5    Additional information

5.1     Taxes

5.1.1  Breakdown of tax expense

In the income statement, expense for 2011 and 2010 breaks down as follows:

Current income taxes are calculated using the actual tax rates in force.

This position comprises income taxes and property gains taxes:

In the Projects & Development division, expenses for property gains taxes are contingent on the time of completion of development real estate; in the Real Estate division, they are contingent on sales from the portfolio. These property taxes are incurred on a cyclical basis accordingly.

As at 31 December, the following receivables and liabilities are due from or owed to municipal and cantonal tax authorities:

The deferred taxes on revaluation break down as follows:

The positive value adjustment of CHF 44.7 million on the investment real estate led to a net negative contribution of CHF 12.2 million to deferred taxes in the income statement, CHF 9.3 million of which was attributable to yield-producing properties and CHF 3.6 million to investment real estate under construction.

In 2011, temporary valuation differences between the tax-relevant individual financial statements of the Allreal Group companies and the consolidated financial statements gave rise to a deferred tax expense of (2010: CHF 3.3 million). During the period under review, tax loss carry-forwards amounting to CHF 0.4 million were capitalised and CHF 0.05 million utilised. With the sale of two investment properties, deferred tax assets of CHF 0.1 million were written back.

The deferred tax liabilities from the provision for deferred taxes reported under long-term liabilities break down as follows:

The deferred tax liabilities in connection with the higher valuation of investment real estate are generally based on an average holding period of 10 years from date of purchase and a tax rate of up to 33% (2010: 33%). Deferred taxes are calculated separately for each investment property.

Temporary valuation differences on investment real estate and other balance sheet positions record the differences between the individual financial statements of the Allreal Group companies and the consolidated financial statements. These mainly involve write-downs on investment and development real estate, additional value adjustments on receivables and the recognition of additional provisions deducted from the current tax assessment. The valuation differences are calculated at the consolidated tax rate of 22% (2010: 22%).

Valuation differences on write-downs on investment real estate in the Canton of Zurich and on other balance sheet positions are calculated at a consolidated tax rate of 22% (2010: 22%). A tax rate of 15% (2010: 22%) was applied to valuation differences on write-downs on investment real estate outside the Canton of Zurich (2010: 22%). As a result of applying this lower tax rate, CHF 0.8 million in deferred taxes were written back to tax expenses for 2011.

In 2011, with the amortisation of the 2.125% convertible bond deferred taxes totalling CHF 0.7 million were credited to the consolidated statement of comprehensive income (2010: CHF 0.8 million).

Deferred tax assets comprise the following positions:

IAS 12 stipulates that deferred tax assets from tax loss carry-forwards or from negative market value adjustments can only be capitalised if they can be allocated both in terms of substance and timing. With regard to the lower valuation of investment real estate, it is possible to offset losses on the sale of real estate against other current gains. A tax rate of 22% was applied (2010: 22%).

Deferred tax assets on negative replacement values of interest rate swaps amounting to CHF 17.9 million were recognised directly in equity and have increased by CHF 7.1 million year-on-year.

As at 31 December 2011, capitalised deferred taxes existed on tax loss carry-forwards of CHF 2.4 million (31.12.2010: CHF 2.5 million) relating to three Allreal Group companies domiciled in Zurich which reported losses in the individual financial statements for 2007 to 2011, which losses are likely to be offset against gains in the following years (expiry of first tax loss carry-forward as of 2014). A tax rate of 22% was applied (2010: 22%).

The following table shows the reconciliation between the theoretical tax rates applicable to the Group and the effective taxes.

The reference tax rate used is the sum total of the national, cantonal and municipal income tax rates which are applied on average.

The adjustment of tax effects on revaluations reflects the change in the upward valuations of properties and their cumulative balance, encumbered with up to 33% deferred taxes and as the difference versus the reference tax rate of 22%.

The charge of CHF 0.3 million for current taxes of previous years results from the recalculation of the tax status of each Group company on the basis of tax returns submitted or definitive tax assessments received.

Income subject to a higher tax rate takes account of the effect whereby gains on real estate, which are subject to property gains tax, are taxed at total tax rates of up to 35% and are therefore above the consolidated tax rate of 22%. In particular, this relates to gains taxed in connection with the invoicing of completed projects in the Projects & Development division.

The capital commitments relate to contractual agreements for the acquisition of development real estate. Whether the commitment is invoked depends on the fulfilment of the conditions agreed with the counterparties; all the commitments listed can be expected to be invoked within the next twelve months.

As in the previous year, there are no guarantees or sureties in favour of third parties. Beyond this, in the individual financial statement, Allreal Holding AG has issued guarantees and sureties amounting to an additional CHF 759.0 million in connection with financings and derivative financial transactions with third parties on behalf of individual subsidiaries (2010: CHF 648.2 million).

As at 31 December 2011, there are no pending legal disputes of a nature liable to have a significant impact on the asset and income situation of the Allreal Group for which no corresponding provisions are in place.

5.4.1  Management of finance and capital

In the context of the financing strategy, in the investment guidelines last amended on 1 October 2006, the Board of Directors issued rules on the extent to which the Allreal Group can take out external debt. The share of consolidated equity must be over 35% on the balance sheet cut-off date, net gearing must not exceed 150%, the interest coverage ratio must not fall below 2.0 and borrowing against investment and development real estate must be less than 70%. The guidelines have not changed from the previous year.

The Board of Directors reviews the capital structure on a quarterly basis and monitors in particular compliance with the limits set out in the investment guidelines.

As at the balance sheet cut-off date, the financial ratios are complied with as follows:

Equity ratio

(equity as a percentage of liabilities)

Net gearing

(net financial debt as a percentage of consolidated equity)

Interest coverage ratio

(EBITDA excl. revaluation gains divided by net financial expense)

Collateral value of real estate

(Borrowings in percent of the book value of investment and development real estate in percent)

The Allreal Group is exposed to various financial risks stemming from the market, changes in interest rates, receivables, refinancing and liquidity. Risk management is conducted in compliance with the financing and investment guidelines approved by the Board of Directors. The operational implementation of the guidelines is undertaken directly by the Chief Financial Officer, who submits reports to Group Management on the most important financial risks at least once a month. The Board of Directors is informed of the development of financial risks in writing every three months by Group Management.

In relation to financial instruments, Allreal is mainly exposed to market risk resulting from changes in interest rates. The relevant sensitivity analysis in this connection is set out under 5.4.4.

Fluctuations in the market interest rate give rise to an interest rate risk for the Allreal Group as the Group companies take out fixed advances with mortgage collateral or mortgage loans on a short-term basis up to a maximum of 12 months. Advances are taken out with banks and are denominated exclusively in Swiss francs. This risk is countered with an early and balanced use of derivative financial instruments in the form of interest rate swaps, the aim being firstly to extend the average remaining term to maturity of the financial liabilities and secondly to fix the average interest rate on this debt. This reduces the interest rate risk. At the same time, so-called payer swaps are concluded which involve Allreal entering into a contract as a fixed payer over a certain term. In return, the counterparty pays the variable CHF Libor rate on a 1-, 3- or 6-month basis. The interest payments are settled with the counterparty net on a monthly, quarterly or half-yearly basis. The variable interest payments from the payer swaps can be shortened further, by reducing the variable 3- or 6-month interest rate with the aid of base swaps on a 1-month basis. These base swaps exchange short-term interest payments and have the same maturity as the overlying payer swaps. They enable Allreal to achieve a risk-free reduction in its interest burden without increasing the contract volume. The requirements of hedge accounting (cash flow hedges) are fulfilled for all interest rate swaps.

The maturity structure is reviewed by the Board of Directors and Group Management at least quarterly and the risks are analysed by means of simplified liability management. The aim is to achieve an even distribution of the interest rate renewal dates with a remaining term of three to five years.

As at 31 December 2011, interest rate swaps (payer swaps) totalling CHF 1170 million are in place (31.12.2010: CHF 1120.0 million).

To reduce financial expense, base swaps were concluded on payment flows already hedged by payer swaps; the base swaps had a contract value of CHF 150 million in the preceding years and CHF 100 million in 2011. The base swaps have maturities ranging from December 2012 to February 2017.

During the period under review, interest rate swaps with a total contract value of CHF 200 million and maturities ranging from December 2013 to December 2014 were prematurely extended, and new maturities were fixed up until October 2021 at the latest. As a result, once the new interest rate swaps came into force, the contractually determined fixed payment flows were immediately adjusted downwards. Restructuring of these interest rate swaps did not impact on income.

Of the negative replacement values of CHF 81.1 million, the amount of CHF 77.4 million was recognised under other long-term liabilities for interest rate swaps with a remaining term of greater than twelve months, and the amount of CHF 3.7 million was recognised under other current liabilities for interest rate swaps maturing in 2012.

Valuation of interest rate swaps

No other derivative financial instruments are used.

As at the balance sheet cut-off date, the following values in connection with the outstanding interest rate swaps apply, broken down by contract maturity:

Since hedge accounting is used, effective changes in the value of the interest rate swaps are reported as part of retained earnings in equity. The interest rate swaps have an impact on the consolidated statement of comprehensive income in each reporting period in which interest payments are exchanged with the counterparty. The timing of these coincides with the maturities of the short-term fixed advances on a mortgage basis. In accordance with hedge accounting, the existing interest rate swaps were fully effective throughout the period under review.

A sensitivity analysis was performed, taking account of the contract volume of the derivative financial instruments and borrowings, cash and financial assets as at the balance sheet cut-off date. It was assumed that the balance sheet positions were in place on this scale for a whole year and that the general interest rate level changes by one percentage point. This approach is consistent with the calculations used in internal financial reporting to the Board of Directors and Group Management.

If the general level of interest rates were 100 basis points higher or lower than on the balance sheet cut-off date and if all other variables were to remain constant, net profit would be CHF 1.4 million lower or CHF 0.05 million higher respectively (2010: CHF 0.2 million/CHF 0.1 million) and equity would increase by CHF 48.2 million or decrease by CHF 38.4 million respectively (31.12.2010: CHF 43.7 million/CHF –32.8 million).

The credit risk to which Allreal is exposed is that a counterparty might be unable to meet its financial obligations owing to default, resulting in losses for the Group. Customers' payment arrears and credit standing are continuously monitored in both the Projects & Development division and the Real Estate division. Monthly reports with comments on the largest positions are submitted to Group Management.

Trade receivables and other receivables consist of a large number of balances vis-à-vis counterparties in the Projects & Development division and vis-à-vis tenants and property management companies in the Real Estate division. Receivables from tenancies are typically secured via separate bank guarantees or tenant deposits. There are no concentrations of risk in which a single debtor accounts for more than 10% of total trade receivables. Payments on account are periodically requested for current construction projects. Allreal's close monitoring of receivables explains its low historical default rate.

The credit risk relating to cash and derivative financial instruments is considered small as the counterparties consist solely of banks and insurance companies with good credit ratings (minimum A rating). Allreal endeavours to work with a large number of banks which mainly operate in Switzerland. At CHF 3.9 million, the maximum default risk relating to cash is lower than the book value of CHF 71.9, since with a number of lending banks waiver of the right to offset credit balance against liabilities was contractually excluded.

The maximum default risk relating to receivables and other claims corresponds to the book value. The guarantees and sureties issued in favour of banks in connection with financing transactions and derivative financial instruments are not likely to give rise to any additional charges greater than the recognised borrowings from banks amounting to CHF 1327.4 million.

As at the balance sheet cut-off date, the credit risk relating to financial assets amounts to CHF 10.5 million, which corresponds to the balance sheet item.

As at the balance sheet cut-off date, unutilised immediately callable credit limits granted by banks are in place in an amount of CHF 245 million. In addition, for individual major projects Allreal can draw on existing credit lines up to a further CHF 320 million, depending on the percentage of completion. The financial ratios agreed with banks in the credit agreements and which must be complied with are the same as those laid down in the investment guidelines; during the period under review they were complied with at all times. Three-year medium-term planning is in place for the Allreal Group which ensures that the thresholds laid down in the investment guidelines are complied with on a rolling basis through early extension of maturing loans. Under the financial covenants, Allreal has the option of taking out around CHF 0.8 billion in new borrowings before new equity is required.

The following breakdown shows the non-discounted payment outflows of existing liabilities, including derivative financial instruments (payer swaps) as defined by IAS 39, as at the balance sheet cut-off date. In accordance with contractual agreements, the earliest possible repayments are entered as the maturity dates. Since the interest rate swaps involve fixing the variable payment flows on a monthly, quarterly or half-yearly basis and as this is in the future, the CHF Libor rates on 31 December were used as the reference interest rates on a 1- to 6-month basis.

Interest and nominal amount payments on liabilities

Financial assets and borrowings are recognised using the amortised cost method.

Derivative financial instruments (interest rate swaps) are stated at market value as at the balance sheet cut-off date, by estimating and discounting future payment flows at current interest rates on 31 December. Because the contracts are standardised, it is possible to value them on the basis of current interest rates. Allreal has the interest rate swaps calculated by banks.

Under IFRS 7, all financial instruments carried at fair value must be broken down into categories.

Allocation to the individual categories is dependent on the database for calculating the fair values.

Category 1: Fair value using prices quoted on an active market (stock exchange)
Category 2: Fair value using a valuation method whose input factors are derived from an active market
Category 3: Fair value using a valuation method whose input factors are not observable on an active market

In 2011 and 2010, there were no reclassifications within the categories.

With the exception of the borrowings shown below, it can be assumed that the book values of the financial assets and the other financial liabilities correspond to fair values.

The fair values of the debt components of the bond issues and convertible bond correspond to the market price as at the balance sheet cut-off date. As in the previous year, for the fixed-rate mortgages the relevant swap rates are applied for the various terms plus a credit margin of 0.45%.

The following table shows the book and market values (fair values) of all financial instruments recognised on the balance sheet.

Related parties within the meaning of IAS 24 consist of those shareholders who have formed a group in the shareholders' pooling agreement with a view to complying with the “Lex Koller” requirements, shareholders with stakes of >3% in Allreal Holding AG, the Board of Directors and the companies affiliated with them, Group Management and the Allreal pension fund.

The Board of Directors' compensation for the 2011 financial year amounts to a total of CHF 0.47 million (2010: CHF 0.47 million), while the remuneration paid to the members of Group Management amounts to CHF 3.62 million (2010: CHF 2.19 million). There are no claims, guarantees or liabilities vis-à-vis members of the Board of Directors or Group Management.

Since 1 January 2011, Group Management has consisted of four persons (2010: three). The members of Group Management received a total of CHF 3.62 million, including variable remuneration amounting to CHF 1.84 million in the form of bonuses (CHF 1.74 million) and shares (CHF 0.10 million). The fixed remuneration comprises basic salaries amounting to CHF 1.57 million and contributions to pension funds (executive pension plan) amounting to CHF 0.21 million.

For further information on the remuneration paid to the Board of Directors and Group Management see notes to the annual accounts of Allreal Holding AG on pages 134 to 135.

The Helvetia Group, which holds 11.7% of Allreal Holding AG´s share capital, is represented on the Board of Directors of Allreal Holding AG by Erich Walser. Insurance contracts (policies covering buildings, construction and management) are in place between the Helvetia Group and individual Allreal companies with an annual premium volume of CHF 1.1 million (2010: CHF 1.0 million).

During the year under review, the Projects & Development division carried out construction projects for a total of CHF 61.2 million (2010: CHF 68.2 million) for several parties to the shareholders' pooling agreement under standard market conditions. The project volumes completed amounted to CHF 60.9 million for the Helvetia Group and CHF 0.3 million for the other parties to the shareholders' pooling agreement.

In 2011, the Projects & Development division realised construction projects with a project volume of CHF 4.8 million on behalf of the Swiss Mobiliar Group, which holds 3.0% of the share capital of Allreal Holding AG, but is not a party to the shareholders' pooling agreement. A buildings insurance contract with an annual premium volume of CHF 0.02 million is also in place.

The Privatbank IHAG Zürich AG, which belongs to the group of companies of the core shareholder IHAG Holding AG, has granted Allreal a loan secured by mortgage of CHF 25 million (interest rate 0.54% p.a. until 23.01.2012) and has been entrusted with the task of market making for the company (fees of CHF 0.08 million).

The Allreal Group obtains consultancy services in legal matters from several law firms, including meyerlustenberger Attorneys at Law, in which Dr. Thomas Lustenberger, Chairman of the Board of Directors of Allreal Holding AG, is one of 18 partners. Decisions to assign mandates to external lawyers are normally taken by Group Management without consulting the Board of Directors.

In the 2011 financial year, meyerlustenberger charged Allreal fees amounting to CHF 0.06 million (2010: CHF 0.29 million).

The Allreal pension fund holds Allreal registered shares with a value of CHF 1.3 million (2010: CHF 1.3 million). As at the balance sheet date, there are no significant receivables or liabilities between Allreal pension fund and the Allreal companies. During the period under review, Allreal´s employer´s contributions amounted to CHF 2.8 million (2010: CHF 2.6 million).

Taking into account the above-mentioned facts, no other transactions with related parties took place in 2011.

The transactions between the individual Group companies are carried out at arm's length. This also applies in particular to building services provided to the Real Estate division by the Projects & Development division.

In addition, the Projects & Development division performs management services for the other parts of the company. In 2011, it received CHF 4.4 million (2010: CHF 4.0 million) from the Real Estate division as well as CHF 0.6 million (2010: CHF 0.6 million) from Allreal Holding AG for such services. These sums were eliminated in the consolidated financial statements.

Between 31 December 2011 and 10 February 2012 (date on which the consolidated financial statements were approved by the Board of Directors), no events took place which would result in any adjustments to the book values of the assets and liabilities or which would need to be disclosed here.