DMIT Annual Report 2017

N OTES TO THE C ONSOLIDATED F INANCIAL S TATEMENTS (Thousands of US dollars) Dar Al-Maal Al-Islami Trust 91 46. Restatement of consolidated financial statements 1. On 31 March 2010, DMI acquired an additional 400 million shares of Ithmaar Bank B.S.C. by participation in a rights issue at a price of USD 0.25 per share for a total consideration of USD 100 million. As a result of this transaction at that point, DMI owned 52.6% of the outstanding shares of Ithmaar Bank B.S.C. converting it from an associate to a subsidiary, which resulted in the full consolidation of Ithmaar’s income statement and balance sheet at 31 December 2010. The step acquisition from the associated company to the subsidiary company resulted in a net gain of USD 334.9 million, which was included in the consolidated statement of income. This amount comprised a mark up to fair value of the associated company shareholding of 44.9%. In assessing the above gain, DMI relied upon an independent valuation commissioned from an international firm of chartered accountants who established a value using various valuation methodologies comprising the average of a peer group market analysis of banks listed on the Bahrain Bourse and a discounted cash flow adjusted for an estimated control premium but the valuation method did not include a reference to the market price of Ithmaar Bank B.S.C.’s shares at the relevant time. Both the independent valuer and DMI believed that the share price quoted on the Bahrain Bourse at that point in time did not reflect the fair value of the business and they also did not consider that the historical turnover of the shares constituted an active market. As a result, the share price was disregarded in the valuation. In accordance with IFRS, the most recent transaction prices should have been considered as an input in the valuation model, unless it can be demonstrated that these transactions related to distressed sales. Therefore, the fair value methodology is now adjusted to reflect the most recent transaction prices instead, in line with IFRS requirements. This exclusion of level price resulted in a valuation of US 483.6 million rather than USD 587.1 million, and led to a decrease in the consolidated retained earnings in the amount of USD 103.5 million for the year ended 31 December 2010 and a corresponding decrease in goodwill and non- controlling interests in the amounts of USD 111.6 million and USD 8.1 million respectively. Management has rectified this day 1 accounting difference in 2017 financial statements by restating the financial statements as per IAS 8 guidance. 2. The entity invested in Perpetual Tier 1 Convertible Capital Securities (“Capital Securities”) on 2 May 2016 amounting to USD 67 million. The Capital Securities are perpetual securities with no fixed or final redemption date. The instrument has convertible feature with the option for the issuer to convert the bond instrument into an equity share and the conversion dates are 2019 to 2021. As per IFRS, a perpetual debt instrument cannot be classified as held to maturity as there is no maturity date. The client had erroneously classified this investment as held to maturity investments in 2016. Management has corrected this by reclassifying this as investment in fair value through profit and loss account. This resulted in an increase in investment income due to fair value changes by USD 11 million for the year ended 31 December 2016 and a decrease of USD 2.6 million for the year ended 31 December 2017. 3. In 2014, DMI had recognised a general provision of USD 12 million which was not in accordance with the requirement of IFRS. This provision has been reversed and adjusted appropriately against retained earnings as at 31 December 2015. 4. One of the Group subsidiary operates a closed ended real estate fund “Dilmunia Development Fund I L.P.” [Dilmunia or the Fund], an exempted limited partnership formed under the laws of Cayman Islands. The fund is managed by the Group’s subsidiary and all the Board representatives are from the Group’s subsidiary. The Group also has direct investment of 40.6% (2016: 38.9%) in the Fund through its subsidiary as Limited Partner. The Group management has reassessed the IFRS 10 criteria such as power over the investee, exposure, or rights, to variable returns from its involvement with the investee and the ability to use its power over the investee to affect the amount of the investor’s returns. Based on such reassessment, it was concluded that the Fund is controlled by the Group and should have been consolidated from its inception in 2007. Management has considered the IAS 8 guidance and rectified the non-consolidation of fund by restating the prior period reported numbers. 5. In addition, in 2016, cash and cash equivalent included restricted cash balances of USD 161,858 which has now been excluded and correctly presented in this consolidated financial statements (Note 5). In 2017, in accordance with the requirements of IAS 8, ‘Accounting policies, changes in accounting estimates and errors’ (“IAS 8”), management has restated comparative figures to adjust the prior year’s consolidated financial statements.