1   Basic principles

The Allreal Group is a real estate company which operates exclusively in Switzerland with the main focus on the Zurich business region. 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 2014, 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 28 March 2014.

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 (Directive Financial Reporting, DFR) of the SIX Swiss Exchange and Swiss law.

With the exception of the adjustments outlined under Note 1.3, the same principles of accounting shall apply as for the 2012 consolidated financial statements. See 2.30 in connection with the valuation uncertainties.

Mergers of entities within the Group resulted in a change in the scope of consolidation, see 1.5.

In the 2013 consolidated financial statements, Allreal applied the following new IFRS standards and interpretations for the first time:

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.

Only two of the new or amended IFRS standards and interpretations detailed under Note 1.2 have an impact on the consolidated financial statements of the Allreal Group.

1.3.1   Fair Value Measurement (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, has been applied since 2013. 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 external real estate valuer identified the Escher-Wyss site in Zurich and the residential property at Zollikerstrasse 185/187 Zurich as two yield-producing properties which meet the relevant criteria. The first-time application of the “highest and best use" concept led to a positive correction of CHF 19 million (before tax) and is contained in earnings from revaluation of investment real estate in the consolidated statement of comprehensive income. Any non-application of the “highest and best use" is in respect of existing rental contracts that cannot be terminated immediately, some of which have terms lasting several years.

1.3.2   Employee Benefits (IAS 19)

The revised standard has resulted in a large number of changes in the treatment of pension fund assets and pension fund commitments. The main changes relate to the recalculation of pension fund 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.

As the corridor method ceased 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.

The first-time application of IAS 19 (revised) was made retrospectively. As a result, pension fund commitments as at 31 December 2012 increased by CHF 4.4 million and deferred taxes by CHF 1.0 million. Accordingly, equity was CHF 3.4 million lower. Application of the net interest method increases personnel expense by CHF 0.6 for the full 2012 financial year.

The following tables summarise the impact of the adjustments on the prior-year period:

Consolidated statement of comprehensive income

Consolidated balance sheet

Consolidated statement of changes in shareholders’ equity

Because of these adjustments, both the consolidated cash flow statement and segment information for the 2012 financial year have also changed.

In the consolidated cash flow statement, this resulted in corrections in the positions “Net profit before tax" and “Change in staff pension fund commitments affecting net income" without this necessitating an adjustment to the position “Cash flows from operating activities".

Subsidiaries are fully consolidated with effect from the date of their acquisition, i.e. from the date on which Allreal gains control. Allreal will be deemed to have gained control if, on the basis of existing rights, it is able to direct those activities of the subsidiaries that significantly affect their returns and also if Allreal is exposed, or has rights, to variable returns from its involvement with the subsidiary and is able to affect those returns through its power over the subsidiary.

Subsidiaries are deconsolidated with effect from the date on which control ends.

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 equity held previously 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.

All intra-Group balances, income and expenses, as well as unrealised gains and losses from intra-Group transactions are fully eliminated.

In the period under review, the scope of consolidation decreased as a result of the merger of the two project companies Allreal Markthalle AG and PM Management AG under Allreal Generalunternehmung AG. In addition, Wohnbau Zürich AG was merged into Hammer Retex AG. As all said companies were held, either directly or indirectly, 100% by Allreal Holding AG, this had no financial impact on the consolidated financial statements for 2013.

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) and Apalux AG (commercial and residential properties) and the property management operations of the Hammer Retex Group.

The Projects & Development division consists largely of Allreal Generalunternehmung AG plus the Hammer Retex Group’s activities as a general contractor.

The activities of Allreal Holding AG (parent company) and Allreal Finan  AG (intra-Group 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.