5-1 Introduction
The “Management Discussion and Analysis of the Financial Conditions and Results of Operations” section presents an analytical review of the operational performance and financial position of Sumou Real Estate Company (the “Company”) during the fiscal years ending on December 31, 2020, 2021, and 2022G. This section is based on the financial statements for the fiscal year ending on December 31, 2020G, the fiscal year ending on December 31, 2021G, and the fiscal year ending on December 31, 2022G. The financial statements were prepared by the Issuer and audited in accordance with international audit standards by the Issuer’s Auditor Talal Abu-Ghazaleh & Co., Certified Public Accountants, for the fiscal year December 31, 2020G, while the financial statements were prepared by the Issuer and audited in accordance with international audit standards by the Issuer’s Auditor Al-Azem, Al- Sudairy, Al-Sheikh and Partners Office for Professional Consulting, a member of the Crowe International Group for the fiscal year ending December 31, 2021 and December 31, 2022G. The Issuer applied the International Financial Reporting Standards and interpretations issued by the Board of International Accounting Standards and approved in the Kingdom of Saudi Arabia, and other standards and versions approved by the Saudi Organization for Certified Public Accountants (together referred to as “International Financial Reporting Standards approved in the Kingdom of Saudi Arabia”) for preparation of audited financial statements for the years ending on December 31, 2020G, 2021G, and 2022G.
Neither Talal Abu-Ghazaleh & Co. Certified Public Accountants, Al-Azem, Al-Sudairy, Al-Sheikh and Partners Office for Professional Consulting, a member of Crowe International, nor any of their subsidiaries or employees own any shares or interest of any kind in the Issuer that would affect their independence, and the auditors have provided their written consent to indicate in this document their role as auditors of the Issuer's accounts for the fiscal years ending on December 31, 2020G and 2021G and 2022G.
As per the property register on 04/11/1444H (corresponding to 24/05/2023G), Aldukheil Financial Group (the Financial Advisor to the Issuer) owns 224,733 ordinary shares, representing 0.6% of the total shares of the Issuer.
This ownership of the Financial Advisor does not contradict with the fact that the Financial Advisor is completely independent from the Issuer, and there is no conflict of interest.
The above-mentioned financial statements also form an integral part of this Document, and this section should be read in conjunction with those statements and the accompanying notes. These financial statements have been included in the “Financial statements and the auditors’ report thereon” section of this Document.
All amounts mentioned in this section have been presented in Saudi riyals, unless otherwise indicated, and the amounts and percentages have been rounded up to the nearest decimal place. Therefore, if the numbers in the tables are added, their sum may not correspond to the totals mentioned in those tables or with the Issuer's audited financial statements.
This section may contain forward-looking statements of the Issuer based on the Management's current plans and expectations regarding the Issuer's business growth, results of operations and financial conditions. This information includes uncertain risks and expectations, and the Issuer's actual performance may differ materially from these expectations due to various factors, including those discussed in this section or another section of this Document, especially the factors mentioned in Section (2) "Risk Factors".
5-2 Board members' declarations regarding the financial statements
The members of the Board of Directors declare that the financial information contained in this section has been prepared on a consolidated basis and extracted without material modifications, and presented in a format consistent with the audited financial statements for the fiscal years ending on december 31, 2020, 2021, and 2022G, and the accompanying notes, which were prepared in accordance with International Financial Reporting Standards. These financial statements have been audited in accordance with the International Financial Reporting Standards approved in the kingdom of Saudi Arabia and other standards and versions approved by the Saudi Organization for Certified Public Accountants.
The members of the Board of Directors declare that there has been no material negative change in the financial and commercial condition during the three years immediately preceding the date of submitting the transfer application, and up to the end of the period covered by the auditors report until approval of the Transfer Document.
The members of the Board of Directors declare that all material facts regarding the Issuer and its financial performance have been disclosed in this Document, and that there are no other facts, information or documents the omission of which might lead to the data contained in this document being misleading.
The members of the Board of Directors declare that the Issuer does not have any property, including contractual securities or other assets whose value is subject to fluctuations or whose value is difficult to ascertain, which significantly affects the evaluation of the Issuer’s financial condition.
The members of the Board of Directors declare that there are no commissions, discounts, brokerage fees, or any non-cash compensation granted by the Issuer or its subsidiaries during the three years immediately preceding the date of submitting the transfer application in relation to the shares subject to the transfer.
The members of the Board of Directors declare that the capital of the Issuer and its subsidiaries are not included in an option right.
5-3 Main factors affecting the Issuer's operations
The real estate sector depends on multifaceted success factors, but at the same time these factors may reveal some risks that may affect the Issuer's operations. The following is a summary of the most significant ones of these factors and their impact on the Issuer's operations:
5-3-1 Demographic factors
The demand for housing units depends on several factors, including: population, population growth rate, per capita income, average family size, urban distribution, and the percentage of youth in the society, in addition to the requirements of some population groups, young people in particular, who are looking for developed residential compounds. Therefore, any change that may occur to one of these factors could affect the demand, by increase or decrease, which will require special policies to harmonize the activities and results of the Issuer's operations accordingly.
5-3-2 Economic factors
The Issuer's business is generally affected by changes in economic factors such as the volume of Government spending, fluctuations in material prices, changes in exchange rates, and others. For example, the volume of Government spending on the real estate sector directly affects activity within the sector. The fluctuation of the procurement market and the prices of materials fundamentally affects the profitability of projects. In addition, the change in exchange rates in the event that building materials are imported from abroad affects the general profitability, which is reflected in the cash liquidity for the implementation of the project. Also, the taxes imposed may be subject to change in the future. Therefore, any change in it or in any of the mentioned factors - for example but not limited to - will have a material impact on the Issuer's business and results.
5-3-3 Changes in the external regulatory environment
The Issuer's business is subject to the laws and regulations in force in the Kingdom, and the regulatory environment in which the Issuer operates may be subject to change. Also, organizational changes caused by economic factors may have a significant impact on the Issuer's operations by restricting the development and expansion of the Issuer. The Issuer may deem it necessary or appropriate to modify its operations in order to operate in accordance with that law, which may have a direct impact on the Issuer's sales or services provided, incur additional costs, or increase levels of competition in the market. In addition, external changes may be represented in an increase in the rate of value-added tax, real estate disposal tax on real estate transactions, the requirement of certain licenses that must be obtained by real estate developers, or the requirements of high settlement rates, and may include the imposition of land buyer protection regulations that may constitute an obstacle to real estate developer business. Therefore, any change that may occur in the regulatory environment may materially affect the Issuer's financial condition and future prospects.
5-3-4 Internal Organizational Factors
The smooth, sustainable and balanced operation of the Issuer's and the achievement of high returns and revenues depend entirely on the constant quality of outputs, and thus the continuity of the Issuer's institutional reputation and increased confidence and loyalty to the services provided by the Issuer. This is affected by the stability of the Issuer's internal cadres, starting from the Executive Management, passing through the technical departments on sites and projects, and ending with qualified and trained technical workers. As some of the official decisions of the state or even the internal decisions of the departments may produce a change in the level of outputs, and this necessitates the development of a system for job succession and administrative and technical empowerment according to a precise plan taken by the human resources department in the Issuer.
5-3-5 Real estate sector initiatives
The real estate sector is one of the most important pillars of the economy in the kingdom, as it is related to the development of multiple sectors, and it also contributes significantly to raising the domestic product. Therefore, initiatives have been put in place to enhance and revitalize the work of the real estate sector by the state represented by the Ministry of Municipal and Rural Affairs and the Ministry of Housing, and, for example, but not limited to, the “wafi program” to regulate off-plan sales or rent practices. Success of the “off-plan sale” business model depends on the population expansion plans in a specific city or residential area, the demand of buyers to purchase housing units in those areas, and the achievement of high quality in the developed buildings. The Issuer
5-4 Basis of preparation, consolidation, and a summary of the most significant accounting policies
5-4-1 Basis of preparation of the consolidated financial statements
a. Statement of compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed in Saudi Arabia and other standards and pronouncements endorsed by the Saudi Organization for Chartered and Professional Accountants (SOCPA).
b. Preparation the consolidated financial statements
The accompanying consolidated financial statements have been prepared on the basis of historical cost and accrual basis except investments in equity instruments by fair value and recognition of employee benefit obligations that are recognized at the present value of future liabilities using the expected credit unit method.
The consolidated financial statements are presented in Saudi Riyals, which is the Issuer’s functional and presentation currency.
5-4-2 Basis of consolidation of financial statements
The consolidated financial statements incorporate the financial statements of the Issuer and its subsidiaries detailed in note 1. Control is achieved when the Issuer:
− has power over the investee;
− is exposed, or has rights, to variable returns from its involvement with the investee; and
− has the ability to use its power to affect its returns.
The Issuer reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.
When the Issuer has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Group considers all relevant facts and circumstances in assessing whether or not the Issuer’s voting rights in an investee are sufficient to give it power, including:
1. the size of the Issuer’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;
2. potential voting rights held by the Issuer, other vote holders or other parties;
3. rights arising from other contractual arrangements; and
4. any additional facts and circumstances that indicate that the Issuer has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.
Consolidation of a subsidiary begins when the Issuer obtains control over the subsidiary and ceases when the Issuer loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of
during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Issuer gains control until the date when the Issuer ceases to control the subsidiary.
Consolidated and each component of other comprehensive income are attributed to the owners of the Issuer.
Total comprehensive income of subsidiaries is attributed to the shareholders of the Issuer. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Issuer’s accounting policies.
All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Issuer are eliminated in full on consolidation.
5-4-3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies adopted by the Issuer
5-4-3-1 Use of estimates
The preparation of consolidated financial statements in accordance with International Financial Reporting Standards requires the use of estimates and assumptions that may affect the value of restricted assets and liabilities, and disclosure of potential assets and liabilities in the date of the financial statements, and the value of revenue and expenses were disclosure to the period of the financial statement’s preparation. Although these estimates and judgments are based on management’s best knowledge and events available to the management in the date of the financial statements, it is possible that actual final results differ from these estimates.
These estimates and assumptions are reviewed on a continual basis and effects resulting from these accounting changes will be disclosed in the year and future period which are affected by it.
Below are the estimates and assumptions that are subject to a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within subsequent financial years:
a. Impairment of Non-financial assets
The Issuer assesses at each reporting date whether there is an indication that the asset has been impaired. If any indication exists, the Issuer estimates the recoverable amount of the asset. The recoverable amount of the asset is the higher of the fair value of the asset less costs to sell and its value in use. In assessing the value in use, the estimated future cash flows of the asset are discounted to their present value using a discount rate that reflects current market assessments of the time value of funds and the risks specific to the asset. When determining fair value less costs to sell, the latest market transactions are taken into consideration. If the recoverable amount of the asset is estimated at less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in the statement of profit or loss. If a subsequent impairment loss is reversed, the carrying amount of the asset is increased to the revised value of its recoverable amount, but only to the extent that the carrying amount does not exceed the carrying amount that would have been determined in the event that there is no impairment loss on the asset previous years. An impairment loss is recognized directly in the statement of profit or loss.
b. Provisions
allowance is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. When an allowance is measured using estimated cash flows to settle the present liability, its carrying amount is the present value of those cash flows. If some or all of the economic benefits required to settle a provision from a third party are expected to be recovered, the amount due is recognized as an asset if the amount is certain to be recovered and the amount of the receivable can be reliably measured.
c. Useful lives for real estate investments & property, plant and equipment
The Issuer's management determines the estimated useful lives of property, property, plant and equipment for the purpose of calculating depreciation. This estimate is made after taking into account the expected use of the asset or the actual obsolescence. The management periodically reviews the estimated useful lives at least annually and the depreciation method to ensure that the method and periods of depreciation are consistent with the expected pattern of economic benefits of the assets.
d. Assumptions of liabilities of employee’s benefits
After-service benefits represent liabilities that will be settled in the future and require the use of assumptions against expected liabilities. IAS 19 "Employee Benefits" requires management to use more assumptions regarding variables such as discount rates, rate of compensation increases, return on original, mortality rates, turnover, and future health care costs. The Issuer's management leads an actuarial valuation of the liability account. Changes in key assumptions can have a significant impact on expected benefit liabilities and / or periodic employee benefit costs incurred.
e. Zakat
The Issuer is subject to zakat according to the regulations of the Zakat, Tax and Customs Authority in the Kingdom of Saudi Arabia, and the accrued zakat is recorded and charged to the profit or loss statement. Additional zakat liabilities, if any, related to reassessments of previous years by the Zakat, Tax and Customs Authority are recognized in the year in which the final assessments are issued.
5-4-3-2 Investment properties
a. Recognition
Land and buildings owned by the Issuer for purposes of generating rental income or for capital appreciation, or for both purposes, are classified as investment properties. Properties that are created or developed for future use as investment properties are also classified as investment properties.
b. Measurement
Investment properties are measured at cost, less accumulated depreciation, if any. As no land is accounted for depreciation. Building consumption is calculated according to the straight-line method on the basis of its useful life.
Investment properties are stated at cost in accordance with IAS 40, the standard give choices for recording its investment properties are at cost or at fair value provided that there is no impediment to the ability to reliably determine the value of the investment. The management has chosen the cost model to record its investments.
5-4-3-3 Project Under development
Projects under development are properties that are being developed for sale. The development cost mainly includes the cost of land, infrastructure costs, construction cost and all other costs necessary to obtain the properties ready for sale. The cost of land and infrastructure is transferred when there is a change in the use of investment properties as evidenced by commencement of development with a view to sale, and accordingly, such investment properties are reclassified as property under development at their carrying value at the date of reclassification. They are subsequently stated at cost or net realizable value, whichever is lower.
Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completing development and resale expenses.
5-4-3-4 Impairment
a. Financial Assets
At the date of each statement of financial position, the values of the financial assets are reviewed, to determine whether there is any indication of impairment in their value. As for financial assets such as accounts receivable and assets assessed individually as not impaired, they are assessed for impairment on a collective basis. Objective evidence of a decline in the value of a portfolio of receivables may include the Issuer's past experience with collecting payments, an increase in the number of late payments that exceed the average credit period, and may include observable changes in local and global economic conditions that correlate with default on receivables.
The carrying amount of the financial asset is reduced by the amount of the impairment loss directly, for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the formation of a provision account. When a receivable is considered uncollectible, the amount of the receivable and the corresponding amount in the allowance account are written off.
Changes in the carrying amount of the allowance account are recognized in the statement of profit or loss.
b. Non-financial Assets
At the date of each statement of financial position, the Issuer reviews the carrying values of its assets to determine whether there is any indication that these assets have suffered impairment losses. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Issuer estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, collective assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the Statement of Profit or Loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
5-4-3-5 Intangible assets
Intangibles assets comprise software licenses for computers, which have finite lives and are amortised over the period of its useful life on a straight line basis and are tested for impairment whenever there is an indication that