5    Additional information

5.1.1 Breakdown of tax expense

In the income statement, expense for 2013 and 2012 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 sale 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:

A ruling of the Swiss Federal Supreme Court handed down on 5 October 2012 confirmed that the business establishment of Allreal Finanz AG in the Cayman Islands, which was subsequently liquidated on 31 December 2012, was subject to an unlimited tax liability in Switzerland. The Federal Supreme Court referred the case back to the Administrative Court of Zug (lower court) for further clarifications. As at 11 February 2014 (date of the approval of the annual financial statements by the Board of Directors), no decision has yet been made. The company believes that as at the balance sheet cut-off date sufficient tax provisions are in place.

The deferred taxes on revaluation break down as follows:

The upward valuation of CHF 8.1 million on the investment real estate resulted in a net charge of CHF 2.4 million to deferred taxes in the income statement, CHF 4.5 million of which was attributable to investment real estate under construction and CHF –2.1 million to yield-producing properties.

During the period under review, the temporary valuation differences between the tax-relevant individual financial statements of the Group companies and the consolidated financial statements increased as a result of actual taxation so that deferred taxes amounting to CHF 4.1 million were charged to the income statement (2012: CHF –1.0 million).

In addition, tax effects amounting to CHF 1.1 million arising from loss carry-forwards and valued at the consolidated tax rate of 22% were capitalised. With the sale of several investment properties deferred tax assets and liabilities amounting to CHF 2.2 million net 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 (difference between market/acquisition value) are generally based on an average holding period of ten years from date of purchase, or year of construction in the case of new properties, and a tax rate of up to 30% (2012: 30%). Deferred taxes are calculated separately for each investment property.

Temporary valuation differences on investment real estate (difference between acquisition value and taxable book value) 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.

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% (2012: 22%). A tax rate of 15% (2012: 15%) was applied to valuation differences on write-downs on investment real estate outside the canton of Zurich (2010: 22%).

In 2013, with the amortisation of the 2.125% convertible bond, deferred taxes totalling CHF 0.7 million were credited to the income statement (2012: CHF 0.6 million).

Deferred tax assets comprise the following positions:

Under IAS 12, 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% (2012: 22%) was applied to properties in canton Zurich and a tax rate of 15% (2012: 15%) was applied to properties in the other cantons.

Deferred tax assets on negative replacement values of interest rate swaps decreased by CHF 7.8 million year-on-year to CHF 8.3 million, CHF 8.2 million of which was taken directly to equity and CHF 0.4 million to income.

As at 31 December 2013, capitalised deferred taxes existed on tax loss carry-forwards of CHF 3.8 million (31.12.2012: CHF 2.7 million) relating to one Group company domiciled in Zurich which reported losses in the individual financial statements for 2007 to 2013, which losses are likely to be offset against gains in the following years (expiry of first tax loss carry-forward as of 2015). A tax rate of 22% was applied (2012: 22%).

The recognition of pension commitments in accordance with IAS 19 results in deferred tax assets amounting to CHF 0.5 million as at the balance sheet cut-off date, representing a year-on-year decrease of CHF 0.5 million.

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 30% deferred taxes and as the difference versus the reference tax rate of 22%.

The credit of CHF 0.8 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 or corresponding court rulings.

Income subject to a lower tax rate factors in that a number of the Group companies are domiciled at locations where the total tax burden is significantly lower than the consolidated tax rate of 22%.

Income subject to a higher tax rate factors in that gains on real estate subject to property gains tax are taxed at total tax rates of up to 32% 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 or from the sale of investment properties in the Real Estate 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.

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 802.5 million in connection with financings and derivative financial transactions with third parties on behalf of individual subsidiaries (2012: CHF 781.5 million).

As at 31 December 2013, 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 and financing guidelines last amended on 1 October 2013, 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 the investment and development real estate balance sheet positions may only be refinanced with a maximum of 70% interest-bearing borrowings.

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 and financing guidelines. Capital management encompasses both equity capital and interest-bearing borrowings (financial debt).

The contractual terms agreed with lenders regarding minimum capitalisation (financial covenants) are identical to those laid down by the internal investment and financing guidelines. During the period under review they were complied with without exception and are as follows as at the balance sheet cut-off date:

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)

Refinancing of properties

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

If the financial covenants are not complied with, the lenders are contractually entitled to raise the margins for financing, introduce amortisation obligations or demand full repayment of loans.

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 investment and financing 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, in some cases, 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 duration of the interest lock-in periods of all 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 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 more than four years.

As at 31 December 2013, interest rate swaps (payer swaps) totalling CHF 885.0 million are in place (31.12.2012: 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 100.0 million in the preceding years. The base swaps mature in September 2015 and February 2017.

The positive replacement values (CHF 5.6 million) were recognised under financial assets and the negative replacement values (CHF 43.3 million) were recognised under other long-term liabilities.

Valuation of interest rate swaps

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

The changes in the value of the interest rate swaps which fulfil the requirements for hedge accounting 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.

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 1.0 million lower or CHF 0.003 million higher, respectively (2012: CHF 1.3 million/CHF 0.03 million), and equity would increase by CHF 65.3 million or decrease by CHF 61.2 million, respectively (31.12.2012: CHF 41.1 million/CHF 36.7 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 20% 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 10.5 million, the maximum default risk relating to cash is lower than the book value of CHF 25.0 million, 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 and insurance companies amounting to CHF 1 121.3 million.

As at the balance sheet cut-off date, the credit risk relating to financial assets amounts to CHF 14.6 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 633 million. In addition, for individual major projects Allreal can draw on existing credit lines up to a further CHF 25 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 and financing 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 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 1.4 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 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.

In 2013 and 2012, 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 bonds correspond to the market price as at the balance sheet cut-off date (fair value category 1). For the fixed-rate mortgages the relevant swap rates are applied for the various terms plus a credit margin of 0.60% (2012: 0.45%) (fair value category 2).

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 under the shareholders’ pooling agreement with a view to complying with the “Lex Koller” requirements and as at the balance sheet cut-off date hold 40.73% of the share capital of Allreal Holding AG, the Board of Directors, Group Management and the Allreal pension fund.

The six members of the Board of Directors receive a fixed fee in the total amount of CHF 0.55 million (2012: CHF 0.47 million for five persons), which is paid out in cash after the annual accounts have been approved by the annual general meeting. These persons do not receive any other remuneration.

The remuneration of the Board of Directors is paid directly by Allreal Holding AG. The members of Group Management are employees of Allreal Generalunternehmung AG, a wholly owned subsidiary of Allreal Holding AG, which pays the remuneration of these persons. All amounts represent gross payments before the social insurance contributions paid by the remuneration recipients. The employer’s share of the social insurance contributions is not included.

As of 1 January 2013, Group Management consisted of five persons (31.12.2012: three). Following Raymond Cron’s appointment to Group Management as Head of Realisation effective 1 August 2013, the number of members increased to six. In the period under review, Group Management received remuneration totalling CHF 3.35 million (2012: CHF 3.16 million), out of which the highest total remuneration of CHF 1.16 million (2012: CHF 1.37 million) was paid to Bruno Bettoni, Chief Executive Officer.

Variable bonuses will be paid out in cash in February 2014 after the annual accounts have been approved by the Board of Directors.

[1]Calculated at the market value on date of allocation

In summary, the following remunerations were paid in total to the Board of Directors and Group Management:

In the period under review and in the previous year, neither loans nor other credits were granted to the members of the Board of Directors or Group Management, nor was remuneration paid to former members of these bodies.

As at 31 December 2013, the following members of the Board of Directors and the Group Management were directly or indirectly invested in Allreal Holding AG:

The shareholding of the Helvetia Group, St. Gallen, in which Dr. Ralph-Thomas Honegger holds the office of Chief Investment Officer (CIO) and member of the Executive Management, is not included in the table.

The shares held by the members of the Board of Directors and the Group Management correspond to 1.82% of the share capital of the company (31.12.2012: 0.15%).

As at the balance sheet cut-off date, Raymond Cron holds CHF 0.02 million at par of the 2.125% convertible bond 2009–2014, acquired in previous years.

During the year under review, the Projects & Development division carried out construction projects for a total of CHF 36.2 million (2012: CHF 41.5 million) for several parties to the shareholders’ pooling agreement under standard market conditions, which corresponds to 5.8% of income from realisation Projects & Development (2012: 7.9%).

The Helvetia Group, which holds 10.0% of Allreal Holding AG’s share capital, is represented on the Board of Directors of Allreal Holding AG by Dr. Ralph-Thomas Honegger. Insurance contracts (policies covering buildings, construction and personnel) are in place between the Helvetia Group and individual Allreal companies with an annual premium volume of CHF 1.2 million (2012: CHF 1.1 million).

A buildings insurance policy with an annual premium volume of CHF 0.05 million (2012: CHF 0.02 million) is held with the Swiss Mobiliar Group, which is a member of the shareholders’ pooling agreement through a subsidiary. Allreal was granted fixed mortgages amounting to CHF 52.5 million (CHF 37.5 million at 1.55% and CHF 15.0 million at 1.90%) with terms running until 2022.

On 28 June 2013, the residential properties Zürcherstrasse 52 and 64 in Schlieren were sold to Raiffeisen Pensionskasse Genossenschaft at a selling price of CHF 16.2 million. In addition, on 2 December 2013, the commercial property at Dreikönigstrasse 37 in Zurich was sold to Swiss Life Ltd. at a selling price of CHF 60.1 million. Both buyers are parties to the shareholders’ pooling agreement.

The private bank IHAG Zurich AG, which belongs to the group of companies of the core shareholder IHAG Holding AG, has granted Allreal loans secured by mortgage totalling CHF 31.6 million (interest rate of 0.52% with a term until the end of January 2014). The bank has also been entrusted with the task of market making for the company (fees of CHF 0.08 million).

Allreal obtains consultancy services in legal matters from several law firms, including Meyerlustenberger Lachenal Attorneys at Law, in which Dr. Thomas Lustenberger, Chairman of the Board of Directors of Allreal Holding AG, is one of 34 partners. Decisions to assign mandates to external lawyers are taken by Group Management without consulting the Board of Directors.

In the 2013 financial year, Meyerlustenberger Lachenal billed Allreal fees amounting to CHF 0.07 million (2012: CHF 0.25 million).

For several years, Allreal has had a business relationship with Banque Cantonale Vaudoise, where Olivier Steimer, member of the Board of Directors of Allreal Holding AG, holds the office of Chairman of the Board of Directors. As at the balance sheet cut-off date, loans secured by mortgage are in place amounting to CHF 45.8 million (interest rate of 0.62% with terms until April 2014), along with derivative financial instruments (payer swaps) with a par value of CHF 150 million.

The Allreal pension fund holds Allreal registered shares with a value of CHF 1.4 million (2012: CHF 1.6 million). As at the balance sheet date, there are no receivables or liabilities between the Allreal pension fund and the Allreal companies. During the period under review, Allreal’s employer’s contributions amounted to CHF 3.8 million (2012: CHF 3.0 million).

Taking the above-mentioned into account, no other transactions with related parties took place in 2013.

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 2013, it received CHF 4.7 million (2012: CHF 4.7 million) from the Real Estate division as well as CHF 0.6 million (2012: CHF 0.6 million) from Allreal Holding AG for such services. These sums were eliminated in the consolidated financial statements.

Between 31 December 2013 and 11 February 2014 (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.