C. MER INDUSTRIES LTD. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 INDEX

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1 CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 INDEX Auditors' Report on the Audit of Components of Internal Control over Financial Reporting 2-3 Auditors' Report 4 Consolidated Balance Sheets 5-6 Consolidated Statements of Income 7 Consolidated Statements of Comprehensive Income 8 Consolidated Statements of Changes in Equity 9-10 Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Appendix A to Consolidated Financial Statements - Condensed Data for Tax Purposes Page

2 Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv 67067, Israel Tel: 972 (3) Fax: 972 (3) AUDITORS' REPORT To the Shareholders of C. MER INDUSTRIES LTD. Regarding the Audit of Components of Internal Control over Financial Reporting Pursuant to Section 9b(c) to the Israeli Securities Regulations (Periodic and Immediate Reports), 1970 We have audited the components of internal control over financial reporting of C. Mer Industries Ltd. and its subsidiaries (collectively, "the Company") as of Control components were determined as explained in the following paragraph. The Company's board of directors and management are responsible for maintaining effective internal control over financial reporting, and for their assessment of the effectiveness of the components of internal control over financial reporting included in the accompanying periodic report for said date. Our responsibility is to express an opinion on the Company's components of internal control over financial reporting based on our audit. We did not audit the effectiveness of the components of internal control over financial reporting of certain subsidiaries, whose assets and revenues constitute approximately 15.70% and 22.8% of the related totals in the consolidated financial statements as of 2011 and for the year then ended, respectively. The effectiveness of the components of internal control over financial reporting of those companies were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to the effectiveness of the components of internal control over financial reporting of those companies, is based on the reports of the other auditors. The components of internal control over financial reporting audited by us were determined in conformity with Auditing Standard 104 of the Institute of Certified Public Accountants in Israel, "Audit of Components of Internal Control over Financial Reporting" ("Auditing Standard 104"). These components consist of: (1) entity level controls, including financial reporting preparation and close process controls and information technology general controls ("ITGCs"); (2) controls over the revenue process; (3) controls over the cash process; (4) controls over the inventory process; (5) controls over the salary process; (6) controls over the expense process (collectively, "the audited control components"). 2

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5 CONSOLIDATED BALANCE SHEETS ASSETS Note Convenience translation (Note 1c) U.S. $ in thousands CURRENT ASSETS: Cash and cash equivalents 3 72,107 67,949 17,783 Restricted cash 3-18,513 4,845 Short-term investments Trade and income receivable 5a 193, ,187 61,028 Income receivable from construction contracts 5b 19,910 24,095 6,306 Other accounts receivable 6 25,945 29,982 7,847 Inventories 7 95, ,372 32, , , ,628 NON-CURRENT ASSETS: Long-term trade and other receivables 7,511 4,993 1,307 Investments in investees 8 20,598 30,568 8,000 Available-for-sale financial assets 9 76,512 64,618 16,911 Prepaid expenses for operating lease 2m(2) 1,317 1, Property, plant and equipment 10 40,093 40,066 10,486 Goodwill Intangible assets 1,533 1, Employee benefit assets 16 10,136 8,224 2,153 Deferred taxes 17 9,751 7,708 2, , ,439 41, , , ,355 The accompanying notes are an integral part of the consolidated financial statements. 5

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7 CONSOLIDATED STATEMENTS OF INCOME Note Convenience translation (Note 1c) Year ended Year ended (except per share data) U.S. $ in thousands Revenues from sales 590, , , ,585 Cost of sales 21b 433, , , ,036 Gross profit 156, , ,578 42,549 Research and development expenses, net 21c 3,752 4,416 6,394 1,674 Sales and marketing expenses 21d 52,894 52,245 51,572 13,497 General and administrative expenses 21e 42,014 52,238 53,229 13,931 Other income 21h (468) (12,967) (259) (68) Operating income 53,390 40,059 51,642 13,515 Finance income 21f 12, , Finance expenses 21g (19,669) (15,553) (15,799) (4,135) Company's share of losses of associates, net (2,799) (2,493) (7,715) (2,019) Income before taxes on income 48,868 22,874 29,251 7,655 Taxes on income 17 7,932 6,859 14,444 3,780 Net income 40,936 16,015 14,807 3,875 Attributable to: Company shareholders 38,712 15,247 14,085 3,686 Non-controlling interests 2, ,936 16,015 14,807 3,875 Net earnings per share attributable to Company shareholders: 22 Basic net earnings Diluted net earnings The accompanying notes are an integral part of the consolidated financial statements. 7

8 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Convenience translation (Note 1c) Year ended Year ended U.S. $ in thousands Net income 40,936 16,015 14,807 3,875 Other comprehensive income (loss) (net of the tax effect): Gain (loss) from available-for-sale financial assets 19,012 13,052 (8,325) (2,179) Transfer to income statement for available-for-sale financial assets - (12,568) 1, Adjustments from translation of financial statements of foreign operations 3,107 (2,322) (3,795) (993) Group's share of other comprehensive income (loss) of associates 27 (80) Total other comprehensive income (loss) 22,146 (1,918) (10,140) (2,654) Total comprehensive income 63,082 14,097 4,667 1,221 Attributable to: Company shareholders 60,858 13,433 3,942 1,032 Non-controlling interests 2, ,082 14,097 4,667 1,221 The accompanying notes are an integral part of the consolidated financial statements. 8

9 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY The accompanying notes are an integral part of the consolidated financial statements. 9 C. MER INDUSTRIES LTD.

10 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY The accompanying notes are an integral part of the consolidated financial statements. 10 C. MER INDUSTRIES LTD.

11 CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Convenience translation (Note 1c) Year ended Year ended U.S. $ in thousands Net income 40,936 16,015 14,807 3,875 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Adjustments to the profit and loss items: Interest expenses, net 6,046 6,352 9,361 2,450 Depreciation 9,552 10,106 9,598 2,512 Amortization of prepaid expenses in respect of operating lease Amortization of intangible assets, net Gain from sale of property, plant and equipment, net (316) (434) (1,155) (302) Gain from sale of available-for-sale financial assets - (12,568) - - Company's share of losses of associates, net 2,799 2,493 7,715 2,019 Taxes on income 7,932 6,859 14,444 3,780 Changes in employee benefit liabilities, net (4,686) (625) 3, Share-based payment 1, Exercise of warrants in subsidiary (569) - - Impairment of available-for-sale financial assets carried to profit or loss Revaluation of liabilities to banks 2,646 1,349 3, Revaluation of long-term debts collectible Decrease (increase) in value of securities measured at fair value through profit or loss Amortization of discount and issuance costs for debentures 1, Gain from early redemption of debentures (782) ,647 15,224 47,783 12,505 Changes in assets and liabilities: Decrease (increase) in trade receivables 36,739 (26,426) (45,510) (11,910) Decrease (increase) in other short-term and long-term receivables 13,483 (6,136) (811) (212) Decrease (increase) in inventories 7,248 (10,454) (31,325) (8,199) Increase (decrease) in trade payables (5,517) 2,942 32,451 8,493 Increase (decrease) in other accounts payable (1,894) 14,532 37,731 9,875 50,059 (25,421) (7,464) (1,953) Cash paid and received during the year for: Dividend received Interest paid (5,825) (5,931) (6,181) (1,618) Taxes paid (8,279) (10,765) (9,715) (2,543) 11 (14,104) (16,696) (15,111) (3,955) Net cash provided by (used in) operating activities 102,538 (11,993) 40,015 10,472 The accompanying notes are an integral part of the consolidated financial statements.

12 CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from investing activities: Convenience translation (Note 1c) Year ended Year ended U.S. $ in thousands Completion of consideration for acquisition of subsidiary - (87) - - Purchase of property, plant and equipment (13,702) (16,130) (12,484) (3,268) Proceeds from sale of property, plant and equipment 1,891 2,918 4,121 1,079 Acquisition of newly consolidated subsidiaries (a) (485) - - Acquisitions and investments in associates (2,981) (5,616) (3,459) (905) Acquisition of available-for-sale financial assets (2,067) (8,396) (1,241) (325) Proceeds from sale of available-for-sale financial assets - 14,439 - Restricted cash - - (18,513) (4,845) Grant of loans and other long-term credit (1,000) (1,595) (10,427) (2,729) Net cash used in investing activities (18,344) (14,467) (42,003) (10,993) Cash flows from financing activities: Exercise of warrants into shares Dividend paid (8,998) (8,988) (10,000) (2,617) Dividend paid to non-controlling interest holders (560) (333) (210) (55) Buyback of Company shares (2,502) (6,731) (3,068) (803) Repayment of debentures (19,836) (17,300) (8,897) (2,328) Receipt of long-term loans and other liabilities 5,289 26,332 9,254 2,422 Repayment of long-term loans and other liabilities (9,152) (9,188) (12,188) (3,190) Short-term credit from banks and other credit providers, net (14,526) 41,048 26,641 6,972 Net cash provided by (used in) financing activities (50,285) 24,844 1, Translation differences in respect of balances of foreign operations (2,780) 1,075 (3,702) (968) Increase (decrease) in cash and cash equivalents 31,129 (541) (4,158) (1,088) Cash and cash equivalents at the beginning of the year 41,519 72,648 72,107 18,871 Cash and cash equivalents at the end of the year 72,648 72,107 67,949 17,783 (a) Acquisition of newly consolidated subsidiaries: Assets and liabilities of the subsidiaries at date of acquisition: Working capital (excluding cash and cash equivalents) Fixed assets, net Intangible assets, net 2, Goodwill created upon acquisition Non-current liabilities (197) Non-controlling interests (1,647) Payables for acquisition of subsidiary (1,000) The accompanying notes are an integral part of the consolidated financial statements. 12

13 NOTE 1:- GENERAL a. C. Mer Industries Ltd. ("the Company") and its investees are engaged in the development, production and establishment of communication systems, electronic security systems, command and control management systems, production, establishment and planning of communication towers, structures for communication equipment and building sites. The Company and its subsidiaries operate mostly in Israel, Mexico, in South America and Africa. b. Definitions: The Company - C. Mer Industries Ltd. The Group - C. Mer Industries Ltd. and its investees, as detailed in Note 25 below. Subsidiaries Associates - Companies that are controlled by the Company (as defined in IAS 27) and whose financial statements are consolidated with those of the Company. - Companies over which the Company has significant influence and that are not subsidiaries. The Company's investment therein is included in the consolidated financial statements of the Company at equity. Investees - Subsidiaries and associates. For a list of companies, see Note 25 below. Interested parties - As defined in the Israeli Securities Regulations (Annual Financial Statements), Related parties - As defined in IAS 24. c. The financial statements as of 2011 and for the year then ended have been translated into U.S. dollars using the representative exchange rate as of that date ($ 1 = NIS 3.821). The translation was made solely for the convenience of the reader. The amounts presented in these financial statements should not be construed to represent amounts receivable or payable in dollars or convertible into dollars, unless otherwise indicated in these statements. 13

14 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES a. 1. Basis of presentation of the financial statements: The Company's financial statements have been prepared on a cost basis, except for available-for-sale financial assets, financial instruments at fair value through profit and loss, assets and liabilities due to employee benefits and liabilities for cashsettled share-based payment arrangements which have been measured at fair value, and investments in associates accounted for at equity. The Company has chosen to present the statement of comprehensive income according to the activity attribute method. 2. Preparation format of the financial statements: These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS Standards"). These standards include: a) International Financial Reporting Standards (IFRS). b) International Accounting Standards (IAS). c) Interpretations to the International Financial Reporting Standards (IFRIC) and the International Accounting Standards (SIC). Additionally, the financial statements were prepared in accordance with the provisions of the Securities Regulations (Annual Financial Statements), Consistent accounting policies: The following accounting policies have been applied consistently in the financial statements for all periods presented, except as described in 4 below. 4. Changes in the accounting policy in light of the implementation of new standards: IAS 1 - Presentation of Financial Statements In accordance with the amendment to IAS 1 ("the Amendment"), it is possible to display the movement between the opening balance and the closing balance for each component of the other comprehensive income in the statement of changes in equity or in the context of notes to the annual financial statements. Accordingly, the Company has selected to display the said details in the statement of changes in equity. The Amendment is applied retroactively as of January 1,

15 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) IAS 24 - Related Party Disclosures The amendment to IAS 24 ("the Amendment") clarifies the definition of Related Party in order to simplify the identification of relationships with related parties and to prevent inconsistency in the application of this definition. In addition, companies related to the government are given partial relief, in the framework of the Amendment, with regard to disclosing transactions entered into with the government, and with other companies as stated. The Amendment was retroactively applied as of January 1, The retroactive application of the Amendment did not materially affect the financial statements of the Company. IAS 32 - Financial Instruments: Presentation - Classification of Rights Issues The amendment to IAS 32 ("the Amendment") determines that rights, options or warrants to purchase a fixed number of the Company's equity instruments in consideration for a fixed fee of any currency, will be classified as equity instruments if the Company offers the rights, options or warrants in a relative manner (pro-rata) to all existing holders of the same type of equity instruments which are not derivatives. The Amendment was retroactively applied as of January 1, The retroactive application of the Amendment did not materially affect the financial statements of the Company. IFRS 3 (Revised) - Business Combinations The amendments to IFRS 3 (Revised) pertain to the following matters: a) Measuring non-controlling interests: The amendment limits the circumstances in which it is possible to choose the measurement of non-controlling interests based on their fair value on the date of acquisition or at their proportionate share in the recognized amounts of the acquiree's identifiable net assets. According to the amendment, this possibility is only available for types of non-controlling interests that are present ownership interests and entitle their holders to a pro rata share of the acquiree's net assets in the event of liquidation (usually shares). In contrast, for other types of non-controlling interests (such as options that represent equity instruments of the acquiree) no such choice is available, and they are measured at fair value on the acquisition date, unless another measurement basis is required by IFRS such as IFRS 2. The amendment has been applied retrospectively from the date of original adoption of IFRS 3 (Revised). 15

16 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The retroactive application of the Amendment did not materially affect the financial statements of the Company. b) Granting share-based payment in a business combination: The amendment prescribes the accounting treatment in a business combination of an exchange of the acquiree's share-based payment awards (whether the acquirer is obligated or chooses to exchange them) with the acquirer's share-based payment awards. According to the amendment, the acquirer allocates a portion of the value of the award to the consideration for the business combination and a portion as an expense in the period following the acquisition. However, if the award expires as a result of the business combination and is exchanged for a new award, the value of the new award in accordance with IFRS 2 is recognized as an expense in the period following the acquisition and is not included as part of the consideration for the acquisition. Furthermore, if share-based payment awards are not exchanged, then, if the instruments have vested, they form part of the noncontrolling interests and are measured pursuant to the provisions of IFRS 2. If the instruments have not vested, they are measured at the value that would have been used had they been granted on the acquisition date and this amount is allocated between the non-controlling interests and a postacquisition expense. The amendment has been applied retrospectively from the date of original adoption of IFRS 3 (Revised). The retroactive application of the Amendment did not materially affect the financial statements of the Company. c) Transitional provisions for contingent considerations from business combinations that occurred before the application of IFRS 3 (Revised): The Amendment clarifies that the amendments to IFRS 7, IAS 32 and IAS 39 which determine that a contingent consideration from a business combination shall be dealt with in accordance with the standards above are not implemented with regard to contingent consideration that has accrued in a business combination the date of purchase of which is earlier than the application date of IFRS 3 (Revised). With regard to the said contingent consideration, the provisions of IFRS 3 should continue to be applied as they were prior to the amendment. The amendment is applied retroactively as of January 1, The retroactive application of the Amendment did not materially affect the financial statements of the Company. 16

17 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) IFRS 7 - Financial Instruments: Disclosure The amendment to IFRS 7 ("the Amendment") clarifies the disclosure requirements presented in the standard. As part of this, the relationship between the quantitative disclosure and qualitative disclosures is emphasized, as is the nature and scope of risks resulting from financial instruments. In addition, as part of the Amendment, disclosure requirements regarding collaterals held by the Company were reduced, and disclosure requirements regarding credit risk were amended. The Amendment was applied retroactively starting with the financial statements for the periods beginning on January 1, The retroactive application of the Amendment did not materially affect the financial statements of the Company. IFRIC 14 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction The amendment to IFRIC 14 ("the Amendment") provides guidelines on estimating the recoverable amount of a defined benefit asset. The Amendment enables the Company to deal with payments in advance as part of the minimum funding requirement as an asset. The Amendment was retroactively applied as of January 1, The retroactive application of the Amendment did not materially affect the financial statements of the Company. IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments IFRIC 19 ("the Interpretation") establishes the accounting treatment for transactions in which financial liabilities are extinguished by issuing equity instruments. According to the Interpretation, equity instruments issued in order to replace liabilities will be measured at the fair value of equity instrument issued, if it can be reliably estimated. If the fair value of the equity instrument issued cannot be reliably estimated, the equity instrument should be measured according to the fair value of the financial liability extinguished as of the date of the extinguishing. The difference between the balance in the financial statements of the financial liabilities extinguished and the fair value of the equity instruments issued is recognized in profit and loss. The Interpretation was retroactively applied as of January 1, The retroactive application of the Interpretation did not materially affect the financial statements of the Company. 17

18 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) b. Significant considerations, estimates and assumptions used in the preparation of the financial statements: 1. Considerations: In the process of applying the accounting policy principles in the financial statements, the Group exercised discretion and made the following judgments on the following issues, which have the most significant effect on the amounts recognized in the financial statements: - Impairment of available-for-sale financial assets The Group assesses at the end of each reporting period whether there is objective evidence that the asset has been impaired and an impairment loss has been incurred. In evaluating impairment, the Group makes judgments as to indicators of objective evidence relating to the extent of the percentage decline in fair value and of the duration of the period of the decline in fair value. See also k below. - Acquisitions of subsidiaries which are not business combinations In accordance with IFRS 3, on the date of the acquisition of consolidated companies and activities, the Company estimates whether the acquisition constitutes a business combination in accordance with IFRS 3. The estimate is based on the following circumstances, pointing to an acquisition of a business: a large number of acquired assets, the existence of a great volume of accessory services, related to the operation of the asset, and the complexity of the management of the asset. See also n below. - Lease classification For the purpose of examining whether a lease should be classified as finance or operating, the Company examines whether the lease transfers in essence all attached risks and benefits to the ownership of the asset. As part of this, the Company examines, inter alia, the existence of acquisition options at opportunity prices, the lease period in comparison with the economic life of the asset, and the fair value of minimal lease payments, in comparison with the fair value of the asset. 18

19 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) 2. Estimates and assumptions: During the preparation of the financial statements, the management is required to exercise discretion and employ estimates, evaluations and assumptions that affect the implementation of the accounting policy and the reported amounts of assets, liabilities, income and expenses. The estimates and assumptions at their basis are reviewed regularly. The changes in accounting estimates are reported in the period of the change in estimate. The key assumptions made in the financial statements concerning uncertainties at the reporting date and the critical estimates computed by the Group, where a material adjustment in the estimates and assumptions may change the value of assets and liabilities for the next financial year are discussed below: - Legal claims In estimating the chances of legal claims filed against the Company and its investees, the companies relied on the opinion of their legal advisors. These estimates by their legal advisors are based on the best of their professional legal opinions, taking into consideration the current stage of the legal proceedings, as well as their accumulated legal experience in various topics. Since the results of the claims are to be decided in courts, the results can be different from these assessments. - Grants by the Chief Scientist Governmental grants received from the Chief Scientist of the Ministry of Industry, Trade and Labor ("the Chief Scientist") are recognized on the date of receipt as a liability, if economic benefits are expected as a result of the research and development activity, which will lead to sale entitling the State to royalties. There is uncertainty regarding the estimated future cash flows and the estimated capitalization rate used for the determination of the liability amount. Regarding the accounting treatment of the grants received from the Chief Scientist, see Note 18c hereunder. - Impairment of available-for-sale financial assets The Group assesses at the end of each reporting period whether there is objective evidence that the asset has been impaired and an impairment loss has been incurred. In evaluating impairment, the Group makes judgments as to indicators of objective evidence relating to the extent of the percentage decline in fair value and of the duration of the period of the decline in fair value. 19

20 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) - Impairment of goodwill The Group examines impairment of goodwill at least once a year. The examination requires the management to perform an estimate of future cash flows expected to arise from the continued use of the cash-generating unit, and also to estimate the appropriate discount rate in regard to these cash flows. For additional information, see t below. - Deferred tax assets Deferred tax assets are recognized for carryforward losses for tax purposes and temporary differences, yet to be utilized, to the extent that it is probable that taxable income will be available against which the losses can be utilized. The management's judgment is required in order to determine the amount of deferred tax assets that can be recognized, based upon the timing and expected amount of future taxable income, and the tax planning strategy. For additional information, see v(2) below. - Pension and other post-employment benefits The liability in respect of post-employment defined benefit plans is determined using actuarial valuations. The calculation of the liability involves making assumptions about, inter alia, capitalization rates, expected rates of return on assets, future salary increases and turnover rates. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. For further details, see Note Fair value of unquoted financial instruments The fair value of unquoted financial instruments categorized into level three of the fair value disclosure hierarchy is determined in accordance with the discounted future cash flows at the current discount rate for items with similar risk characteristics and terms. There exists uncertainty as to the estimated future cash flows and estimated discount rates. For additional information, see Note 15g. - Determining fair value of share-based payment transactions The fair value of share-based payment transactions is based on an acceptable option pricing model. The model's assumptions include the share price, exercise price, expected fluctuation, expected life, expected dividend and risk-free interest rate. 20

21 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) - Estimate of costs under construction contract, and estimate of the engineering completion rate The Group has construction contracts, at a fixed price. The income from construction contracts is recognized according to the engineering completion rate. Costs entailed in the execution of work, for which invoices are yet to be received, are estimated by the Company's management on the basis, inter alia, of information in its possession. The actual costs may be different from these estimates. c. Consolidated financial statements: Due to the initial implementation of IFRS 3 (Revised) and IAS 27 (2008), the Group changed the accounting policy implemented in business combinations and transactions with non-controlling interests. For further information, see a above. The consolidated financial statements include the statements of companies that are controlled by the Company (subsidiaries). Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of the controlled company. The effect of potential voting rights that are exercisable at the balance sheet date is considered when assessing whether an entity has control. The consolidation of the financial statements commences on the date on which control is obtained until the date that such control ceases. Significant mutual balances and transactions and profits and losses resulting from intragroup transactions are eliminated in full in the consolidated financial statements. Non-controlling interests for subsidiaries represent the non-controlling interests in the comprehensive income (loss) of the subsidiaries, and in assets, net, at fair value, upon acquisition of the subsidiaries. The non-controlling interests are presented separately as part of the Company's equity. Starting on January 1, 2010, the acquisition of non-controlling interests by the Group is registered against growth in equity (retained earnings), calculated as the difference between the consideration paid by the Group, and the amount of the purchased part in the non-controlling interests, deducted on the acquisition date (when non-controlling interests include a share of other comprehensive income, the Company re-attributes the accrued recognized sums under other comprehensive income between the Company's owners and the non-controlling interests). When such difference is negative, the decrease in equity (retained earnings) is recognized at the value of this difference. 21

22 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) In disposal of the holdings in a subsidiary, without loss of control, an increase or decrease in equity (retained earnings) is recognized at the value of the difference between the consideration received by the Group and the carrying amount of the non-controlling interests in the subsidiary, added to the Company's equity, taking into consideration also disposal of goodwill for the subsidiary, if any, as well as translation differences for foreign operations recognized under other comprehensive income, if any, in accordance with the decrease in the rate of holding in the subsidiary. Until 2009, for acquisition of non-controlling interests, additional goodwill was recognized, and the effect of the sale of non-controlling interests was recognized in the statement of income. Starting on January 1, 2010, losses are attributed to non-controlling interests even if as a result of this, the remaining non-controlling interests in the consolidated balance sheet are negative. Until 2009, losses were all attributed to the Company's shareholders, unless the non-controlling interest holders had the obligation and ability to perform further investments. Losses accumulated until 2009, were not redistributed between the Company's shareholders and the holders of non-controlling interests. The financial statements of the Company and of the subsidiaries are prepared for the same dates and periods. The accounting policy in the financial statements of the subsidiaries was applied consistently and uniformly with the policy applied in the financial statements of the Company. d. Functional currency, presentation currency and foreign currency: 1. Functional currency and presentation currency: The Company's functional currency is the NIS. The functional currency, which is the currency that best reflects the economic environment in which the Company operates and conducts its transactions, is separately determined for each Group company, including an associate presented using the equity method, and this currency is used to measure its financial position and operating results. The Company's functional currency is the NIS. When a Group company's functional currency differs from the functional currency of the Company, this represents a foreign operation whose financial statements are translated so that they can be included in the consolidated financial statements as follows: a) Assets and liabilities for each balance sheet date (including comparative data) are translated at the closing rate at each reporting date. Goodwill and any fair value adjustments to the carrying amount of assets and liabilities at the date of the acquisition of that foreign operation are treated as assets and liabilities of the foreign operation and are translated at the closing rate at each reporting date. 22

23 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) b) Income and expenses for each period presented in the statement of income (including comparative data) are translated at average exchange rates for the presented periods; however, if exchange rates fluctuate significantly, income and expenses are translated at the exchange rates at the dates of the transactions themselves. c) Share capital, capital reserves and other changes in equity are translated at the exchange rate on the date of their incurrence. d) Retained earnings are translated based on the opening balance translated at the exchange rate at that date and other relevant transactions (for example, dividends) during the period translated as described in sections b) and c) above. e) All resulting translation differences are recognized as a separate item in other comprehensive income (loss) of a separate equity section, as the capital reserve "adjustments arising from translating financial statements". When realizing foreign operations, in part or in whole, the accumulated income (loss), in part or in whole, respectively, recognized under other comprehensive income, is transferred to the statement of income. Starting on January 1, 2010, at the time of realizing a part of a foreign operation, which is a subsidiary, with loss of control, the accumulated income (loss) recognized under other comprehensive income is transferred to the income statement, while at the time of realization of a part of a foreign operation, which is a subsidiary, while retaining control of the subsidiary, a relative part of the accumulated amount recognized under other comprehensive income, is re-attributed to non-controlling interests. Intragroup loans, which are not to be cleared and are not likely to be repaid in the foreseeable future, and that therefore constitute a part of investments in foreign operations, are treated as part of the investment, with exchange rate differences arising from these loans recognized in the same item of equity, as discussed in paragraph e) above. 2. Transactions, assets and liabilities in foreign currency: Transactions denominated in foreign currency (other than the functional currency) are recorded on initial recognition at the exchange rate at the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are translated at the end of each reporting period into the functional currency at the exchange rate at that date. Exchange differences, other than those capitalized to qualifying assets or recorded in equity in hedging transactions, are recognized in profit or loss. Non-monetary assets and liabilities measured at cost in a foreign currency are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currency and measured at fair value are translated into the functional currency using the exchange rate prevailing at the date when the fair value was determined. 23

24 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) 3. Index-linked monetary items: e. Cash equivalents: Monetary assets and liabilities linked to the changes in the Israeli Consumer Price Index ("Israeli CPI") are adjusted at the relevant index at the end of each reporting period according to the terms of the agreement. Linkage differences arising from the adjustment, as above, other than those capitalized to qualifying assets or recorded in equity in hedge transactions, are recognized in profit or loss. Cash equivalents are considered as highly liquid investments, including unrestricted short-term bank deposits with an original maturity of three months or less from the date of acquisition or with a maturity of more than three months, but which are redeemable on demand without penalty and which form part of the Group's cash management. f. Allowance for doubtful accounts: The allowance for doubtful accounts is determined in respect of specific debts whose collection, in the opinion of the Company's management, is doubtful. Impaired debts are derecognized when they are assessed as uncollectible. g. Inventories: Inventories are measured at the lower of cost and net realizable value. The cost of inventories comprises costs of inventory purchase and costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business, deducting the estimated costs of completion and costs required for performing the sale. The cost of inventories is determined as follows: Raw materials - on the basis of the weighted average method. Finished goods - on the basis of average cost, including materials, labor and other direct and indirect production costs. The Company periodically examines the condition and age of inventories and makes provisions for slow moving inventories accordingly. If in a particular period production is not at normal capacity, the cost of inventories does not include additional fixed overheads in excess of those allocated based on normal capacity. Such unallocated overheads are recognized as an expense in the statement of income in the period in which they are incurred. Furthermore, cost of inventories does not include abnormal amounts of materials, labor or other costs resulting from inefficiency. 24

25 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) h. Work under construction contracts: The Group has entered into fixed price construction contracts. Revenues from construction contracts are recognized by the percentage of completion method when all the following conditions are satisfied: the revenues are known or can be estimated reliably, collection is probable, costs related to performing the work are determinable or can be reasonably determined, there is no substantial uncertainty regarding the Company's (prime contractor's) ability to complete the contract and meet the contractual terms and the percentage of completion can be estimated reliably. The percentage of completion is determined based on completion of engineering stages of the work. If not all the criteria for recognition of revenue from construction contracts are met, then revenue is recognized only to the extent of costs whose recoverability is probable ("zero profit margin" presentation). An expected loss on a contract is recognized immediately in cost of sales irrespective of the stage of completion. i. Operational cycle period: The Group has two operational cycles. In relation to contractual works, the operational cycle is longer than a year, and may last between two and three years. In relation to other activities, the operational cycle is up to one year. Therefore, in relation to contractual works, when the operational cycle period is longer than one year, the assets and liabilities related to that activity are classified in the balance sheet as part of the current assets and liabilities, in accordance with the operational cycle. j. Financial instruments: Financial assets within the scope of IAS 39 are recognized at the initial recognition date at fair value plus directly attributable transaction costs, except for investments at fair value with changes through the statement of income. After initial recognition, the accounting treatment of investments in financial assets is based on their classification into one of the following four categories: Financial assets measured at fair value through profit or loss. Held-to-maturity investments. Loans and receivables. Available-for-sale financial assets. 25

26 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) 1. Financial assets at fair value through profit or loss: The Group has financial assets at fair value through profit or loss comprising financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired principally for the purpose of selling or repurchasing in the near term, if they form part of a portfolio of identified financial instruments that are managed together to earn short-term profits or if they are derivatives not designated as hedging instruments. Gains or losses on investments held for trading are recognized in profit or loss when incurred. Derivatives are classified as held for trading, excluding those designated to be used as effective hedging instruments. 2. Loans and receivables: The Group has loans and receivables that are financial assets (non-derivative) with fixed or determinable payments that are not traded in an active market. After initial recognition, loans are presented according to their terms, at amortized cost, using the effective interest method, which also takes into account directly attributed transaction costs, if any. Short-term credit (such as customer credit and other receivables) is presented according to its terms, usually at its nominal value. Gains and losses are recognized in the statement of income when the loans and receivables are derecognized or impaired, and as a result of systematic amortization. For recognition of income from interest, see y below. 3. Available-for-sale financial assets: The Group has available-for-sale financial assets that are financial assets (nonderivative) that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition, available-for-sale financial assets are measured at fair value. Gains or losses from fair value adjustments, except for exchange rate differences that relate to monetary debt instruments that are carried to the statement of income under financing, are recognized in equity as other comprehensive income (loss) in the reserve for available-for-sale financial assets. When the investment is disposed of or in case of impairment, the other comprehensive income (loss) is transferred to the statement of income. For the recognition of income from interest for investments in debt instruments and dividends for investments in equity instruments, see y below. 26

27 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) 4. Fair value: The fair value of financial instruments that are traded in the active market is determined by market prices on the balance sheet date. For financial instruments for which there is no active market, fair value is determined by using valuation techniques. These techniques include using recent transactions at market terms, reference to the current market value of another instrument which is substantially the same, capitalization of cash flow or other valuation models. 5. Financial liabilities: Financial liabilities at amortized cost Loans and credit are recognized initially by fair value less directly allocated transaction costs, if such exist (such as cost of raising capital). After initial recognition, the loans, including debentures, are presented according to their terms, at amortized cost, using the effective interest method, also taking into consideration directly allocated transaction costs. Short-term credit (such as credit to suppliers and other payables) is presented according to its terms, generally at nominal value. Gains and losses are recognized in the statement of income upon the disposal of the financial liability and as a result of the systematic amortization. 6. Derecognition of financial instruments: Financial assets Financial assets are derecognized when the contract rights to receive cash flows from the financial asset have expired, or when the Company has transferred the contract rights to receive cash flows from the financial asset or has undertaken a liability to pay the cash flows received in full to the third party, without significant delay, and in addition transferred in a material way all the risks and benefits connected with the asset or did not transfer and has not even retained in a material way the risks and benefits connected to the asset, but has transferred control of the asset. Financial liabilities Financial liabilities are derecognized when they are cleared, which is to say when the liability is repaid, cancelled, or expired. Financial liabilities are retired when the debtor (the Group): Repays the liability by a cash payment, with other financial assets, in goods or services, or Is legally released from the liability. 27

28 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) 7. Treasury shares: The shares of the Company held by the Company are presented based on the cost offset from the equity of the Company. All gains or losses derived from the purchase, sale, issuance or termination of the treasury shares are carried directly to equity. k. Impairment of financial assets: The Group examines, at every reporting date, where there exists objective evidence of the impairment of financial assets or a group of the following financial assets: 1. Financial assets displayed at amortized cost: There is objective evidence of impairment of debt instruments, loans and receivables and held-to-maturity investments carried at amortized cost as a result of one or more events that has occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows. Evidence of impairment may include indications that the debtor is experiencing financial difficulties, including liquidity difficulty and default in interest or principal payments. The amount of the loss recorded in profit or loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred) discounted at the financial asset's original effective interest rate (the effective interest rate computed at initial recognition). If the financial asset has a variable interest rate, the discount rate is the current effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account (see allowance for doubtful accounts above). In a subsequent period, the amount of the impairment loss is reversed if the recovery of the asset can be related objectively to an event occurring after the impairment was recognized. The amount of the reversal, up to the amount of any previous impairment, is recorded in profit or loss. 2. Available-for-sale financial assets: For equity instruments classified as available-for-sale financial assets, the objective evidence includes a significant or prolonged decline in the fair value of the asset below its cost and calculation of changes in the technological, market, economic or legal environment in which the issuer of the instrument operates. The determination of a significant or prolonged impairment depends on the circumstances at the end of each reporting period. In making such a determination, historical volatility in fair value is considered, as well as a decline in fair value of 20% or more, or a decline in fair value whose duration is 12 months or more. Where there is evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost (less any previous impairment losses) and the fair value - is reclassified from other comprehensive income and recognized as an impairment loss in profit or loss. In subsequent periods, any reversal of the impairment loss is not recognized in profit or loss but recognized in other comprehensive income. 28

29 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) l. Derivative financial instruments designated as hedges: The Group enters into contracts for derivative financial instruments such as forward currency contracts and interest rate swaps to hedge risks associated with foreign exchange rates and interest rate fluctuations. Such derivative financial instruments are initially recognized at fair value. After initial recognition, the derivatives are measured at fair value. Derivatives are carried in the statement of financial position as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains or losses arising from changes in the fair values of derivatives that do not qualify for hedge accounting are recorded immediately in profit or loss. The fair value of forward contracts for foreign currency is calculated by reference to current exchange rates for contracts with similar maturity dates. m. Leases: The tests for classifying leases as finance or operating leases depend on the substance of the agreements and are made at the inception of the lease in accordance with the rules set out in IAS 17. The Group as lessee 1. Finance leases: In finance leases of vehicles and machines, all risks and benefits related to ownership of the leased asset were substantially transferred. The leased asset was measured at the commencement of the lease term at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The liability for lease payments is presented at its present value with lease payments apportioned between finance expenses, for payment of the liability for the lease, using the effective interest method. After the initial recognition, the leased asset is treated in accordance with the customary accounting standards regarding the said asset (see also Note 18g). 2. Operating leases: Lease agreements where all risks and benefits related to ownership of the leased asset are not substantially transferred, are classified as operating leases. Initial direct costs incurred are added to the carrying amount of the leased asset and recognized over the lease term. 29