Statutory auditor’s report on the audit of the consolidated financial statements

To the General Meeting of
Allreal Holding Ltd, Baar

Zurich, 13 February 2018


Statutory auditor’s report on the audit of the consolidated financial statements


Opinion

We have audited the consolidated financial statements of Allreal Holding Ltd and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at 31 December 2017 and the consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion the consolidated financial statements (pages 58 to 121) give a true and fair view of the consolidated financial position of the Group as at 31 December 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law as well as article 17 of the Directive on Financial Reporting (DRF) of SIX Swiss Exchange.


Basis for opinion
We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISAs) and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report.

We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.


Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the consolidated financial statements.

Market valuation of completed/purchased investment properties and investment properties under construction

Risk
The market valuation of investment properties and investment properties under construction was key for our audit because this process entails significant estimates and the assets measured in this way came to CHF  3,931.2m and CHF 25.4 and were significant for the Group’s statement of financial position. As disclosed in the notes to the consolidated financial statements under Notes to the consolidated statement of financial position 4.1 “Investment properties” and Significant accounting policies 2.9 “Investment properties”, the market values were calculated by an external real estate expert using the discounted cash flow method. These estimations of market value were based on assumptions, relating in particular to rental income, discount rates, vacancies and maintenance expenses as well as development risks in the case of investment properties under construction.

Our audit response
Among other audit procedures, we assessed the objectivity, independence and competence of the external real estate expert as well as the valuation model used. We also examined on a sample basis the correctness of property-specific data (including rental income, maintenance expenses) included in the valuation. Furthermore, we assessed the underlying key assumptions of the external real estate expert by discussing these with both management and the external expert.

Recognition of revenue and costs (profit recognition according to the percentage of completion) for general contracting projects with third parties

Risk
Correct profit recognition by management for general contracting projects with third parties was key for our audit because this process entails significant estimates and the profit recognized from general contracting (third-party projects) of CHF 45,0m was significant for the Group. As disclosed in the notes to the consolidated financial statements under Notes to the consolidated statement of comprehensive income 3.5 “Profit from general contracting” and Significant accounting policies 2.6 “Profit from general contracting”, project estimates and profit recognition are based on assumptions relating to current cost forecasts and the contractually agreed project income, variations approved and claims raised. The project estimates (stage of completion and forecast earnings) determine the timing and extent of profit recognition.

Our audit response
Among other audit procedures, we made inquiries of various parties involved in selected projects (including project managers and controlling but also management) and compared project-specific forecasts of anticipated costs to complete the project, including variations approved and claims raised, with the originally planned project costs. Furthermore, we tested the allocation of the costs incurred to projects and periods by inspecting third-party invoices on a sample basis. We assessed the stage of project completion using internal project documents and assessed profit recognition according to the percentage of completion and revenue recognition using the general contracting agreement between the Company and the third party.

Calculation of deferred tax liabilities on valuation differences of investment properties

Risk
We considered the deferred taxes on valuation differences of investment properties to be key for our audit because the calculation of deferred tax obligations entails significant estimates by management (for example in terms of the anticipated holding periods of the properties) and the deferred tax obligations on valuation differences of investment properties of CHF 201.0m were significant for the Group’s statement of financial position. The calculation method for deferred taxes is disclosed in the notes to the consolidated financial statements under Additional disclosures 5.1.6 “Deferred tax obligations and assets” and Significant accounting policies 2.23 “Taxes”.

Our audit response
We assessed the structure of the internal processes relevant for the calculation of deferred tax obligations on valuation differences of investment properties. We also validated management’s assumptions relating to estimates of holding periods and compared the tax rates used for income tax (state, canton and municipality) and capital gains tax purposes to the current tax rates. Furthermore, we examined on a sample basis the correctness of calculations of differences in value and the classification of gains from appreciation in value and recovered depreciations.


Other information in the annual report
The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements, remuneration report and our auditor’s reports thereon.

Our opinion on the consolidated financial statements does not cover the other information in the annual report and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information in the annual report and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.


Responsibility of the Board of Directors for the consolidated financial statements
The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS, article 17 of the Directive on Financial Reporting (DRF) of SIX Swiss Exchange and the provisions of Swiss law, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.


Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law, ISAs and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

A further description of our responsibilities for the audit of the consolidated financial statements is located at the website of EXPERTsuisse: http://www.expertsuisse.ch/en/audit-report-for-public-companies. This description forms part of our auditor’s report.


Report on other legal and regulatory requirements
In accordance with article 728a para. 1 item 3 CO and the Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors.We recommend that the consolidated financial statements submitted to you be approved.

 

Ernst & Young AG

Daniel Zaugg
Licensed audit expert
(Auditor in charge)
Daniel Lanfranconi
Licensed audit expert