1   Basic principles

The Allreal Group is a real estate company which operates exclusively in Switzerland, with the main focus on the greater Zurich area. It is involved in the development and management of its portfolio of residential and commercial real estate and engages in management activities both for its own yield-producing properties and on behalf of third parties (Real Estate division). The general contraction activities encompass project development and the realisation, purchase and sale of properties (Projects & Development division).

Allreal Holding AG (parent company) has its registered office in Baar, Canton Zug, and is listed on the SIX Swiss Exchange.

On 11 February 2013, the Board of Directors of Allreal Holding AG approved the consolidated financial statements for publication. They are also subject to the approval of the annual general meeting of Allreal Holding AG of 5 April 2013.

The consolidated annual accounts are based on the individual company accounts, which were prepared in accordance with uniform Group accounting standards as at 31 December. The consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS) and conform to the Listing Rules as well as Article 17 of the Directive on Financial Reporting of the SIX Swiss Exchange (Directive Financial Reporting, DFR) and Swiss law.

With the exception of the adjustments outlined under Note 1.3, the same principles of accounting shall apply as for the 2011 consolidated financial statements. See 2.30 in connection with the valuation uncertainties.

With the acquisition of the Hammer Retex Group as at 4 April 2012, the scope of consolidation expanded by the acquired companies with effect from the acquisition date, see 4.5.

In the 2012 consolidated financial statements, Allreal applied the following new IFRS standards and interpretations for the first time:

• IAS 12: Deferred Tax: Recovery of Underlying Assets (Amendment)
• IFRS 7: Financial Instruments: Transfers of Financial Assets (Amendment)

The revised standards have no significant impact on the consolidated financial statements.

Some new or amended IFRS standards and interpretations have been adopted by the IASB, but will only enter into force in a subsequent accounting period. The new developments or amendments are listed in the following table, specifying the financial year in which the adjustment enters into force at Allreal.

IAS 19

The revised standard will result in a large number of changes in the treatment of pension assets and pension commitments. The main changes relate to the recalculation of pension commitments and past-service cost taking account of the apportionment of risk between the employer and the employees. In addition, the corridor method for recognising actuarial gains and losses will cease to be used and a net interest rate is to be introduced in place of interest costs and anticipated returns. To supplement this, additional disclosure obligations may be necessary in relation to powers and responsibilities in the pension scheme.

To date, Allreal has taken actuarial gains and losses resulting from the periodic recalculations to income on a straight-line basis over the average remaining working lives of the active scheme members, if they exceed 10 percent of the larger of assets and benefit obligations (corridor method).

After the corridor method ceases to be applied as of 1 January 2013, actuarial gains and losses will be taken immediately to other earnings in equity (not recognised in income) and recognised immediately in past service cost. Non-recognised actuarial losses and non-recognised past service cost amounted to CHF 5.1 million as at 31 December 2012. If the standard had been applied earlier, pension liabilities would have been CHF 4.4 million higher as at 31.12.2012 (after allowing for employee contributions) and equity (net of deferred taxes) would have been CHF 3.4 million lower. Application of the net interest method would have increased pension expense by CHF 0.5 million in 2012.

IFRS 13

The new standard replaces the requirements previously incorporated in IAS 40 for determining the fair value of investment real estate. The concept of “highest and best use”, which entails a slightly modified definition of fair value, is now used. Allreal only expects the implementation of the standard to result in higher fair values for a small number of Allreal investment properties. To date, only four properties have been identified for which adjustments are possible following application of the new standard. Examples of cases potentially resulting in higher fair values are underused plots of land, future changes of use, replacement buildings and conversions of rental apartments into condominium properties. The quantitative impact on the consolidated financial statements is assessed as immaterial at the present time.

The detailed impact of the new IFRS standards and interpretations on the consolidated financial statements is to be analysed in 2013. Apart from additional disclosure requirements, the remaining IFRS amendments are not expected to result in any material adjustments.

1.3     Change in realisation of gains on development real estate, change in presentation of consolidated statement of comprehensive income and gross presentation of downpayments for development real estate

1.3.1  Agreement with SIX Exchange Regulation on the 2011 IFRS annual financial statements

In the first half of 2012, as part of preliminary clarifications and an investigation, SIX Exchange Regulation determined facts relating to the 2011 IFRS annual financial statements of the Allreal Group, which, in accordance with IAS 8, lead to a retrospective adjustment of the previous year’s accounts, see notes 1.3.2 to 1.3.5.

SIX Exchange Regulation and Allreal Holding AG reached a written agreement, under which the proceedings against the company are deemed to have been completed, subject to compliance with the conditions stipulated.

1.3.2  Realisation of gains on development real estate

Up until now, gains on sales of development real estate have only been recognised in the statement of comprehensive income once ownership of the last units of own projects has been transferred. This does not meet the requirements of IAS 18, under which the gains resulting from a given transaction must be recorded at the same time as the revenues and expenditure from the same transaction. This means that when ownership of individual units of development real estate is transferred and the associated revenues are recognised in the statement of comprehensive income, the pro rata project costs and gains also have to be recorded.

For the 2011 financial year as a whole, this results in additional gains on sales of development real estate amounting to CHF 9.2 million and tax expenses amounting to CHF –3.2 million (2010: CHF –10.0 million/CHF 3.5 million). Compared to the previously published figures, this increases the net profit for 2011 by a net CHF 6.0 million (2010: 2010: CHF –6.5 million). In the consolidated balance sheet, these adjustments increase the value of development real estate as at 31 December 2011 by CHF 10.7 million (31.12.2010: CHF 1.4 million), while the value of the provisions for deferred taxes increases by CHF 3.8 million (31.12.2010: CHF 0.5 million). The year-back figures were restated accordingly and are recognised in the 2012 consolidated financial statements.

1.3.3  Gross presentation of downpayments for development real estate

In the consolidated balance sheet, downpayments made by future owners of real estate units for development were previously offset against the book value of development real estate. This does not comply with the requirements of IAS 1 as assets and liabilities may only be offset where this is explicitly required by an IFRS standard, which is not the case in the present instance. For this reason, the downpayments for development real estate are now shown on the consolidated balance sheet as a separate position under liabilities. As at 31 December 2011, downpayments for development real estate amounted to CHF 18.2 million (31.12.2010: CHF 63.2 million). The year-back figures were adjusted accordingly.

1.3.4  Change in presentation of consolidated statement of comprehensive income

As a minimum requirement for the reporting of comprehensive income, IAS 1 requires all sales revenues recognised during a period under review to be reported in accordance with IAS 18 (“Operating revenue”). IAS 33 furthermore specifies that adjusted earnings per share which are not based on the calculations laid down by IAS 33 may only be reported in the Notes.

To date, Allreal has reported sales revenues recognised under IAS 18 in the statement of comprehensive income broken down by business areas and has disclosed earnings per share excluding revaluation effect as information appended to the statement of comprehensive income. This does not comply with IFRS requirements.

The presentation of the statement of comprehensive income has therefore been adjusted to IFRS requirements. These changes do not affect net profit or consolidated equity.

Moreover, a revised statement of comprehensive income was already presented when the consolidated financial statements for the 2011 financial year were published, as previously the project volume completed by the Projects & Development division (Projects & Development sales) was reported in the statement of comprehensive income as the sum of all income from third-party projects and revenues from the sales of development real estate – determined by the production method. At the same time, investment costs for unsold development real estate were charged to direct expenses for completed project volume Projects & Development. As IAS 2 and IAS 18 specify that revenue from the sale of development real estate and associated costs may only be recorded in the statement of comprehensive income on the transfer of benefits and risks, the result of the Projects & Development division was divided into income from realisation Projects & Development (third-party projects) and income from sales Development (own projects).

1.3.5  Impact of the adjustments

The following tables summarise the impact of the adjustments described in Notes 1.3.2 to 1.3.4:

Consolidated statement of comprehensive income

Consolidated balance sheet

Because of these adjustments, both the consolidated cash flow statement and segment information for the 2011 financial year have changed. In the consolidated cash flow statement, this resulted in corrections in the positions “Net profit before tax”, “Increase in development real estate” and “Decrease in downpayments for development real estate” without this necessitating adjustments to the positions “Cash flows from operating activities”, “Investment activities” or “Financing activities”.

Group companies over which the Allreal Group exercises more than 50% of management and control will be taken into account through full consolidation in the consolidated financial statements. New companies will be fully included from the reference date of the acquisition.

Capital is consolidated at the time of purchase using the acquisition method. The purchase price for a corporate acquisition is determined as the total of the market value of the assets transferred, the liabilities contracted or taken over and the equity financial instruments issued by Allreal. Transaction costs in connection with a corporate acquisition will be charged to the income statement. The goodwill arising from a corporate acquisition is reported as an asset on the balance sheet and corresponds to the surplus of the purchase price, the contribution of minority interests in the companies taken over and the market value of the share of previously held equity over the balance of the assets, liabilities and contingent liabilities valued at market values. If the difference is negative, the surplus is immediately charged to the income statement after renewed assessment of the market value of the net assets taken over.

Receivables and liabilities, expenses and income between the consolidated companies and intercompany interim earnings are eliminated.

During the period under review from 4 April 2012, the scope of consolidation expanded to include the three acquired companies Hammertor AG, Hammer Retex AG and Wohnbau Zürich AG, see 4.5.

The Allreal Group is subdivided into the two divisions Real Estate and Projects & Development, which constitute segments in their own right. This presentation is in line with the management approach under which Group Management, as the decision-making body, monitors the results of the two divisions on the level of net profit on a quarterly basis. For the transfer of segment reporting to the consolidated statement of comprehensive income, see 2.7.

The Real Estate division comprises the companies Allreal Home AG (residential properties), Allreal Office AG (commercial properties), Allreal Toni AG (Toni site in Zurich-West), Allreal Vulkan AG (commercial properties at Vulkanstrasse and Bändliweg in Zurich-Altstetten), Allreal West AG (Escher-Wyss site in Zurich-West), Apalux AG (commercial and residential properties) and the property management operations of the Hammer Retex Group.

The Projects and Development division consists of Allreal Generalunternehmung AG, Allreal Markthalle AG and PM Management AG, plus the Hammer Retex Group’s activities as a general contractor.

The activities of Allreal Holding AG (parent company) and Allreal Finanz AG (intercompany financing) are not assigned to segments as their business activities do not generate any operating income. In the segment information they are listed under Holding company/Eliminations.