potential impact of this amendment to its consolidated financial statements.

Amendment to IAS 12 Income Taxes: Deferred Tax related to Assets and Liabilities arising from a single Transactions (Effective date January 2023)

The main change is the exemption from the initial recognition exemption in a transaction which is not a business combination and, at the time of a transaction, affect neither accounting profit nor taxable profit.

The Group is currently assessing potential impact of this amendment to its consolidated financial statements.

Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

(Effective date postponed indefinitely)

The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business (as defined in IFRS 3). A partial gain or loss is recognised when a transaction involves assets that do not constitute a business. In December 2015, the IASB postponed the effective date of this amendment indefinitely pending the outcome of its research project on the equity method of accounting.

The Group does not expect that the Interpretation, when initially applied, will have material impact on the financial statements for the Group.

2.4  Basis of consolidation

Business combinations

Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group.

The Group measures goodwill at the acquisition date as:

·          the fair value of the consideration transferred; plus

·          the recognised amount of any non-controlling interests in the acquiree; plus

·          if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less

·          the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts generally are recognised in profit or loss.

Transaction cost, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.

Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not re-measured and settlement is accounted for within the equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.

The interest of non-controlling shareholders at the date of the business combination is recorded at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets, which are generally at fair value.

Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the accounting policies applied by the Group.

Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements

2.5  Foreign currency translation

Foreign currency transactions

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). Transactions in foreign currencies are translated to the respective functional currencies of Group entities at the foreign exchange rate at the transaction date.

Monetary assets and liabilities denominated in foreign currencies are retranslated to the respective functional currencies of Group entities at the exchange rate valid at the reporting date; where the functional currency is Czech crowns, at the exchange rate of the Czech National Bank; otherwise at the exchange rate of European Central Bank. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated to the respective functional currencies of Group entities at the foreign exchange rate at the date of the transaction. Foreign currency differences are generally recognized in profit or loss and presented within finance costs.

2.5  Foreign currency translation (continued)

A summary of the main foreign exchange rates applicable for the reporting period is presented in Note 20 – Financial Risk Management.

Functional and presentation currency

These financial statements are presented in Euro (EUR), which is the currency in which the Company’s share capital is denominated, in accordance with the provisions of article 187 of the Companies Act, and is also the Company’s functional currency. Functional currency is the Czech crown (CZK) for the majority of the project entities.

All financial information presented in EUR has been rounded to the nearest thousand except when otherwise indicated.

For the purpose of presenting these financial statements to Euro, the assets and liabilities, including goodwill and fair value adjustments arising on consolidation, are translated from functional currency into Euros at foreign exchange rate at the reporting date. The income and expenses are translated from the functional currency into Euros using an average foreign exchange rate.

Foreign exchange differences arising on translation of financial information of foreign subsidiaries are recognised in other comprehensive income and presented in the translation reserve in equity. The relevant proportion of the translation difference is allocated to non-controlling interests if applicable.

The exchange rates used for translating items from functional currency CZK (for entities with functional currency CZK) to the presentation currency EUR are as follows:

·          24.86 – Closing middle rate of exchange at 31 December 2021 for statement of financial position items

·          25.645 – Average middle rate of exchange for the year ended 31 December 2021 for statement of comprehensive income items

2.6  Significant accounting policies

Intangible assets other than goodwill

Software and other intangible assets

2.6  Significant accounting policies (continued)

Investment property

Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is initially measured at cost and subsequently at fair value with any change therein recognised in profit or loss. Investment property includes assets under construction for future use as investment property.

Cost includes expenditure that is directly attributable to the acquisition of the investment property. The cost of self-constructed investment property includes the cost of materials and direct labour, any other costs directly attributable to bringing the investment property to a working condition for their intended use and capitalised borrowing costs.

Dual-use property is classified as investment property only if the portion of the property held for own use is insignificant. The assessment is carried out on property-by-property basis with reference to value and usable floor space.

The change in the fair value of investment property is recognized in the operating result section of the consolidated statement of comprehensive income.

External independent valuation companies, having appropriate recognised professional qualifications and recent experience in the location and category of property being valued, valued 100 % of investment property amount at the period end. Results of external valuation companies were further analysed by the Group’s valuation committee and based on its assessment included in these consolidated financial statements (refer to Note 4 - Critical accounting estimates and judgments).

Any gain or loss on disposal of an investment property (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in profit or loss.

Leasing

The Group as a lessor

A lessor classifies each of its leases as either an operating lease or a finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards of ownership of the underlying asset. In other cases, it is an operating lease.

Operating leases

The Group recognises lease payments received and receivable under operating leases as income on a straight-line basis over the lease term. Incentives granted to the lessee in negotiation of a new or renewed operating lease are recognized as an integral part of the net consideration agreed for the use of the asset. They are recognized as a reduction of the rental income over the lease term on a straight- line basis.

Financial assets

On initial recognition, the Group classifies financial assets in the following measurement categories: financial assets measured at amortised cost; debt investments measured at fair value through other comprehensive income (FVOCI), equity investments measured at FVOCI based on the Group’s irrevocable election; or financial assets measured at fair value through profit and loss (FVTPL). The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows.

Financial assets are not reclassified subsequent to their initial recognition unless the Group changes its business model for managing financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the business model.

A financial asset is measured at amortised cost if it meets both of the following conditions:

·          it is held within a business model whose objective is to hold assets to collect contractual cash flows; and

·          its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

2.6  Significant accounting policies (continued)

Financial assets (continued)

A debt investment is measured at FVOCI if it meets both of the following conditions:

·          it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

·          its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in the investment´s fair value in OCI. This election is made on an investment-by-investment basis.

All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL. On initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

Financial assets – Business model assessment

The Group makes an assessment of the objective of the business model in which a financial asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes:

·          the stated policies and objectives for the portfolio and the operation of those policies in practice. These include whether management´s strategy focuses on earning contractual interest income, maintaining a particular interest rate profile, matching the duration of the financial asset to the duration of any related liabilities or expected cash outflows or realizing cash flows through the sale of the asset;

·          how the performance of the portfolio is evaluated and reported to the Group´s management;

·          the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed;

·          how managers of the business are compensated – e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and

·          the frequency, volume and timing of sales of financial assets in prior periods, the reasons for such sales and expectations about future sales activity.

Transfers of financial assets to third parties in transactions that do not qualify for derecognition are not considered sales for this purpose, consistent with the Group´s continuing recognition of the assets.

Financial assets that are held for trading or are managed and whose performance is evaluated on a fair value basis are measured at FVTPL.

Financial assets – Assessment whether contractual cash flows are solely payments of principal and interest

For the purposes of this assessment, ´principal´ is defined as the fair value of the financial asset on initial recognition. ´Interest´ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of the time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs) as well as profit margin.

In assessing whether the contractual cash flows are solely payments of principal and interest, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making this assessment, the Group considers:

·          contingent events that would change the amount or timing of cash flows;

·          terms that may adjust the contractual coupon rate, including variable-rate features;

·          prepayment and extension features; and

·          terms that limit the Group´s claim to cash flows from specified assets (e.g. non-recourse features).

A prepayment feature is consistent with the solely payments of principal and interest criterion if the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable additional compensation for early termination of the contract. Additionally, for a financial asset acquired at a discount or premium to its contractual par amount, a feature that permits or requires prepayment at an amount that substantially represents the contractual par amount plus accrued (but unpaid) contractual interest (which may also include reasonable additional compensation for early termination) is treated as consistent with this criterion if the fair value of the prepayment feature is insignificant at initial recognition.

2.6  Significant accounting policies (continued)

Financial assets (continued)

Recognition

Trade receivables are initially recognised in the statement of financial position when they are originated. All other financial assets are recognised when the Group becomes a party to the contractual provisions of the instrument.

Measurement

A financial asset (unless it is a trade receivable without a significant financing component) is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. A trade receivable without a significant financing component is initially measured at the transaction price in accordance with IFRS 15.

Financial assets at FVTPL are subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognised in profit or loss.

Financial assets at amortised cost are subsequently measured at amortised cost using effective interest rate method. The amortised cost of a financial asset or liability is the amount in which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest rate method of any difference between the initial amount recognised and the maturity amount, net of any impairment losses. Interest income, foreign exchange gains and losses and impairment are recognised in profit or loss. Any gain or loss on derecognition is recognised in profit or loss.

Debt instruments at FVOCI are subsequently measured at fair value. Interest income calculated using the effective interest rate method, foreign exchange gains and losses and impairment are recognised in profit or loss. Other net gains and losses are recognised in OCI. On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss.

Equity investments at FVOCI are subsequently measured at fair value. Dividends are recognised as income in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment. Other net gains and losses are recognised in OCI and are never reclassified to profit or loss.The accounting policy relating to fair value measurement is disclosed in Note 3 of these consolidated financial statements.

Derecognition

The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset.

The Group enters into transactions whereby it transfers assets recognised in its statement of financial position but retains either all or substantially all of the risks and rewards of the transferred assets. In these cases, the transferred assets are not derecognised.

Offsetting

Financial assets and liabilities are off set and the net amount presented in the statement of financial position when there is a currently legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions.

Trade and other receivables

Trade receivables are recognised initially at the transaction price and are subsequently measured at amortised cost using the effective interest rate method. Trade and other receivables are stated after deducting the appropriate allowances for expected credit losses (refer to Note 2.6 Significant accounting policies - Impairment) of these consolidated financial statements.

Derivative financial instruments

The Group uses derivative financial instruments to manage its foreign exchange risk exposures.

Derivatives financial instruments are categorised as financial instruments classified as held for trading under the fair value through profit and loss category and are recognised initially at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are generally recognised in profit or loss within finance income/loss.

2.6  Significant accounting policies (continued)

Cash and cash equivalents; restricted cash

Cash and cash equivalents include cash in hand, deposits held at call with banks, other current highly liquid investments with original maturities of three months or less.

The Group holds restricted bank accounts containing deposit for settlement of foreign exchange swap, specified rental payments and other deposits (Note 8) and these are presented on a separate line of the financial statements.

Share capital and reserves

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the proceeds, net of tax.

Ordinary shares

Ordinary shares are stated at their par value. Consideration received for the shares sold in excess over their par value is shown as share premium. Incremental external costs directly attributable to the issue of new shares are accounted for as a deduction from share premium.

Dividends

Dividends are recorded as a liability and deducted from equity in the period in which they are declared and approved. Any dividends declared after the reporting date and before the financial statements are authorised for issue are disclosed in the Subsequent events note.

Translation reserve

The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations to the presentation currency of the Group.

Financial liabilities

Loans and borrowings; bonds issued

Loans and borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated statement of comprehensive income over the period of the borrowings using the effective interest rate method.

Borrowing costs for financing the development projects are capitalized in the costs of investment property (Note 2 – Investment property). Other borrowing costs are expensed directly to the consolidated statement of comprehensive income as incurred.

The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

2.6  Significant accounting policies (continued)

Financial liabilities (continued)

Trade payables and other liabilities

Trade payables and other liabilities are recognised initially at fair value, net of transaction costs incurred. Trade payables and other liabilities are subsequently measured at amortised cost using the effective interest rate method.

Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognised in profit or loss. Other financial liabilities are subsequently measured at amortised cost using the effective interest rate method. Interest expense and foreign exchange gains and losses are recognised in profit or loss. Any gain or loss on derecognition is also recognised in profit or loss.

2.6  Significant accounting policies (continued)

Impairment (continued)

Financial assets

Staging

The Group applies simplified approach for impairment of trade and lease receivable. The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on days past due. The expected loss rates are based on the payment profiles of customers over a period of 36 month before each balance sheet date and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. Currently, due to a limited size of the trade receivables portfolio and its limited credit history, the loss rates are based on an expert judgment. The credit loss allowance for trade receivables is determined according to provision matrix presented in Note 7.

For other financial assets the Group applies a three-stage model for impairment, based on changes in credit quality since initial recognition. A financial instrument that is not credit-impaired on initial recognition is classified in Stage 1. Financial assets in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL that results from default events possible within the next 12 months or until contractual maturity, if shorter (“12 Months ECL”). If the Group identifies a significant increase in credit risk (“SICR”) since initial recognition, the asset is transferred to Stage 2 and its ECL is measured based on ECL on a lifetime basis, that is, up until contractual maturity, if any (“Lifetime ECL”). Refer below for a description of how the Group determines when a SICR has occurred. If the Group determines that a financial asset is credit-impaired, the asset is transferred to Stage 3 and its ECL is measured as a Lifetime ECL. The Group’s definition of credit-impaired assets and definition of default is explained below. The ECLs are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the counterparties to settle the receivables. The Group periodically reviews the development of major macroeconomic indicators (GDP growth, unemployment, property price index, default rates) and assesses the impact of the changes on the credit quality of receivables, e.g. in case the majority of monitored indicators shows an expectation of an economic downturn, the Group downshifts the implied credit ratings. For trade receivables, the Group generally expects forward-looking information will not have an impact on the credit quality due to generally short maturity.

Significant increase in credit risk

The assessment whether or not there has been a significant increase in credit risk (“SICR”) since initial recognition is performed on an individual basis by monitoring the triggers stated below. The presumption, being that there have been significant increases in credit risk since initial recognition when financial assets are more than 30 days past due, has not been rebutted.

Significant increase in credit risk is not assessed for financial assets whose credit risk is considered to be low, applying the low credit risk exemption for investment grade financial assets. These are mainly considered to be cash & cash equivalents and receivables from banks, since these assets represent short-term exposures towards investment grade-rated counterparties.

The Group considers a financial instrument to have experienced a SICR when one or more of the following quantitative, qualitative or backstop criteria have been met:

·          30 days past due;

·          Significant change in external or intercompany financing costs;

·          Available qualitative information, such as an assessment of the state of the underlying project of the financed entity, financial analysis and comparison of the project performance as at reporting date to the initial plan, suggests significant financial or operational difficulties of the borrower

2.6  Significant accounting policies (continued)

Impairment (continued)

The level of ECL that is recognised in these consolidated financial statements depends on whether the credit risk of the borrower has increased significantly since initial recognition. This is a three-stage model for ECL measurement. A financial instrument that is not credit-impaired on initial recognition and its credit risk has not increased significantly since initial recognition has a credit loss allowance based on 12-month ECLs (Stage 1). If a SICR since initial recognition is identified, the financial instrument is moved to Stage 2 but is not yet deemed to be credit-impaired and the loss allowance is based on lifetime ECLs. If a financial instrument is credit-impaired, the financial instrument is moved to Stage 3 and loss allowance is based on lifetime ECLs. The consequence of an asset being in Stage 3 is that the entity ceases to recognise interest income based on gross carrying value and applies the asset’s effective interest rate to the carrying amount, net of ECL, when calculating interest income.

If there is evidence that the SICR criteria are no longer met, the instrument is transferred back to Stage 1.

Credit-impaired financial assets and Default

The Group considers a financial asset to be credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events:

·          90 days past due;

·          significant financial difficulty of the counterparty;

·          a breach of contract, such as a default or past due event;

·          the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider;

·          it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

·          the disappearance of an active market for that financial asset because of financial difficulties; or

·          the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.

The Group considers a financial asset to be defaulted if at any point it fulfils the definition of being credit-impaired.

Credit risk grading system

For measuring credit risk and grading financial instruments by the amount of credit risk, the Group applies an approach based on risk grades estimated by external international rating agencies (Moody’s). External credit ratings are mapped on an internally defined master scale, implied by the borrowing rate and corresponding average yields of externally rated debt securities, with a specified range of probabilities of default as disclosed in the table below:

2.6  Significant accounting policies (continued)

Impairment (continued)

Each master scale credit risk grade is assigned a specific degree of creditworthiness:

·          Excellent – strong credit quality with low expected credit risk;

·          Good – adequate credit quality with a moderate credit risk;

·          Satisfactory – moderate credit quality with a satisfactory credit risk;

·          Special monitoring – facilities that require closer monitoring and remedial management; and

·          Default – facilities in which a default has occurred.

The rating models are regularly reviewed by the credit risk specialists, backtested on actual default data and updated, if necessary. Regardless of the method used, the Group regularly validates the accuracy of ratings estimates and appraises the predictive power of the models

Current and deferred income tax

Income taxes comprise current and deferred tax. Income taxes are recognised in profit or loss, except to the extent that they relate to a business combination or to items recognised directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the reporting period and any adjustment to tax payable in respect of previous years. The current income tax charge is calculated on the basis of the laws enacted or substantively enacted at the reporting date in the countries where the company’s subsidiaries operate and generate taxable income. 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.

Current tax, to the extent unpaid, is recognized as income tax liability. If the amount already paid for income taxes exceeds the amount due, the excess is recognised as a current asset.

Deferred income tax is provided in full, 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 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 reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax asset is primarily recognised from tax losses carried forward. When the utilisation of the tax loss is not probable, the deferred tax asset is not recognised. According to Czech income tax law, tax losses carried forward could be used within a maximum period of five consequent years from its origination. The Group recognised a deferred tax asset from tax losses in subsidiaries for which it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred tax assets and deferred tax liabilities are offset, if a current legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

2.6  Significant accounting policies (continued)

Revenue recognition

Rental income from leases

Rental income from leases of plots which are to be developed and sold in the future is recognised as income on a straight-line basis over the lease term. When the Group provides incentives to its tenants, the cost of incentives is recognised over the lease term, on a straight-line basis, as a reduction of rental income.

Rental and lease income also includes tenant payments for utilities and service charges if the services have been provided. For certain operating costs, the Group qualifies as an agent under IFRS 15. The operating costs of electricity, water, heat and gas, for which the Group operates as an agent, are recognized on a net basis. The other operating costs are recognized on a gross basis.

For all investment property leases, the rental income is fixed under the contracts, but some leases require the lessee to reimburse the insurance costs of the Group. When this is the case, the amounts of insurance costs are determined annually.

Finance income and finance expense

Finance income

Finance income comprises interest income on funds invested, foreign currency gains and other finance income.

Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate.

3 Determination of fair values and accounting classification

The Group applies IFRS 13 as a source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. It also requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

·          Quoted prices in active markets for identical assets or liabilities (level 1).

·          Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly (level 2).

·          Inputs for the asset or liability that are not based on observable market data (level 3).

For valuation of investment property, which is measured at fair value, the Group uses level 3 of fair value measurement hierarchy.

For valuation of derivative financial instruments, the Group uses level 2 of fair value measurement hierarchy.

Fair values of financial assets and liabilities not measured at fair value are determined using level 3 of fair value measurement hierarchy (except for cash in hand at Level 1, cash at banks and restricted cash at Level 2).

There were no transfers between levels of fair value measurement hierarchy during the year.

Valuation techniques and significant unobservable inputs used for measurement of fair value for Investment Property are described in Note 4.

For derivatives and other financial assets and liabilities, fair value is measured using the discounted cash flows method, whereby the contractual cash flows are discounted by the market discount rate prevailing as at the reporting date, adjusted for relevant risks (such as credit spread and liquidity adjustment for loans) if applicable. OIS curves are used for discounting derivatives.

Carrying values of financial assets and liabilities not measured at fair value (except for bonds issued) are a reasonable approximation of their fair value and therefore are not shown separately in the notes to these consolidated financial statements. Fair value of bonds issued amounts to EUR 65 725 thousand as at 31 December 2021 and was measured using the discounted cash flow method, whereby the contractual cash flows were discounted by the market discount rate adjusted by risk premium based on average rating of loans provided to subsidiaries.

4  Critical accounting estimates and judgements (continued)

Investment property (continued)

Summary of projects as at 31 December 2021

Valuation methods

Property under development and property planned to be re-developed completely was valued with the use of the residual analysis method. Residual analysis determines a price that could be paid for the site given the expected “as if complete” value of the proposed development and the total cost of the proposed development, allowing for market level profit margins and having due regard to the known characteristics of the property and the inherent risk involved in development.

The residual value is the surplus after total costs including constructions, fees, contingency, ancillary costs, legal/agency and professional fees, finance costs and developer´s profit are deducted from an estimate of the gross development value upon completion. The gross development value (being estimated value that a property would fetch on the open market if it were to be sold in the current economic climate) includes all of the separate areas that comprise the entire development including commercial areas (office, retail areas; garages and parking; and other areas). This surplus or residual value represents the amount that a purchaser would be willing to pay for the site. The level of profit reasonably required by a developer (developer´s margin) that decreases the residual value will diminish as each stage is passed and the risk associated in realising the value of completed development is reduced. The process can be simply expressed as follows:

GDV – Total Development Costs = Residual Market Value of the site

COVID – 19 impact

The outbreak of COVID-19, declared by the World Health Organisation as a “Global Pandemic” on the 11^th March 2020, has and continues to impact many aspects of daily life and the global economy – with some real estate markets having experienced lower levels of transactional activity and liquidity. Travel, movement and operational restrictions have been implemented by many countries. In some cases, lockdowns have been applied to varying degrees and to reflect further waves of COVID-19, although these may imply a new stage of the crisis, they are not unprecedented in the same way as the initial impact.

The pandemic and the measures taken to tackle COVID-19 continue to affect economies and real estate markets globally. The response to COVID 19 means that unprecedented set of circumstances on which to base a judgment are faced with.

Investment property description

Palace Savarin and Project Savarin are situated in the city district Prague 1 and occupies a central and strategic location in the very heart of Prague town centre. The surrounding area is mixed use in nature comprising mainly prime retail along with numerous offices, hotels and residential accommodation. Both projects have access points off Wenceslas Square, Na Příkopě Street, Panská Street and Jindřišská Street.

The property is strategically located and benefits from excellent communication and public transport facilities. Considering the intended development, the property will be accessible from four directions. Public transport includes numerous tram lines and metro lines A and B.

The site is cross shape with entry points off the four streets. The current accommodation comprises brick built historical buildings adjacent to the street fronts with protected facades except for that of Darex Building. The inner courtyard comprises partly of courts and partly of modern annexes to historical buildings form 20th century. Decision of the removal of buildings located in the inner courtyard has been already issued and subsequent demolition has been partially executed. There is a historical classicists riding hall located inside the courtyard which is culturally protected.

The existing property comprises of six mixed use buildings. Darex Building comprises Grade A accommodation while other buildings comprise generally Grade B office accommodation. Each building has office accommodation located on the ground floor. The internal accommodation varies in standard and provides variety of uses, ranging from office space, retail accommodation, bar and restaurant usage and sport facilities.

The future development consists of the construction of a new commercial administrative area in the shape of cross that requires construction of the passages connecting the streets Na Příkopě, V Cípu, Jindřišská and Wenceslas Square all leading to one point in the courtyard are near the former riding hall which will serve as the transport and communication node.

4  Critical accounting estimates and judgements (continued)

Investment property (continued)

Investment property description (continued)

The future development will provide total lettable area extending 60,835 sqm. One part of the development in the form of Palace Savarin will offer 3,543 sqm including 489 sqm of external seating and terrace. The second part, Project Savarin will provide 57,292 sqm including 4,353 sqm of external seating and terraces. The premises will be predominantly used as a retail and office area. There will be also 120 car parking spaces.

Assumption used in final management estimates

It was assumed that Palace Savarin will be completed in 2023 and Project Savarin in 2025.

Rental evidence

There is a number of similar available projects in the analysed district to the subject of valuation which shows similar evidence as that produced in the property valued. Similar office building projects include property Myslbek, Palladium, Slovanský Dům, Quadrio, Palác Euro – Astra, Stará Celnic, Palác Špork where rent for signed deals approximated 15.9 – 24.8 EUR per sqm. Similar retail buildings projects include property located in Náměstí Republiky, Jungmannovo náměstí, Na Příkopě street, 28. října street, Můstek, Jindřišská and Panská where rent for recently signed deals approximated 26 – 160 EUR per sqm.

Based on current market conditions, analysis of above mentioned offers and letting transactions that have been concluded and the nature of the property, the office rental was estimated at 22 and 21 EUR per sqm for Palace Savarin and Project Savarin. Retail rental was estimated at 124 and 55 EUR per sqm for Palace Savarin and Project Savarin.

Estimate of costs and developer’s margin

Development costs included in fair value computations are based on budgets of project companies that represent expected costs incurred comparable to market standards. Hard construction costs were estimated as 3,247 EUR per sqm and 3,100 EUR per sqm for Palace Savarin and Project Savarin, respectively. Contingency of 3-3.5%% of hard construction costs creates part of development costs together with professional fees in the approximate amount of 12-16% of total hard constructions costs and contingency. The marketing and letting fees were estimated at 5 and 10% from NOI. As a result, development costs amount to approximately 43.5 % and 42% of gross development value. for Palace Savarin and Project Savarin, respectively.

Developer´s margin represents 7.5% and 20% of total pending costs for Palace Savarin and Project Savarin, respectively. It depends on the stage of the project. The level of profit reasonably required by a developer (developer´s margin) is diminishing as each stage is passed and the risk associated in realising the value of completed development is reduced.

Financing costs were estimated 3 %. This is current best estimate of market lending rates of this type of development.

Yield

Yield in range of 4.25% – 4.5 % was used for investment property project, depending on current market condition, location and specification of the property.

Comparable projects in Prague – Palác Špork, DRN, Prague Studios, Rustonka and Florence Office Centre – provides a yield in range 4 – 5%.

Functional currencies of different entities of the Group.

Different entities within the Group have different functional currencies, based on the underlying economic conditions of their operations. This determination, of what the specific underlying economic conditions are, requires judgement. In making this judgement, the Group evaluates among other factors, the location of activities, the sources of revenue, risks associated with activities and denomination of currencies of operations of different entities.

5  Changes in the Group structure

In January 2021, the Group entered into contracts to acquire control in WELWYN COMPANY, a.s. (operating investment property project Savarin) and Palace Savarin, s.r.o. (operating investment property project Palace Savarin), through acquisition of shares in Savarin HoldCo, s.r.o. and Palace Savarin HoldCo, s.r.o. from CRESTYL SAVARIN Ltd.

Group management considered the optional concentration test as provided by IFRS 3 and concluded that this transaction is an acquisition of group of assets and liabilities.

Impact of this transaction on the consolidated financial statements can be summarized as follows:

Consideration, paid in cash, consists of EUR 2 thousand for transfer of ownership interests and EUR 51,155 thousand for assignment of the amounts receivable by CRESTYL SAVARIN Ltd from Savarin HoldCo, s.r.o. and Palace Savarin HoldCo, s.r.o. in the amount of EUR 76,900 thousand. Both contracts were treated as a single transaction as they have a single economic objective and substance.

This transaction was financed by the public bonds issue by Savarin P.L.C. in the Czech Republic in January 2021. Nominal value of bonds amounted to CZK 2,200,000 thousand (corresponding to EUR 84,001 thousand) while proceeds from the issuance of these bonds amounted to EUR 59,882 thousand (corresponding to CZK 1,568,336 thousand) without transaction cost related to issue of bonds (refer to Note 10 Bonds issued).

6 Investment property

Change in fair value charged to profit or loss could be summarized as follows:

Rental income from investment property is disclosed in Note 14 to these consolidated financial statements.

All investment property generated rental income in 2021. Direct operating expenses arising from such investment property amounted to 291 EUR thousand in 2021.

All investment property is subject of bank and bond collateral (refer to Note 10 Bonds issued, Note 11 Loans and borrowings and Note 18 Contingencies and commitments).

Assumptions used for determination of fair value of investment property and description of the property are stated in Note 4.

Sensitivity analysis

Sensitivity analysis – investment property – combined purpose

At 31 December 2021, an increase or decrease in future construction costs by 10% would have resulted in fair values of investment property shown in the table below. This analysis assumes that all other variables remain constant.

At 31 December 2021, an increase or decrease in Allowance for Developer’s margin by 10% would have resulted in fair values of investment property shown in the table below. This analysis assumes that all other variables remain constant.

6 Investment property (continued)

Sensitivity analysis (continued)

At 31 December 2021, an increase or decrease in equivalent yield by 25 bp would have resulted in fair values of investment property shown in the table below. This analysis assumes that all other variables remain constant.