Authorized & Paid-up Capital : KD 16,348,437

Transcription

1

2

3 Kuwait Shareholding Company Incorporated in Kuwait under An Amiri Decree issued on 02/04/1974 Authorized & Paid-up Capital : KD 16,348,437 Kuwait Dinars Sixteen Million Three Hundred Forty Eight Thousand Four Hundred Thirty Seven Commercial Registration No : Head Office : Gate No.7, Shuwaik Port P.O.Box : 21998, Safat 13080, Kuwait Tel : / Fax : website : heisco@heisco.com

4 2

5 His Highness The Crown Prince Sheikh Nawaf Al-Ahmed Al-Jaber Al-Sabah His Highness The Amir of Kuwait Sheikh Sabah Al-Ahmed Al-Jaber Al-Sabah 3

6 CONTENTS BOARD OF DIRECTORS... 5 BOARD OF DIRECTORS REPORT INDEPENDENT AUDITORS REPORT CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF INCOME CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CASH FLOWS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEISCO AT A GLANCE

7 BOARD OF DIRECTORS JUHAIL MOHAMMED ABDUL RAHMAN JUHAIL Chairman ADNAN MUSAED KHALIFA AL KHARAFI Vice Chairman HUSSAIN MURAD BEHBEHANI Director AZZAM ABDUL AZIZ AL FULAIJ Director GHAZI AHMAD AL MIJREN AL ROUMI Director 5

8 BOARD OF DIRECTORS REPORT FOR 2010 TO OUR SHAREHOLDERS, Net Profit decreased from KD 4,866,413 in year 2009 to KD 4,837,309 in year Earnings per share decreased from Fils in year 2009 to Fils in year SHIPYARD OPERATIONS : Navy Business: Iraq Navy Repair of patrol boat Nasser 701 completed and successful departure. US Navy repair / preservation of 14 patrol boats (34 foot) completed and successful departure. US Army Vessel Kuwait Navy Al Seef, secured a bid to repair/rehabilitate (1-year project). Agreements: The Board of Directors of the Company convey greetings and are pleased to express their deep appreciation for your continued interest in the achievements of the Company in all fields. The Board of Directors are pleased to submit the 35th Annual Report which sets out the activities and performance of the Company during the Year 2010, together with a representation of the main indicators of the consolidated Financial Statements of Heavy Engineering Industries & Shipbuilding Company (K.S.C) and its subsidiary, Gulf Dredging and General Contracting Company (K.S.C) for the year ended on FINANCIAL HIGHLIGHTS Revenue decreased from KD Million in year 2009 to KD Million in year 2010 reflecting a decrease of 21 %. Gross Profit decreased from KD Million in year 2009 to KD Million in year Qualified for Master Agreement for Repair and Alteration of Vessels(MARAV), it approves HEISCO to bid/work on US Navy vessels. Increased number of agency agreements by 100%. Signed agreement with Goltens to upgrade mechanical service at shipyard. General Achievements: Won bid for US Army 2011 COSIS project. Increased volume of vessels repaired in year 2010 by 26% from year Others: Participated in largest worldwide marine exhibition at SMM Hamburg. Approved by UMC (Global diving Co.) to provide diving services. Revamped marketing campaign through publication of new brochures in 3 languages. 6

9 OIL & GAS OPERATIONS : Newly awarded projects Part B - Pipeline Works for Installation of FG and Gas Oil Pipelines and Pumping Station from MAA to AzZour & Shuaiba Power Stations (KOC/Petrofac/KN). Part A - Pipeline Works for Installation of Low Sulphur Fuel Oil (LSFO), FG and Gas Oil Pipelines from MAA to Sabiya and Doha Power Stations (KOC/ Hyundai). Supply and Installation of Cathodic Protection System at Shuaiba Oil Pier (KNPC). Supply of Pressure Vessels for New 30 Crude Transit Line Project (ABB / KOC). Supply of Launchers/Receivers for LSFO Pipeline Project (HDEC / KOC). Supply of Launchers/Receivers for LSFO Pipeline Project (PETROFAC / KOC). Supply of Suction Scrubbers, Discharge Scrubbers & Drain Seal Drums for GC 7, 8 & 21 New Compressors Project (SAIPEM / KOC). Ongoing projects Flowline and Associated Works to New GC-16 and Existing Facilities at West Kuwait Areas (KOC). Pipeline Repair, Replacement, Modification and Constructions Works in WK Areas(KOC). Design, Supply & Pre-fabrication and Construction of Fire Water Tanks - Building New Booster Station BS-160 at SE Kuwait (KOC/Saipem/KN). Building New Booster Station-BS-160 (PipelineWorks)for KN/KOC(KOC/ Saipem/KN). Supply of Recycle Water Pump Skid, Internals & LIT Chambers for ASAB Project Abu Dhabi (ADCO). Supply of Filter Vessels for ASAB Project Abu Dhabi (ADCO). Supply of Pressure Vessels for New Booster Station BS-132 (SKEC / KOC). Supply of Launchers/Receivers for Crude Export Line, Incoming Group Production Feeders and Pipelines to New GC-16 and New Effluent Water Line to MWIP, West Kuwait (Combined Group / KOC). Supply of Filter Vessels for Sahil Shah Full Fields Development Project (ADCO). Mechanical Maintenance at JO-Wafra. Retubing of Heat Exchanges (KNPC). MEW HFO Pipeline Project 7

10 Completed projects Modification in Tank Vapour System Crude Tank Filling Pipework and Reconstruction of Tanks at SEK GCs (KOC). Engineering, Procurement, Construction & Pre-commissioning of Heavy Aromatic Storage Tank (KPPC). Construction of 40 Gas Pipeline and Associated Civil & CP Works from BS-131 to MAA (KOC/Saipem/KN). Supply of Separators & Scrubbers (KOC). Supply of Launchers/ Receivers for 40 Gas Pipeline from BS-131 to LPG Plant at MAA (Petrofac / KOC). HAS Tanks Supply of Pressure Vessels & HP Separator ( JO). Supply of Launcher/Receiver Scraper Traps for Building New Booster Station BS-160 at South East Kuwait (SAIPEM/KOC). Engineering, Procurement, Construction, Testing and Commissioning of 2 x 20 HFO Pipelines 117 KM each from KNPC MAA Refinery to Doha West Power Station. (Kuwait Oil Company). Interim Mechanical Maintenance Services ( Joint Operations, Wafra). Indirect Heaters for KOC GC-24 8

11 GULF DREDGING & GENERAL CONTRACTING CO. K.S.C (Wholly owned subsidiary) Completed projects Purification & Cleaning works of Navigational Channel and Basin at Shuwaikh Port. Maintenance Dredging Works at Private Marina. Diving Services for Nakilat Dry Dock Yard at Ras Laffan Qatar ( under S/c Agreement with Daewoo Korea) Boubyan Seaport Project, Phase-1, Stage-1, Ministry of Public Works Shuaiba North Co-Generation Plant, Offshore Intake Pipeline Works (under S/c Agreement with FISIA ITALI)-MEW. MARINE OPERATIONS : Newly awarded projects Construction & Maintenance of Coast Guard Stations at Ras Abrouq Phase-1 & Umm Bab Phase-2 (Qatar). Purification & Cleaning of Navigational Channel and Marina Basin at Mina Abdullah (KPA). Supply of fill material to Boubyan Seaport Project, Phase-1, Stage-1, Ministry of Public Works (under S/c Agreement with Hyundai Co. Korea). Ongoing projects Maintenance Works for Fishing Berths at Shuwaikh Port (KPA). Boubyan Seaport, Stage -1, Phase 1 (MPW). Design and construction of Road, Rail Bridges and Soil Improvement Works (China Harbour Engineering Company Limited Gulf Dredging & General Contracting Co., - Shaheen Al Ghanim Co - Joint Venture). Offshore works for Coast Guard Stations at Umm Bab- Qatar Tenders Awarded and Waiting for Contract Signature Maintenance Dredging Works at Private Marina. Geotechnical Investigation of Navigational Channel at Shuwaikh Port. 9

12 Advertisement Hoarding works in Sabah Al Salam University Project (4700 m.l. the longest in Kuwait) Construction of Temporary Facilities at BS-171 CIVIL OPERATIONS Newly Awarded Projects Construction, completion and maintenance of Infrastructure works at Sabah Al Salem University project Kuwait University. Onshore Civil Works of new Booster Station project (BS-171) at west Kuwait Project-(KOC) Ongoing Projects Onshore Civil Works for design and construction of Shuaiba North Co-Generation (Power & Desalination) Plant Project-(MEW). Tenders Awarded and Waiting for Contract Signature Excavation works and Installation of (LSFO) Pipeline from Mina Al-Ahmadi to Sabiya and Doha-(KOC). Design, Supply, Construction and operation for the New Acid Gas Removal Plant (AGRP) and AGRP Revamp Project at Mina Al-Ahmadi Refinery- KNPC. Construction works of utility plant Project Nos.1 and 2 and annex Buildings -Package Number (3A) - at Sabah Al-Salem University. In conclusion, the Board of Directors expresses its deep appreciation and thanks to the various Ministries and Departments of the State and to all Companies, Establishments, Institutions and Banks which have cooperated with the Company during In particular, we express our thanks and appreciation to all the personnel of the Company and wish them continued progress and success. BOARD OF DIRECTORS 10

13 And its Subsidiaries CONSOLIDATED FINANCIAL STATEMENTS AND AUDITORS REPORT 31 DECEMBER

14 INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS REPORT ON CONSOLIDATED FINANCIAL STATEMENTS We have audited the accompanying consolidated financial statements of Heavy Engineering Industries and Shipbuilding Company K.S.C. (the Parent Company) (collectively referred to as the Group ), which comprise the consolidated statement of financial position as of 31 December 2010, and the consolidated statement of income, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatements, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2010, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. 12

15 INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS (CONTINUED) Report on Other Legal and Regulatory Requirements Furthermore, in our opinion, proper books of accounts have been kept by the Parent Company and the consolidated financial statements, together with the contents of the report of the Parent Company s Board of Directors relating to these consolidated financial statements are in accordance therewith. We further report that we obtained all the information and explanations that we deemed necessary for the purpose of our audit; and that the consolidated financial statements incorporate all the information that is required by the Commercial Companies Law of year 1960, as amended, and by the Parent Company s Articles of Association; that inventory count was duly carried out; and that to the best of our knowledge and belief, no violations of the Commercial Companies Law of 1960 as amended, or of the Parent Company s Articles of Association have occurred during the year ended 31 December 2010 that might have had a material effect on the business of the Group or on its consolidated financial position. Bader A. Al-Wazzan License No. 62A Deloitte & Touche Al- Fahad, Al-Wazzan & Co. Nasser Abdullah Al Muqait R.A.A. No. 9A Al Ahli Bureau Kuwait - 28 March

16 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS OF 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars) Note ASSETS Non current assets Property, plant and equipment 5 27,234,543 27,469,427 Investments available for sale 6 5,431,562 3,730,044 32,666,105 31,199,471 Current assets Inventories 7 4,873,278 5,703,266 Contracts in progress 8 15,224,413 25,361,398 Trade and other receivables 9 26,792,810 23,937,020 Cash and cash equivalents 10 1,837,597 1,691,301 48,728,098 56,692,985 Total assets 81,394,203 87,892,456 Equity and liabilities Equity Share capital 11 16,348,437 14,862,216 Statutory reserve 12 4,220,627 3,711,163 General reserve 12 2,691,521 2,182,057 Fair valuation reserve (342,325) (2,067,775) Retained earnings 6,716,651 4,384,491 29,634,911 23,072,152 Non current liabilities Post employment benefits 13 4,932,018 4,370,645 Term loans 15 1,483,159 2,140,999 6,415,177 6,511,644 Current liabilities Trade and other payables 14 28,683,343 31,608,455 Bank overdrafts 15 6,761,594 18,604,660 Term loans 15 9,899,178 8,095,545 45,344,115 58,308,660 Total liabilities 51,759,292 64,820,304 Total equity and liabilities 81,394,203 87,892,456 Juhail Mohammed Abdul Rahman Juhail Chairman Adnan Musaed Khalifa Al Kharafi Vice Chairman The attached notes on pages 19 to 41 form an integral part of these consolidated financial statements 14

17 CONSOLIDATED STATEMENT OF INCOME - YEAR ENDED 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars) Note Revenue 64,346,597 81,444,047 Cost of sales 16 (55,413,035) (71,751,119) Gross profit 8,933,562 9,692,928 Other operating income 80, ,261 General and administrative expenses 18 (3,407,462) (3,498,485) Provision for impairment of inventories (53,669) - Investment income , ,557 Finance costs (1,202,341) (1,533,778) Foreign exchange gain/ (loss) (189,953) (188,135) Net profit before deductions 5,094,642 5,115,348 Contribution to Kuwait Foundation for Advancement of Sciences (37,775) (17,798) National Labour Support Tax (112,817) (121,498) Zakat expense 21 (50,741) (53,639) Board of Directors remunerations (56,000) (56,000) Net profit for the year 4,837,309 4,866,413 Basic and diluted earnings per share (fils) The attached notes on pages 19 to 41 form an integral part of these consolidated financial statements 15

18 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - YEAR ENDED 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars) Note Net profit for the year 4,837,309 4,866,413 Other comprehensive income: Gain from fair valuation of investments 1,701, ,507 Total comprehensive income for the year 6,538,968 5,371,920 The attached notes on pages 19 to 41 form an integral part of these consolidated financial statements 16

19 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - YEAR ENDED 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars) Share Capital Statutory Reserve General Reserve Fair Valuation Reserve Retained Earnings Total Balance at 31 December ,862,216 3,711,163 2,182,057 (2,067,775) 4,384,491 23,072,152 Total comprehensive income for the year ,701,659 4,837,309 6,538,968 - Impairment of available for sale investments recycled to Consolidated Statement of Income ,791-23,791 Issue of bonus shares 1,486, (1,486,221) Transfer to reserves - 509, ,464 - (1,018,928) - Balance at 31 December ,348,437 4,220,627 2,691,521 (342,325) 6,716,651 29,634,911 Balance at 31 December ,862,216 3,199,628 1,670,522 (2,573,282) 541,148 17,700,232 Total comprehensive income for the year ,507 4,866,413 5,371,920 Transfer to reserves - 511, ,535 - (1,023,070) - Balance at 31 December ,862,216 3,711,163 2,182,057 (2,067,775) 4,384,491 23,072,152 The attached notes on pages 19 to 41 form an integral part of these consolidated financial statements 17

20 CONSOLIDATED STATEMENT OF CASH FLOWS - YEAR ENDED 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars) Note Operating activities Net profit for the year 4,837,309 4,866,413 Adjustments for: Depreciation 5 4,335,365 4,146,976 Investment income 17 (554,122) (515,557) Finance costs 1,202,341 1,533,778 Loss on disposal of property, plant and equipment 18, ,539 Post employment benefits 13 1,035, ,752 Operating profit before working capital changes: 10,874,922 11,058,901 Decrease/ (increase) in inventories 829,988 (1,073,142) Decrease/ (increase) in contracts in progress 10,136,985 (1,865,800) (Increase)/ decrease in trade and other receivables (2,855,790) 9,456,958 Decrease in trade and other payables (2,985,607) (10,955,804) Post employment benefits paid 13 (473,702) (420,806) Net cash generated from operating activities 15,526,796 6,200,307 Investing activities Purchase of property, plant and equipment 5 (4,226,575) (3,923,660) Proceeds from sale of property, plant and equipment 107,140 22,968 Proceeds from sale of investments available for sale - 2,307,250 Dividends received from investments , ,425 Net cash used in investing activities (3,537,480) (1,338,017) Financing activities Proceeds from/ (repayment of) term loans 1,145,793 (3,870,929) Repayment of bank overdrafts (11,843,066) (238,659) Interest paid (1,127,417) (1,527,248) Dividends paid (18,330) (8,629) Net cash used in financing activities (11,843,020) (5,645,465) Net change in cash and cash equivalents 146,296 (783,175) Cash and cash equivalents at 1 January 1,691,301 2,474,476 Cash and cash equivalents at 31 December 10 1,837,597 1,691,301 The attached notes on pages 19 to 41 form an integral part of these consolidated financial statements 18

21 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars unless otherwise stated) 1. Incorporation and activities (the Parent Company) is a shareholding company registered in Kuwait and was incorporated in the year The main activities of the Parent Company are shipbuilding, ship repair and other related marine activities and industrial and engineering contracting with specialisation in oil and energy sectors. The Parent Company s registered office is P. O. Box 21998, Safat 13080, Kuwait The consolidated financial statements include the Parent Company s financial statements and the financial statements of the following two wholly owned subsidiaries together referred to as the Group. Company Name Country Legal Form Gulf Dredging and General Contracting Company Kuwait K.S.C.C. Kuwait International Company for Environmental Service and Industrial Inspection Kuwait W.L.L The subsidiaries are mainly engaged in dredging and related marine and civil construction activities and in providing services related to industrial inspection of materials, quality control and environment. The consolidated financial statements for the year ended 31 December 2010 were authorised for issue by the Board of Directors (the Board) on 28 March 2011 and are subject to the approval of shareholders at the annual general meeting. 2. Basis of preparation and significant accounting policies 2.1 Basis of preparation These consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB). These consolidated financial statements have been prepared under the historical cost basis of measurement as modified by the revaluation of financial assets classified as available for sale. These consolidated financial statements have been presented in Kuwaiti Dinar. The preparation of these consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that may affect amounts reported in these consolidated financial statements, as actual results could differ from those estimates. It also requires management to exercise its judgment in the process of applying the Group accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to these consolidated financial statements are disclosed in Note Significant accounting policies The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in previous year. The new and amended IFRSs issued by IASB which are effective in 2010 did not have any impact on these consolidated financial statements. The following Standards have been revised or newly issued but are not yet effective and have not been early adopted by the Group: 19

22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars unless otherwise stated) IFRS 9: Financial Instruments: Classification and Measurement This new Standard was issued in November 2009 and becomes effective for financial years beginning on or after 1 January IFRS 9 will replace IAS 39 in its entirety on its effective date. The Accounting Technical Committee of the Ministry of Commerce and Industry in Kuwait decided during December 2009 to postpone earlier application of this Standard until further notice. IAS 24: Related Party Disclosures (revised) The revised Standard simplifies the identification of related party relationships and eliminates inconsistencies in its application. It introduces a partial exemption of disclosure requirements for government related entities. The Group does not expect any impact of this revision on its consolidated financial position or its performance. IAS 32: Financial Instruments: Presentation (amended) The amendment to IAS 32 is effective for annual periods beginning on or after 1 February The definition of a financial liability has been amended in order to classify rights issues (and certain option warrants) as equity instruments under certain conditions. The Group does not expect any impact of this amendment on its consolidated financial position or its performance. Adoption of other new or amended Standards are not expected to have material effect on the consolidated financial position or financial performance of the Group. Additional disclosures will be made in the consolidated financial statements when these Standards become effective. 2.3 Consolidation Subsidiaries are those enterprises, including special purpose entities, controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements on a line-byline basis, from the date on which control is transferred to the Group until the date that control ceases. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances based on latest audited financial statements of subsidiaries. Intra group balances, transactions, income, expenses and dividends are eliminated in full. Profits and losses resulting from intra group transactions that are recognized in assets are eliminated in full. If a parent loses control of a subsidiary, it derecognizes the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts at the date when control is lost as well as related non-controlling interests. Any investment retained is recognized at fair value at the date when control is lost. Any resulting difference along with amounts previously directly recognized in equity is transferred to the consolidated statement of income. 20

23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars unless otherwise stated) Non-controlling interest in an acquiree is stated at the non-controlling interest s proportionate share of the acquiree s identifiable net assets at the acquisition date and the non-controlling interest s share of changes in the equity since the date of the combination. Total comprehensive income is attributed to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. Changes in the Group s ownership interest in a subsidiary that do not result in loss of control are accounted for as equity transactions. The carrying amounts of the controlling and non-controlling interests are adjusted to reflect the changes in their relative interest in the subsidiary and any difference between the amount by which the non-controlling interests is adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to the Parent Company s shareholders. Non-controlling interest is presented separately in the consolidated statements of financial position and income. The noncontrolling interests are classified as a financial liability to the extent there is an obligation to deliver cash or another financial asset to settle the non controlling interest. 2.4 Financial Instruments Classification The Group classifies its financial instruments upon initial recognition based on the purpose of acquiring these financial instruments. The Group classifies its financial assets as loans and receivables or available for sale and its financial liabilities as other than at fair value through profit or loss. Loans and receivables These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Group s loans and receivables comprises of contracts in progress, trade and other receivables, and cash and cash equivalents. Available for sale These are non-derivative financial assets that are either designated in this category or not included in any other category and are principally those acquired to be held for an indefinite period of time, which could be sold when liquidity is needed or upon changes in prices. Recognition and de-recognition A financial asset or a financial liability is recognized when the Group becomes a party to the contractual provisions of the instrument. A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire; or when the Group has transferred substantially all the risks and rewards of ownership; or when it has neither transferred nor retained substantially all risks and rewards of ownership and it no longer has control over the asset or portion of the asset. If the Group has retained control, it shall continue to recognize the financial asset to the extent of its continuing involvement in the financial asset. A financial liability is derecognized when the obligation specified in the contract is discharged/cancelled or has expired. All regular way purchase and sale of financial assets are recognized on the trade date - the date on which the Group commits to purchase or sell the financial asset. 21

24 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars unless otherwise stated) Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognized amounts and the Group intends to settle on a net basis. Measurement All financial instruments are initially recognised at fair value. Transaction costs that are directly attributable to the acquisition or issue are included as part of initial cost. Loans and receivables are subsequently carried at amortized cost. The amortized cost is the amount at which the financial instrument is initially recognized minus principal repayments, plus or minus the amortization of premiums or discounts using effective interest rate, less any allowance for impairment. Available for sale financial assets are subsequently measured and carried at fair value and any resultant gains or losses are taken to fair valuation reserve in equity. When the available for sale financial asset is disposed of or impaired, the related accumulated fair value changes earlier reported in equity are transferred to the consolidated statement of income as gains or losses. The translation gains or losses on non-monetary items classified as available for sale financial assets are included in equity. Financial liabilities other than at fair value through profit or loss are subsequently measured and carried at amortized cost using the effective interest rate. Fair values Fair values of quoted instruments are based on quoted closing bid prices. If the market for a financial asset is not active or is unquoted, fair value is derived from recent arm s length transactions, discounted cash flow analysis, other valuation techniques commonly used by market participants or determined with reference to market values of similar instruments. The fair value of financial instruments carried at amortised cost is estimated by discounting the future contractual cash flows at the current market interest rates for similar financial instruments. Available for sale financial asset whose fair value can not be reliably determined are recorded at cost less impairment. Impairment of financial asset A financial asset is impaired if its carrying amount is greater than its estimated recoverable amount. An assessment is made at each consolidated statement of financial position date to determine whether there is objective evidence that a specific financial asset or a group of similar assets may be impaired. If such evidence exists, the asset is written down to its recoverable amount. The amount of impairment loss is measured for financial assets carried at amortised cost as the difference between the asset s carrying amount and the present value of estimated future cash flows, including amounts recoverable from guarantees and collateral, discounted at the financial asset s original effective interest rate. If the financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. If in a subsequent period, the amount of the impairment loss decreases, the previously recognised impairment loss is reversed through the consolidated statement of income. 22

25 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars unless otherwise stated) In the case of financial assets classified as available for sale, a significant or prolonged decline in the fair value of assets below its cost is considered in determining whether the financial assets are impaired. If any such evidence exists for available for sale financial assets, the cumulative loss measured is the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated statement of income. If in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognised in the consolidated statement of income. Impairment losses recognised on available for sale equity investments are, however, not reversed through the consolidated statement of income. 2.5 Property, plant and equipment Property, plant and equipment are carried at cost less accumulated depreciation and impairment losses, if any. Depreciation is provided on a straight line basis on all property, plant and equipment, other than land which is determined to have an indefinite life. The rates of depreciation are based upon the following estimated useful lives: Dock and lifts Buildings Machinery and equipment Other assets 24 to 46 years 12 to 56 years 8 to 31 years 2 to 33 years The asset s residual values and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date. Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. All other expenditure are recognised in the consolidated statement of income as the expense is incurred. Projects under construction are included in property, plant and equipment until they are completed and ready for their intended use. At that time, they are reclassified under similar assets and depreciation is calculated since then. Gains and losses on disposals are determined by comparing proceeds with the carrying amounts and are recognised in the consolidated statement of income. 2.6 Inventories Inventories are stated at the lower of cost and net realizable value. Costs are those expenses incurred in bringing each item to its present location and condition, determined on a weighted average cost basis. Net realizable value is the selling price less cost to sell. 2.7 Cash and cash equivalents Cash and cash equivalents are defined as cash and bank balances and current investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value and with original maturities of three months or less. 23

26 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars unless otherwise stated) 2.8 Post employment benefits The Group is liable under Kuwait Labour Law to make payments under defined benefit plans to employees at termination of employment. The defined benefit plan is un-funded and is based on the liability that would arise on involuntary termination of all employees at the consolidated statement of financial position date. This basis is considered to be a reliable approximation of the present value of the Group s liability. 2.9 Provisions Provisions are recognized when the Group has a legal or constructive obligation as a result of past events, and it is probable that an outflow of economic benefits will be required to settle that obligation. Provisions are reviewed at each consolidated statement of financial position date and adjusted to reflect the best current estimate of the obligation Foreign currencies The functional currency of the Group is Kuwaiti Dinar. Transactions in foreign currencies are recorded at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are converted to Kuwait Dinar at the rate of exchange ruling at the consolidated statement of financial position date. All differences are taken to the consolidated statement of income Revenue recognition Revenue from contracts involving the rendering of services is recognised by reference to the stage of completion of the contract based on internal surveys of work performed. When the outcome of the contract cannot be estimated reliably, revenue is recognised only to the extent of expenses that are incurred are recoverable. Variation orders and claims are recognised upon acceptance by customers. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Revenue from sales transactions are recorded when goods are delivered. Dividend income is recognised when the right to receive payment is established Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset is capitalized as part of the cost of that asset. Capitalization of borrowing costs is suspended during extended periods in which active development is interrupted. Capitalization of borrowing costs is ceased when substantially all the activities necessary to prepare the qualifying asset for its intended use are completed. Other finance costs are recognized as expenditure in the consolidated statement of income in the period in which they are incurred Segment reporting A segment is a distinguishable component of the Group that engages in business activities from which it earns revenues and incurs costs. The operating segments are used by the management of the Group to allocate resources and assess performance. Operating segments exhibiting similar economic characteristics, product and services, class of customers where appropriate are aggregated and reported as reportable segments. 24

27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars unless otherwise stated) 3. Financial risk management 3.1 Financial risk factors The Group s use of financial instruments exposes it to a variety of financial risks such as credit risk, market risk and liquidity risk. The Group continuously reviews its risk exposures and takes measures to limit it to acceptable levels. Risk management is carried out by the finance department of the Group under policies approved by the Board. The Board approves policies for overall risk management and for specific areas such as credit risk; market risk comprising of foreign currency risk and interest rate risk; and liquidity risk. The finance department identifies and evaluates financial risks in close co-operation with the Group s operating units. The significant financial risks that the Group is exposed to are discussed below: (A) Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation causing the other party to incur financial loss. The financial assets of the Group exposed to credit risk are contracts in progress, trade and other receivables and cash equivalents. The Group transacts business with customers with financial stability and high credit worthiness. The Group s cash balances are placed with financial institutions with high credit rating. The table below shows the gross exposure to credit risk on the consolidated statement of financial position date without taking into account collateral or other credit mitigants: Contracts in Progress 14,374,421 25,115,305 Trade and other receivables 24,982,799 22,728,646 Cash equivalents 1,719,922 1,644,904 41,149,142 49,488,855 (B) Market risk (i) Foreign exchange risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group is exposed to foreign currency risk arising from transacting business with certain customers in US Dollar and other foreign currencies. The Group ensures that the net exposure is kept to acceptable levels and the management is monitoring the foreign currency exchange rates on a regular basis to identify any changes that may affect the Group s operations. Following is the receivables/ (payables) in foreign currency as of the date of the consolidated financial statements: 25

28 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars unless otherwise stated) US Dollar (6,741,997) (7,200,294) Others currencies 577,879 (110,893) At 31 December 2010, if the Kuwaiti Dinar had strengthened by 5% against US Dollar with all other variables held constant, profit for the year would have been higher by KD 351,649 (2009: KD 375,063). Effect of change in the exchange rate does not have any material effect on the equity. A 5% weakening of the Kuwaiti Dinar against the US Dollar would have had the equal but the opposite effect on profit. Variation in the exchange rate of other foreign currencies will not have a material effect on the profit. (ii) Equity price risk Equity price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices caused by factors specific to the instrument or its issuer or factors affecting all instruments traded in the market. The Group s investments are primarily quoted on the Kuwait Stock Exchange. At 31 December 2010, if equity prices had increased by 5%, the equity of the Group would have been higher by KD 257,029 (2009: KD 171,454). Alternatively, a 5% decrease in the equity prices would have had the equal but the opposite effect on the Group s equity. (iii) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group is exposed to interest rate risk arising from borrowings carrying variable interest rates as it exposes the Group to cash flow interest rate risk. The Group s policy is to enter into derivative contracts to protect it from significant adverse impact from potential volatility in interest rates. However, at present the Group enjoys competitive interest rates from various banks in Kuwait. If as on 31 December 2010, the interest rates had increased by 5% the net profit would have been lower by KD 907,196 (2009: KD 1,442,060). Alternatively, a 5% decrease in the interest rates would have had the equal but the opposite effect on the Group s net profits. (C) Liquidity risk Liquidity risk is the risk that the Group may not be able to meet its funding requirements. Prudent liquidity risk management implies maintaining sufficient cash and making available funding through an adequate amount of committed credit facilities. To manage this risk, the Group periodically assesses the financial viability of its customers and ensures that adequate funding facilities are available from its lenders. 26

29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars unless otherwise stated) The table below analyses the Group s financial liabilities into relevant maturity groupings based on the remaining period at the consolidated statement of financial position date to the contractual maturity date. The balances disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying amounts balances as the impact of discounting is not significant. Less than 1 year Between 1 and 2 years Between 2 and 5 years Total At 31 December 2010 Term loans 10,449,593 1,513,835-11,963,428 Trade and other payables 28,683, ,683,343 Bank overdrafts 7,099, ,099,674 46,232,610 1,513,835-47,746,445 Less than 1 year Between 1 and 2 years Between 2 and 5 years Total At 31 December 2009 Term loans 8,612, ,107 2,266,296 11,703,343 Trade and other payables 31,608, ,608,455 Bank overdrafts 19,642, ,642,543 59,863, ,107 2,266,296 62,954, Capital risk management The Group s objectives when managing capital are to safeguard the Group s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the costs of capital. In order to maintain or adjust the capital structure, the Group monitors capital on the basis of gearing ratio. The ratio is calculated as net debt divided by total capital. Net debts calculated as total borrowings less cash and cash equivalents. Total capital is calculated as equity as shown in the consolidated statement of financial position plus net debt. The gearing ratio as of 31 December 2010 and 2009 were as follows: Total borrowings 18,143,931 28,841,204 Less: cash and cash equivalents (1,837,597) (1,691,301) Net debt 16,306,334 27,149,903 Total equity 29,634,911 23,072,152 Total capital 45,941,245 50,222,055 Gearing ratio 35% 54% 27

30 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars unless otherwise stated) 3.3 Fair value of financial instruments Fair values of all financial instruments are not materially different from their carrying values. The fair values of financial instruments are estimated by the Group as follows: Quoted investments are based on closing bid prices published by the Kuwait Stock Exchange on the date of consolidated statement of financial position. Unquoted investments are based on valuation techniques. 4. Significant accounting estimates and judgements In the preparation of these consolidated financial statements, the Group makes estimates and assumptions concerning the future. The resulting accounting estimates will by definition, seldom equal the related actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Fair value of unquoted equity investments Valuation techniques for unquoted equity investments in which estimates are used are representing in the expected cash flows discount rates, return trades, adjusted local market prices, credit risks, related cost and other valuation techniques used by market participants. The Group calibrates the valuation techniques periodically and tests these for validity using either prices from observable current market transactions in the same instrument or other available observable market data. Impairment losses of accounts receivable The Group reviews its receivables to assess impairment on a regular basis. In determining whether an impairment loss should be recorded in the consolidated statement of comprehensive income, the Group makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from the receivables. In particular, considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimated and the actual loss. Impairment of inventories Inventories are held at the lower of cost and net realisable value. When inventories become old or obsolete, an estimate is made of their net realisable value. For individually significant amounts this estimation is performed on an individual basis. Amounts which are not individually significant, but which are old or obsolete, are assessed collectively and a provision applied according to the inventory type and the degree of ageing or obsolescence. 28

31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars unless otherwise stated) Impairment of property, plant and equipment The Group reviews the property, plant and equipment to determine whether an impairment loss should be recognised. An estimate is set by the management in terms of amount and timing of expected cash flows as well as the discount rates used when calculating the value in use. Revenue recognition The Group uses the percentage of completion method in accounting for its fixed priced contracts. Use of percentage of completion method requires the Group to estimate the work performed to date as a proportion of the total work to be performed. Judgements Classification of investments On acquisition of an investment, management has to decide whether it should be classified as at fair value through profit or loss, loans and receivables, held to maturity or as available for sale. In making that judgment the Group considers the primary purpose for which it is acquired and how it intends to manage and report its performance. Such judgment determines whether it is subsequently measured at cost or at fair value and if the changes in fair value of instruments are reported in the consolidated statement of income or directly in equity. Impairment of available for sale financial assets The Group follows the guidance of IAS 39 to determine when an available-for-sale financial asset is impaired. A significant or prolonged decline in the fair value of equity instruments classified as available for sale is objective evidence of an impairment. Determining which is significant and which is prolonged requires judgement from management. In making this judgment, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow. Contingent liabilities Contingent liabilities are potential liabilities that arise from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Provisions for liabilities are recorded when a loss is considered probable and can be reasonably estimated. The determination of whether or not a provision should be recorded for any potential liabilities is based on management s judgment. 29

32 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 31 DECEMBER 2010 (All Amounts in Kuwaiti Dinars unless otherwise stated) 5. Property, Plant and Equipment Dock and lift Land and Buildings Machinery and equipment Other assets Assets under construction Total Cost As of 31 December ,032,101 13,007,642 13,710,351 21,423,013 1,906,855 61,079,962 Additions ,403 34, ,604 1,270,223 2,263,128 3,923,660 Transfers ,419 1,227,889 43,351 - (1,311,659) - Disposals (441,802) (412,242) (725,090) - (1,579,134) As of 31 December ,087,923 13,828,031 13,682,064 21,968,146 2,858,324 63,424,488 Additions ,666 7, ,087 2,700, ,948 4,226,575 Disposals (300) (129,848) (1,089,811) - (1,219,959) Transfers , ,045 1,531, ,897 (2,617,372) - As of 31 December ,345,822 14,416,977 15,858,500 23,862, ,900 66,431,104 Depreciation As of 31 December ,995,674 6,006,026 8,189,386 11,070,626-33,261,712 Charge for the year , ,990 1,133,731 2,340,528-4,146,976 Disposals (373,871) (406,276) (673,480) - (1,453,627) As of 31 December ,225,401 6,075,145 8,916,841 12,737,674-35,955,061 Charge for the year , ,921 1,309,427 2,310,836-4,335,365 Disposals (299) (95,350) (998,216) - (1,093,865) Transfers ,960 - (3,960) - - As of 31 December ,461,582 6,557,727 10,130,918 14,046,334-39,196,561 Net book value As of 31 December ,884,240 7,859,250 5,727,582 9,816, ,900 27,234,543 As of 31 December ,862,522 7,752,886 4,765,223 9,230,472 2,858,324 27,469,427 The land on which shipbuilding and repair yard is located is leased from Kuwait Government for a period of 25 years. The Group s management expects to renew this contract at the same terms and conditions. 30