NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2012 and 2011 and January 1, 2011 (transition date)
(In thousands of Mexican pesos ($) and thousands of U.S. dollars (US$))

1. Activities

Grupo Carso, S.A.B. de C.V. (“Grupo Carso”) and Subsidiaries (the “Entity”) is a holding entity with a duration of 99 years that maintains investments in the shares of a group of companies that operate in the industrial, retail and infrastructure and construction sectors. Grupo Carso is domiciled in Lago Zurich 245, sixth floor, Colonia Ampliación Granada, Mexico City, Postal Code 11529.


2. International Financial Reporting Standards (IFRS)

Adoption of IFRS - Beginning January 1, 2012, the Entity adopted International Financial Reporting Standards (“IFRS”) and their amendments and interpretations issued by the International Accounting Standards Board (“IASB”), effective as of December 31, 2012, with a transition date of January 1, 2011. Therefore, the Entity adopted IFRS 1, First-time Adoption of International Financial Reporting Standards, since are part of the period covered in these financial statements were reported previously under Mexican Financial Reporting Standards (“MFRS”, individually referred to as Normas de Información Financiera or “NIF”). IFRS comprises various standards and interpretations known, by their acronyms, as IFRS, IAS, IFRIC and SIC.

IFRS 1 generally requires retrospective application of the standards and interpretations applicable in an entity’s first set of IFRS financial statements. Nevertheless, IFRS 1 contains certain mandatory exceptions and allows certain other voluntary exemptions to retrospective application of certain IFRS upon initial adoption, to assist entities in the transition process. The Entity has applied the mandatory exceptions and has elected certain first-time adoption exemptions as described below. Further information regarding the effects of adoption are dicussed in Note 35.

Mandatory exceptions:

  • The Entity applied the mandatory exception with respect to accounting estimates at the transition date that are consistent with those used as of that date under MFRS. This mandatory exception does not apply to MFRS accounting estimates that were determined on a basis different from that under IFRS.
  • Non-controlling interests - The Entity prospectively applied certain requirements of IAS 27 (2008) Consolidated and Separate Financial Statements as of the transition date.
  • As of the transition date, the Entity was already applying hedge accounting in accordance with MFRS, which complies with the criteria established in IAS 39, Financial Instruments: Recognition and Measurement, for which reason this mandatory exception has no effects upon adoption.

Other mandatory exceptions are not applicable to the Entity.

Furthermore, the Entity has applied the optional exceptions for first-time adoption, as described below:

  • As the Entity applied business combination transactions prospectively as of the transition date, it did not reissue any business combinations which arose prior to the transition date. Accordingly, the values and classification of acquired assets and assumed liabilities determined in accordance with MFRS are presented on the previous MFRS basis in the initial financial statements.
  • Given the circumstances of each subsidiary’s assets, the Entity opted to utilize the fair value determined at the transition date based on the appraisals made for certain assets (property, machinery and equipment and investment properties) or the restated value determined in accordance with MFRS (depreciated cost adjusted for the effects of inflation) at the transition date as the deemed cost used for certain property, plant and equipment components.
  • With respect to the recognition of employee retirement benefits, the Entity applied the exemption to recognize all actuarial gains and losses related to all employee benefits plans at the transition date, instead of separating the respective recognized and unrecognized portions.
  • The Entity elected to take the exemption which allows for the application of foreign currency translation effects against retained earnings on the transition date. This optional exemption was applied to the foreign currency translation effects of all subsidiaries with a functional currency different from the Mexican peso.
  • The Entity has operations that require the recognition of provisions for environmental damage and dismantlement of assets. Therefore, the application of this exemption allows the Entity to include in the depreciated cost of certain assets, the amount equal to the net present value of the dismantlement liability determined at the date of transition, net of depreciation accumulated from the date the liability was first incurred through the date of transition.
  • The Entity applied the transition provisions of IAS 23, Borrowing Costs, which enables the transition date to be designated as the starting date upon which to capitalize borrowing costs of loans related to all qualifying assets.

3. Significant events for the year

  • On January 12, 2012, the Entity made a Public Offering (the “Offering”) for the acquisition of up to $6,793,779, equal to 828,509,610 ordinary no par value Series B-1 shares which represented 32.82% of the common stock of its subsidiary, Carso Infraestructura y Construcción, S.A. de C.V. (CICSA), an entity listed with the Mexican Stock Exchange (BMV). Through the Offering, which expired on February 10, 2012, Grupo Carso acquired 32.71% of the noncontrolling interest in and increased its holding to 99.92 of the outstanding shares of CICSA, thereby resulting in its delisting from the BMV.This transaction generated a charge to retained earnings of $3,308,309, together with a decrease in noncontrolling interest in the amount of $3,553,598.
  • The subsidiary, Tenedora de Empresas de Materiales de Construcción, S.A. de C.V. made two equity contributions in Elementia, S.A. de C.V. as follows: on December 28, 2012, it acquired 822,620 Series B-L shares for the amount of $267,971 and on July 31, 2012, it acquired an additional 822,620 Series B-L shares for the amount of $267,971.
  • On January 14, 2011, Grupo Condumex, S.A. de C.V. sold the shares of its subsidiaries, Hubard y Bourlon, S.A. de C.V., Ingeniería HB, S.A. de C.V. and Selmec Equipos Industriales, S.A. de C.V. to its related party, Enesa Ingeniería, S.A. de C.V. The total selling price of the shares was $515,000, generating an accounting profit of $92,040 for Hubard y Bourlon, S.A. de C.V., an accounting loss of ($69) for Ingeniería HB, S.A. de C.V. and an accounting profit of $78,228 for Selmec Equipos Industriales, S.A. de C.V. As of December 31, 2010, such operations were reclassified to held for sale and discontinued operations.
  • On March 1, 2011, an issuance of capital was carried out to formalize the transaction whereby Grupo Carso contributed the amount of US$23,300 to Tabasco Oil Company (TOC), in exchange for 70% of the equity of such company. TOC is certified as an oil company and has the concession for the LLA 56 block located in the Llanos Orientales region of northeast Colombia, which was granted by the National Hydrocarbons Agency of Colombia (ANH) in February 2011 for purposes of exploration and production of hydrocarbons. The concession area covers 413.2 km2 and includes a commitment to make initial investments as stipulated in the concession agreement. TOC must complete three-dimensional seismic studies in an area of at least 145.2 km² and develop at least one exploratory well in the first phase. At the date of issuance of this report, there are basic studies on the perspectives of such block, including two dimensional seismic studies. Based on current estimates, the first exploratory well A3 will be drilled in late 2013 and beginning of 2014.
    In March 2012, TOC acquired contractual rights for the exploration and production of hydrocarbons in the Jagüeyes B block. This contract was executed for a 30-year period and refers to a contracted area of 243.97 Km2. Three-dimensional (3-D) seismic studies have already been performed for a 150 Km2 area of this block. Two exploratory A3 wells have also been drilled. TOC is currently drilling a third exploratory well in compliance with the third phase of the contract.
  • In November 2011, CICSA acquired the remaining 20% of the common stock of Bronco Drilling MX, S.A. de C.V. (formerly Bronco Drilling MX, S. de R.L. de C.V.), for US$5,000, after which CICSA now holds 100% of the common stock of Bronco Drilling MX, S.A. de C.V. This purchase originated a benefit of $132,156 recorded directly to stockholders’ equity because it represents the acquisition of the non-controlling interest.
  • In January 2011, CICSA reached an agreement with Tubacero, S. de R.L. de C.V. to sell certain assets related to the operation of a pipe mill within the manufacturing and services sector with a value of US$ 45 million. The sale, which took place in May 2011, generated a loss of $45,535, which is included in income from discontinued operations.
  • As of December 31, 2011, CICSA sold all of its shares held in Archer Limited, a public entity listed on the Oslo Stock Exchange, to Allis Chalmers Energy, Inc., the same entity from which CICSA originally acquired the shares of Archer Limited during 2011. This transaction generated a loss on the sale of shares of $105,206, which was recorded under the heading of other expenses. This loss arose due to the decrease in the market value of the shares over the period from when they were acquired. As of December 31, 2010, there were 2,700,000 publically traded shares with a market value of $ 236,552.
  • In November 2010, CICSA reached an agreement with its related party, Ideal Panamá, S.A., to sell 100% of the common stock of its subsidiary Cilsa Panamá, S.A. for US$700, which transaction was completed on January 31, 2011. This sale generated a gain of $51,390, which is included in income from discontinued operations. Accordingly, the operating results of this subsidiary are excluded from income from continuing operations as presented in these consolidated financial statements (See Note31).
  • CICSA acquired a warrant (the “Warrant”) from Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa for a three-year period to acquire up to 5,440,770 shares of Bronco Drilling at par value of US$ 0.10 each share. These shares will be subscribed when the Warrant is exercised; its main terms and conditions include the following:
    In June 2011, the Entity exercised the Warrant issued for the 5,440,770 shares of Bronco Drilling at US$ 7.00 per share, with a market value of US$ 11 per share. This transaction generated a gain of $163,381, which is presented in the consolidated statements of comprehensive income.
  • In order to utilize the installed capacity of platform construction yards, the Entity, through its subsidiary, Operadora Cicsa, S.A. de C.V. (“Operadora”), began construction of a Jack-Up (mobile platform used to drill marine oil wells) in 2009, which was completed in the first quarter of 2011. During the second quarter of 2011, as the Entity’s Board of Directors resolved to sell this platform, it was classified as inventory; the marketing process was then commenced through specialized entities. Marketing efforts continued throughout 2012, thus allowing the Entity to gain an in-depth knowledge of this market and identify different options for this equipment, including the provision of services and leasing, which the Board of Directors agreed to consider. This equipment was therefore reclassified to property, plant and equipment during 2012 (see Note 15).

4. Basis of preparation and consolidation

  • Basis of preparation-The consolidated financial statements as of December 31, 2012 and 2011 and for the years then ended have been prepared in accordance International Financial Reporting Standards (“IFRS”)
    The accompanying consolidated financial statements have been prepared on a historical cost basis, except for certain long-term non-monetary assets and financial instruments which were recognized at fair value upon transition to IFRS. Historical cost is generally measured as the fair value of the consideration received for the assets. The interim consolidated financial statements are prepared in pesos, the legal currency of the United Mexican States and are presented in thousands, except as noted otherwise.
    The policies set out below have been consistently applied to all periods presented.
  • Basis of consolidation of financial statements - The consolidated financial statements include those of Grupo Carso, S.A.B. de C.V. and its direct and indirect subsidiaries over which it exercises control. Intercompany balances and transactions have been eliminated on consolidation. The ownership percentages over the capital stock of its subsidiaries as of December 31, 2012, 2011, and January 1, 2011 are shown below:
    Subsidiary Country of incorporation
    and operations
    Activity December 31,
    2012
    Ownership %
    December 31,
    2011
    January 1,
    2011
    Carso Infraestructura y
    Construcción,
    S.A.B. de C.V.
    and Subsidiaries
    (“CICSA”)
    Mexico, Central america
    and South america
    Performance of several branches of engineering, including: oil well drilling and oil rig construction projects and all types of civil, industrial and electromechanical projects and facilities; construction and maintenance of highways, water pipes, water treatment plants and hydroelectric stations; housing construction; manufacturing and selling of cold-formedcarbon steel tubes; and installation of telecommunication and telephone networks. 99.92 67.15 65.76
    Grupo Condumex,
    S.A. de C.V.
    and Subsidiaries
    (“Condumex”)
    Mexico, U.S.A., Central
    america, South america
    and Spain
    Manufacture and sale of cable products used in the construction, automotive, energy and telecommunications industries; manufacture and sale of products of copper and aluminum. 99.57 99.57 99.57
    Grupo Sanborns,
    S.A. de C.V.
    and Subsidiaries
    (“Sanborns”)
    Mexico, El Salvador
    and Panamá
    Operation of department stores, gift shops, record stores, restaurants, cafeterias and management of shopping malls through the following commercial brands, principally: Sanborns, Sears, Saks Fifth Avenue Mix-up and iShop. 99.98 99.98 99.98
    Industrial Cri,
    S.A. de C.V.
    and Subsidiaries
    (“Industrial Cri”)
    Mexico Holding of shares of companies in the following sectors: installation and maintenance of telephone stands, manufacturing all types of candies and manufacture of bicycles. 100.00 100.00 100.00
    Carso Energy,
    S.A. de C.V.
    and Subsidiary
    Mexico and Colombia Drilling and exploration of oil wells 100.00 100.00 -

    The equity in results and changes in stockholders’ equity of the subsidiaries bought or sold during the year are included in the financial statements, from or up to the date on which the transactions were performed.

  • Seasonality - In the operation of the retail sector, the Entity has historically experienced seasonal patterns of sales in stores due to increased consumption activity during the Christmas and New Year period, in the months of May and June, because of Mother’s Day and Father’s Day, respectively, and at the start of the school year in September. During these periods, products such as toys or winter clothes, and school supplies during the back-to-school period, are promoted. By contrast, sales decrease in July and August. The Entity seeks to reduce the effect of seasonality in its results through commercial strategies such as agreements with suppliers, competitive pricing and intensive promotion, for which reason the impact of seasonality on financial position and financial performance are insignificant.

5. Significant accounting policies

The accompanying consolidated financial statements have been prepared in accordance with IFRS. Their preparation requires that the Entity’s management make certain estimates and use certain assumptions that affect the amounts reported in the financial statements and their related disclosures. However, actual results may differ from such estimates. The Entity’s management, upon applying professional judgment, believes that estimates made and assumptions used were adequate under the circumstances. The significant accounting policies of the Entity are as follows:

  • Recognition of effects of inflation - The Entity only recognizes the inflationary effects for entities that operate in hyperinflationary economies, which are considered to be economies in which cumulative inflation over the last three years is greater than 100%. In 2012 and 2011, the Entity did not recognize inflationary effects in its operations.
  • Foreign operations- To consolidate the financial statements of foreign operations, the following methodologies are applied:
    Foreign operations with a functional currency different from the recording currency translate their financial statements from local currency to functional currency, using the following exchange rates: 1) the closing exchange rate in effect at the date of the statement of financial position for monetary assets and liabilities; 2) historical exchange rates for non-monetary assets and liabilities and stockholders’ equity; and 3) the rate on the date of accrual of revenues, costs and expenses, except those arising from non-monetary items that are translated using the historical exchange rate for the related non-monetary item. Translation effects are recorded as foreign currency gains and losses in the consolidated statement of comprehensive income. The financial information in functional currency is subsequently translated to the reporting currency using the exchange rate in effect at the date of the statement of financial position for assets and liabilities, the historical exchange rate for stockholders’ equity and the rate on the date of accrual of revenues, costs and expenses; translation effects are recorded within other comprehensive income.
    Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rate in effect on the date the fair values are determined.
    Foreign operations with a reporting currency different from the functional currency translate their financial statements from the functional currency to the reporting currency using the following exchange rates: 1) the closing exchange rate in effect at the date of the statement of financial position for assets and liabilities; 2) historical exchange rates for stockholders’ equity; and 3) the rate on the date of accrual of revenues, costs and expenses. Translation effects are recorded in other comprehensive income.
    Foreign currency transactions are recorded at the exchange rate in effect as of the date of the transaction. Monetary assets and liabilities denominated in foreign currency are translated to the reporting currency in effect at the date of the statement of financial position. Exchange rate gains and losses are recognized within the statement of comprehensive income. In the case of exchange rate differences from foreign currency loans relating to assets under construction qualifying for capitalization of interest, these are included in the cost of those assets when they are regarded as an adjustment to interest costs on such loans denominated in foreign currency.
    The functional and recording currency of Grupo Carso and all of its subsidiaries is the Mexican peso, except for foreign subsidiaries whose functional and recording currency are as shown below:
    Company Currency in which
    transactions are recorded
    Functional currency
    Cablena, S.A. Euro Euro
    Cablena do Brasil, Limitada Real Real
    Carso Construcción de Costa Rica, S.A. Colón US dollar
    Cicsa Colombia, S.A. Colombian peso Colombian peso
    Carso Construcción de Dominicana, S. de R.L.
    (antes Cicsa Dominicana, S.A.)
    Dominican peso Dominican peso
    Cicsa Ingeniería y Construcción Chile Ldta, S. de R.L. Chilean peso Chilean peso
    Tabasco Oil Company, LLC Colombian peso US dollar
    Cicsa Jamaica Limited Jamaican dollar Jamaican dollar
    Cicsa Perú, S.A.C. New Sol New Sol
    Cobre de México, S.A. de C.V. Peso US dollar
    Servicios Integrales GSM, S. de R.L. de C.V. Peso US dollar
    Bronco Drilling MX, S.A. de C.V. Peso US dollar
    Arcomex, S.A. de C.V. Peso US dollar
    Arneses Eléctricos automotrices, S.A. de C.V. Peso US dollar
    Condumex Inc. US dollar US dollar
    Condutel Austral Comercial e Industrial, Limitada Chilean peso Chilean peso
    Cometel de Guatemala, S.A. Quetzal Quetzal
    Cometel de Honduras, S.A. Lempira Lempira
    Cometel de Nicaragua, S.A. Córdoba Córdoba
    Cometel de Colombia, S.A.S. Colombian peso Colombian peso
    Acordaflex, S.A. de C.V. Peso US dollar
    Cupro do Brasil, Limitada Real Real
    Grupo Sanborns Internacional, S.A. (Panamá) US dollar US dollar
    Nacel de Centroamérica, S.A. Quetzal Quetzal
    Nacel de Honduras, S.A. Lempira Lempira
    Nacel de Nicaragua, S.A. Córdoba Córdoba
    Nacel de El Salvador, S.A. US dollar US dollar
    Procisa Ecuador, S.A. US dollar US dollar
    Procisa do Brasil Projetos, Construcoes e Instalacoes, Ltd. Real Real
    Procosertel, S.A. Argentine peso Argentine peso
    Procosertel Uruguay, S.A. Peso uruguayo Peso uruguayo
    Corporación de Tiendas Internacionales, S.A. de C.V. (El Salvador) US dollar US dollar

    The entities listed above are considered foreign operations under IFRS.
    In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded using the exchange rate prevailing on the dates of transactions are conducted.
  • Cash and cash equivalents - Consist mainly of bank deposits in checking accounts and short-term investments, highly liquid and easily convertible into cash or with a maturity of three months upon its acquisition and are subject to insignificant value change risks. Cash is stated at nominal value and cash equivalents are valued at fair value; any fluctuations in value are recognized in results of the period. Cash equivalents are represented by money market funds and short-term bank investments in pesos and U.S. dollars.
  • Inventories and cost of sale - Inventories are stated at the lower of cost or net realizable value (estimated selling price less all necessary costs to complete sale), as follows:
    Industrial, construction and retail inventories -Are valued using first in-first out and/or average cost depending on the activity of each entity. Cost includes the cost of materials, direct costs and an appropriate portion of fixed and variable overhead costs that are incurred in transforming the inventories in accordance with the respective activity of the Entity. Impairments are reflected as reductions in the carrying amount of inventories.
    Real estate inventories - Real estate inventory that is substantially complete is valued at the lower of cost or net realizable value. Land to be developed is tested for impairment if there are indications that its value will not be recoverable. The real estate inventory includes all direct costs of land, construction and other development and incurred during the development stage, as well as financial costs. Property development costs, include the cost of land, materials, subcontracts, and all related indirect costs, such as indirect labor, purchases, repairs and depreciation. The general and administrative costs are expensed as incurred.
    In the case that the estimated total property development costs exceed the estimated total revenue, the expected loss is recorded with a charge to income. Cost of sales of real estate inventories is determined and prorated based on total costs of promotions or projects.
    Real estate for which the construction phase exceeds one year is classified as long-term inventories.
  • Assets available for sale - Long-term assets and groups of assets held for sale are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is deemed to be met only when the sale is highly probable, the asset (or group of assets) is available for immediate sale in its present condition and management is committed to the sale of such assets, which is expected to be completed during the period of one year from the date of such classification. Assets held for sale are classified as current in the statement of financial position in accordance with management’s intent and are recorded at the lower of carrying value or fair value less costs to sell.
    When Grupo Carso are committed to a plan of sale involving loss of control of a subsidiary, all assets and liabilities of that subsidiary are classified as held for sale when it meets the criteria described above, even when the entity retains a non-controlling interest in the subsidiary after the sale.
    Non-current assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
  • Property, machinery and equipment - As of January 1, 2011, property, plant and equipment were valued at deemed cost (depreciated cost adjusted for an inflation index), or fair value determined through appraisals for certain items of property, machinery and equipment. Subsequent acquisitions are recorded at acquisition cost. Depreciation is calculated using the straight-line method based on the remaining useful lives of the related assets which are reviewed yearly; the effect of any change in the accounting estimate is recognized on a prospective basis. Depreciation of machinery and equipment in certain subsidiaries is calculated based on units produced during the period in relation to the total estimated production of the assets over their service lives.
      Depreciation weighted
    average rate
      % Residual value
    Buildings and leasehold improvements 1.4 a 10   5 y 10
    Machinery and equipment 4.1 a 5    
    Vehicles 25   5, 10 y 25
    Furniture and equipment 5 a 12.8    
    Computers 16.7 a 41.2    

    Borrowing costs incurred during the period of construction and installation of qualifying property, machinery and equipment are capitalized.

    The gain or loss on the sale or retirement of an item of property, plant and equipment is calculated as the difference between the resources received from sale and the carrying value of the asset, and is recognized in results.
    The buildings and machinery to be used in production that are under construction are carried at cost less any recognized impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalized in accordance with the accounting policy of the entity. Depreciation of these assets, as well as other properties, starts when the assets are ready for their intended use.
    Assets held under finance leases are depreciated over the shorter of their estimated useful lives as owned assets or the corresponding lease term.
  • Leases - Leases are classified as finance leases when the terms of the lease substantially transfer all the risks and benefits inherent to ownership. All other leases are classified as operating leases.
    The assets held under finance leases are recognized as assets of the Group at their fair value at the inception of the lease, or if lower, the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as part of accounts payable and accrued liabilities.
    Lease payments are apportioned between the finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they can be directly attributable to qualifying assets, in which case they are capitalized in accordance with the general policy of Grupo Carso for borrowing costs.
    Rental payments for operating leases are charged to results using the straight-line method during the lease term, except when another systematic distribution basis is more representative of reflecting the pattern of leasing benefits. Contingent rentals are recognized as expenses in the periods in which they are incurred.
  • Investment properties - Investment properties are those maintained for leasing and/or capital gains through appreciation in their value over time (including properties in construction for such purpose). Investment properties are valued at fair value through appraisals. The gains or losses that arise from changes in the fair value of the investment property are included in the net gain or loss during the period in which they are originated. Properties which are held as investment include two shopping malls of certain subsidiaries of the Entity.
  • Borrowing costs - Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. All other borrowing costs are recognized in profit or loss in the period in which they are incurred.
  • Investment in shares of associated companies and other - Permanent investments in entities where significant influence exists are initially recognized based on the net fair value of the entities’ identifiable assets and liabilities as of the date of acquisition. If impairment indicators are present, investment in shares of associated companies is subject to impairment testing.
    Subsequent to initial recognition, the comprehensive income of associates as well as the distribution of profits or capital repayments is incorporated into the consolidated financial statements using the equity method, unless the investment is classified as held for sale, in which case is recorded in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. When Grupo Carso participation in the losses of an associate exceeds the investment value, is discontinued recognition of its share of such losses. Additional losses are not recognized until the time of Grupo Carso is legally required to cover payments on behalf of its associate.
  • Intangibles assent - Intangible assets are recognized in the accompanying balance sheets only if they can be identified, provide future economic benefits and control exists over such assets. Intangible assets with an indefinite useful life are not amortized and the carrying value of these assets is subject to annual impairment testing, and intangible assets with a defined useful life are amortized systematically based on the best estimate of their useful life, determined in accordance with the expected future economic benefits. The useful life, residual value and amortization method are subject to annual impairment assessment, any change is recorded on a prospective basis.
    The disbursements caused by research activities are recognized as an expense in the period in which they are incurred.
    Intangible assets recognized by the Entity mainly relate to costs incurred during the evaluation phase, which are capitalized as other assets during the exploration and evaluation of the Project, and are amortized on the straight-line basis over the useful life of the concession or of the Project, whichever is lower.
    Plans and projects for environmental control are presented within other assets. The expenses that are made for this concept are applied to the provision for environmental remediation and the subsequent increase to such provision is debited to the net income of the year, only if it corresponds to present obligations or to other future obligations, in the year that they are determined.
  • Intangible assets acquired in business combination - ntangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date. Intangible assets acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
    In assessing value in use, the estimated future cash flows are discounted at present value using a discount rate before tax that reflects current market assessments, the time value of money and the risks specific to the asset for which not adjusted future cash flows.
  • Government grants - Government grants are not recognized until there is reasonable assurance that the Entity will comply with the conditions attaching to them and that the grants will be received.
    Government grants whose primary condition is that the Entity should purchase, construct or otherwise acquire non-current assets are recognized as deferred revenue in the consolidated statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets.
  • Goodwill - The goodwill arising from a business combination are recognized at historical cost as an asset at the date that control is acquired (the acquisition date), less impairment losses recognized, if any. Goodwill is the excess of the consideration transferred the amount of any non-controlling interest in the acquired over the fair value of the acquirer’s interest in the equity of the acquired and / or on the net at the date of acquisition identifiable assets acquired and liabilities assumed.
    When the fair value of the identifiable net assets acquired exceeds the sum of the consideration transferred, the amount of such excess is recognized in earnings as a gain on purchase.
    Goodwill is not amortized and is subject to annual impairment testing. For purposes of impairment testing, goodwill is allocated to each cash-generating unit for which the Entity expects to obtain benefits. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of goodwill allocated to the unit and then to the other assets of unit, proportionately, based on the carrying amount of each asset in the unit. The impairment loss recognized for goodwill purposes cannot be reversed in a subsequent period.
    When a subsidiary is disposed-off, the amount attributable to goodwill is included in determining the gain or loss on the disposal.
  • Impairment of tangible and intangible assets excluding goodwill - The Entity reviews the carrying values of its tangible and intangible assets to determine whether there are indications that such assets have suffered any loss for impairment. In the event of any such indication, the recoverable amount of the asset is calculated in order to determine the amount of the loss from impairment. When it is not possible to estimate the recoverable amount of an individual asset, the Entity estimates the recoverable amount of the cash generating unit to which such asset belongs. When a reasonable and consistent distribution basis can be identified, the corporate assets are also assigned to the individual cash generating units; otherwise, they are assigned to the smallest group of cash generating units for which a reasonable and consistent distribution basis can be identified. Intangible assets with an indefinite useful, are annually tested for impairment and when indicator of impairment is present.
    The recoverable amount is the higher of fair value less cost of sale and the value in use. When the value in use is assessed, the estimated future cash flows are discounted at present value using a discount rate before taxes that reflects the current market assessment of the value of money over time and the specific risks of the asset for which the estimated future cash flows have not been adjusted.
    If it is estimated that the recoverable amount of an asset (or cash generating unit) is less than its carrying value, the carrying value of the asset (or cash generating unit) is reduced to its recoverable value. Losses from impairment are recognized in results except when the asset is recorded at a revalued amount, in which case the loss from impairment should be considered as a reduction in the revaluation.
    When a loss from impairment subsequently reverses, the carrying value of the asset (or cash generating unit) is increased to the estimated value revised to its recoverable value, in such a way that the increased carrying value does not exceed the carrying value that would have been determined if a loss from impairment had not been recognized for such asset (or cash generating unit) in previous years. The reversal of the loss from impairment is recognized in results, unless the asset is recognized at revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
  • Business Combinations - Are the transactions or other events whereby assets acquired and liabilities assumed constitute a business. The acquisition of subsidiaries and businesses are accounted for using the purchase method. The consideration for each acquisition is valued at its fair value at the date of acquisition and the net assets and liabilities acquired. The acquisition-related costs are recognized in income when incurred.
    The identifiable assets, liabilities and contingent liabilities of the acquired that meet the conditions for recognition under IFRS 3, Business Combinations, are recognized at their fair value at the acquisition date, except that:
    • Assets or deferred tax liabilities and liabilities or assets related to agreements employee benefits are recognized and valued in accordance with IAS 12, Income Taxes, and IAS 19, Employee Benefits, respectively;
    • Liabilities or equity instruments related to the replacement by the Entity acquired awards of share-based payments are valued in accordance with IFRS 2, Share-based Payments, and
    • Assets (asset group for sale) that are classified as held for sale in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard.
    If the initial recognition of a business combination is not completed at the end of the reporting period in which the combination occurs, the Entity reports provisional amounts for the items for which recognition is incomplete. During the appraisal period, the acquirer shall recognize adjustments to the provisional amounts recognized assets or liabilities or additional requirements to reflect new information obtained about facts and circumstances that existed at the acquisition date, which if known, would have affected the valuation of the amounts recognized at that date.
    The valuation period is the period from the acquisition date until the Entity obtains complete information about facts and circumstances that existed at the date of acquisition which is subject to a maximum of one year.
    In the case that the consideration for the acquisition includes any asset or liability caused by a contingent consideration arrangement, such arrangement is valued at fair value at the acquisition date. Subsequent changes in such fair values are adjustments to the acquisition cost, which are classified as valuation period adjustments. All other changes in fair value of contingent consideration classified as an asset or liability in accordance with the relevant IFRS are recognized directly in income. Changes in fair value of contingent consideration classified as equity are not recognized.
    In the case of a business combination in stages, prior investment of the Entity in the capital of the acquired is remeasured to fair value at the acquisition date (meaning the date on which the Entity obtains control) and the resulting gain or loss, if any, are recognized in income. The amounts resulting from participation in the acquired prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to earnings, provided that such treatment would be appropriate in the case to be sold such participation.
    Contingent liabilities acquired in a business combination are initially measured at fair value at the acquisition date. At the end of subsequent reporting periods, such contingent liabilities are measured at the higher of the amount that would be recognized in accordance with IAS 37 and the amount initially recognized less cumulative amortization recognized in accordance with IAS 18, Revenue.
  • Financial instruments - Financial assets and financial liabilities are recognized when the Entity becomes a party to the contractual provisions of the instrument.
    Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.
    • Financial assets - All the financial assets are recognized and are derecognized for accounting purposes at the transaction date, in the presence of a purchase or sale of a financial asset under a contract whose conditions require the delivery of the asset over a period generally regulated by the respective market, and are initially measured at fair value, plus transaction costs, except for those financial assets classified at fair value changes in profit, which are initially measured at fair value.
      Financial assets are classified into the following specified categories: “financial assets at fair value through profit or loss” (FVTPL), “held-to-maturity investments”, “available-for-sale” (AFS) and “loans and receivables”. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Currently, the Entity holds AFS and loans and receivables.
      • Financial assets at fair value through profit or loss(FVTPL)
        Financial assets are classified as FVTPL when the financial asset is held for trading purposes or designated as a fair value financial asset with changes through results.
        A financial asset will be classified as held for trading purposes if:
        • It is purchased mainly for the purpose of sale in the near term; or
        • In its initial recognition, it forms part of a portfolio of identified financial instruments which the Entity administers together, and for which there is a recent real pattern of short-term profit-taking; or
        • It is a derivative that is not designated as a hedge instrument.
        A financial asset other than a financial asset held for trading may be designated as a financial asset at fair value through profit or loss on initial recognition if:
        • With such designation eliminates or significantly reduces a measurement or recognition inconsistency valuation that would otherwise arise, or
        • The financial asset forms part of a group of financial assets, financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with a risk management strategy and investment documented by the Entity and information is provided internally on that group, on the basis of their fair value; or
        • It forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire hybrid contract (asset or liability) to be designated as at FVTPL.
        Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘other gains and losses’ line item. Fair value is determined in the manner described in note 14.
      • Held-to-maturity financial assets
        The investments held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Entity plans and can hold to maturity. After initial recognition, investments held to maturity are valued at amortized cost using the method of effective interest rate less any impairment exists.
      • Financial assets available for sale
        The shares listed on the stock exchange that maintains the Entity and that are traded in an active market are classified as held for sale and recorded at fair value. The fair value is determined in the way described in Note 14. Gains and losses arising from changes in fair value are recognized in other comprehensive income and accumulated in investment revaluation reserve, except for impairment losses, interest calculated using the effective interest method, and gains and losses on changes, which are recognized in the results. Where an investment is available or determined impairment, the cumulative gain or loss previously accumulated in the investment revaluation reserve is reclassified to the income.
        Dividends on equity instruments available for sale are recognized in income when establishing the right of Entity to receive dividends.
        The fair value of monetary assets available for sale denominated in foreign currency is determined in that foreign currency and converted at the spot exchange rate at the end of the reporting period. Gains and losses on foreign exchange are recognized in the results, are determined based on the amortized cost of the monetary asset. Other gains and losses on changes recognized in other comprehensive income.
      • Loans and accounts receivable
        Loans, customer receivables and other accounts receivable with fixed or determinable payments, which are not traded on an active market, are classified as loans and accounts receivable. Loans and accounts receivable are valued at amortized cost using the effective interest rate method, less any impairment. An allowance for bad debts is recognized in results when there is objective evidence that the accounts receivable are impaired. Interest income is recognized by applying the effective interest rate, except for short-term accounts receivable if the interest recognition is immaterial.
      • Effective interest rate method
        This is a method of calculation for the amortized cost of a financial instrument and of assigning the financial revenue or financial expense throughout the relevant period. The effective interest rate is the discount rate that exactly discounts the estimated future cash flows receivable or payable (including commission, interest basis points paid or received, transaction costs and other premiums or discounts that are included in the effective interest rate calculation) throughout the expected life of the financial instrument (or, when appropriate, in a shorter period), to the net carrying value of the financial asset or liability upon its initial recognition
      • Impairment of financial assets
        Financial assets other than financial assets at fair value through profit or loss, are subject to testing for impairment purposes at the end of each period being reported. Considered financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.
        For listed equity instruments classified as available for sale, a significant or prolonged fair value of securities below its cost is considered to be objective evidence of impairment.
        Objective evidence of impairment could include:
        • Significant financial difficulty of the issuer or counterparty; or
        • Default or delinquency in interest or principal payments; or
        • It becoming probable that the borrower will enter bankruptcy or financial re-organization.
        For certain categories of financial assets, such as customer receivables, the assets which have been subjected to impairment testing and have not suffered individual impairment, are included in the evaluation of impairment on a collective basis. The objective evidence that a receivables portfolio might be impaired could include the Entity’s past experience in terms of collections, an increase in the number of late payments in the portfolio which exceed the average credit period of seven months, and observable changes in national and local economic conditions that correlate with payment defaults.
        For the financial assets recorded at amortized cost, the amount of the recognized loss from impairment is the difference between the carrying value of the asset and the present value of future collections, discounted at the original effective interest rate of the financial asset.
        The carrying value of the financial asset is directly reduced by loss from impairment for all the financial assets, except customer receivables, where the carrying value is reduced through an allowance for doubtful accounts. When an account receivable is deemed to be a bad debt, it is eliminated against the allowance. The subsequent recovery of amounts previously eliminated is recognized against the allowance. Changes in the carrying value of the allowance for bad debts are also recognized within results.
        When it is consider that a financial asset available for sale is impaired, the cumulative gain or loss previously recognized in other comprehensive income are reclassified to profit or loss.
        Except for equity instruments available for sale, whether in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying value of the investment at the date the impairment is reversed does not exceed the amortized cost would have been if no impairment had been recognized.
        With respect to equity instruments available for sale, impairment losses previously recognized in income are not reversed through them. Any increase in fair value after recognition of the impairment loss is recognized in other comprehensive income.
    • Financial liabilities and equity instruments issued by the Entity
      Classification as debt or equity - Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.
      Equity instruments - An equity instrument is any contract that evidences a residual interest in the net assets of an entity. Equity instruments issued by the Entity are recognized at the proceeds received, net of direct issuance costs.
      Financial liabilities- Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities.
      • Other financial liabilities
        Other financial liabilities, including loans, are initially valued at fair value, net of transaction costs; subsequently, they are valued at amortized cost using the effective interest rate method, and the interest expense is recognized on an effective yield basis.
      • Derecognition of financial liabilities
        The Entity derecognizes financial liabilities when, and only when, the Entity´s obligations are discharged, cancelled or they expire. The difference between the carrying value and the sum of the consideration received or receivable is recognized in results
  • Derivative financial instruments - The Entity enters into derivative financial instruments for trading purposes and for hedging risks related to: a) interest rates, and b) exchange rates on long-term debt c) stock price, d) metal prices and, e) natural gas price. Note 15 provides additional detail regarding derivative financial instruments.
    When derivatives are entered into to hedge risks, and such derivatives meet all hedging requirements, their designation is documented at the beginning of the hedging transaction, describing the transaction’s objective, characteristics, accounting treatment and how the effectiveness of the instrument will be measured.
    Derivatives are initially recognized at fair value at the date on which the derivative contract is signed and are subsequently remeasured at fair value at the end of the reporting period. The resulting gain or loss is recognized in results unless the derivative is designated and is effective as a hedge, in which case the timing of the recognition in results will depend on the nature of the hedging relationship. The Entity designates certain derivatives either as fair value hedges of recognized assets or liabilities or firm commitments (fair value hedges), hedges of highly probable forecasted transactions or foreign currency risk hedges of firm commitments (cash flow hedges).
    A derivative with a positive fair value is recognized as a financial asset whereas a derivative with a negative fair value is recognized as a financial liability. A derivative is presented as a long-term asset or liability if the maturity date of the instrument is 12 months or more, and it is not expected to be realized or canceled within those 12 months. Other derivatives are presented as short-term assets and liabilities.
    • Hedge accounting
      The Entity designates certain hedging instruments, which include derivatives, embedded derivatives and non-derivatives in respect of foreign currency risk, as either fair value hedges, cash flow hedges, or hedges of net investments in foreign operations. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges.
      At the inception of the hedge relationship, the Entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Entity documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk.
      Note 14 sets out details of the fair values of the derivative instruments used for hedging purposes.
    • Cash flow hedges
      At the start of each hedge, the Entity documents the hedging relationship and objective, together with its risk management strategy. This documentation includes the manner in which the Entity will measure the effectiveness of the hedge with regards to offsetting changes to the fair value of the hedged item or the cash flow attributable to the hedged risk.
      The Entity recognizes all assets and liabilities resulting from transactions involving derivative financial instruments at fair value in the statement of changes in financial position, regardless of its reason for holding these instruments. Fair value is determined based on the prices reported on recognized markets; however, when they are not quoted on a market, the Entity utilizes valuation techniques accepted by the financial sector. The decision to enter into an economic or accounting hedge is based on an analysis of market conditions and expectations concerning domestic and international economic scenarios.
      The effective portion of changes to the fair value of the derivative financial instruments designated and classified as cash flow hedges is recognized under other comprehensive income. The gains and losses derived from the ineffective portion of the hedge instrument are recognized in results and included under the heading of “other (income) expenses”.
      Amounts previously recognized in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item is recognized in profit or loss, in the same line as the recognized hedged item. However, when the hedged forecast transaction results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognized in other comprehensive income and accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability.
      Hedge accounting is discontinued when the Entity revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognized in other comprehensive income and accumulated in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in profit or loss. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognized immediately in profit or loss.
    • Fair value hedges
      Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognized in profit or loss in the line item relating to the hedged item.
      Hedge accounting is discontinued when the Entity revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. The fair value adjustment to the carrying amount of the hedged item arising from the hedged risk is amortized to profit or loss from that date.
    • Hedges of net investments in foreign operations
      Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in other comprehensive income and accumulated under the heading of foreign currency translation reserve. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss, and is included in the of “other (income) expenses” line item.
      Gains and losses on the hedging instrument relating to the effective portion of the hedge accumulated in the foreign currency translation reserve are reclassified to profit or loss on the disposal of the foreign operation.
      The debt and equity instruments are classified as financial liabilities or as equity in accordance with the substance of the contractual arrangement.
    • Embedded derivatives
      The Entity reviews its executed contracts to identify any embedded derivatives which must be separated from the host contract for valuation and accounting purposes. When embedded derivatives are identified in other financial instruments or contracts (host contracts), they are treated as separate derivatives when their risks and characteristics are not closely related to those of the respective host contracts and when the latter are not recorded at their fair value with changes recorded through results.
      An embedded derivative is presented as a long-term asset or liability when the respective hybrid instrument will mature in 12 months or more and when is not expected to be realized or canceled during that 12-month period. Other embedded derivatives are presented as short-term assets or liabilities.
      During the reporting period, the Entity did not enter into any fair value hedges for its net investment in foreign transactions or embedded derivatives.
  • Provisions - Are recognized for current obligations (legal or assumed) that arise from a past event, that are probable to result in the use of economic resources, and that can be reasonably estimated.
    The amount recognized as a provision is the best estimate of the resources required to settle the present obligation at end of period, taking into account the risks and uncertainties associated with the obligation. When a provision is valued using the estimated cash flows to settle the present obligation, its carrying amount represents the present value of the cash flow (only when the value of money over time is material).
    When it is expected that some or all of the economic benefits required to settle a provision are recovered from a third party, an asset is recognized by a receivable when it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
    • Provision for environmental remediation - The Entity has adopted environmental protection policies within the framework of applicable laws and regulations. However, due to their activities, the industrial subsidiaries, sometimes perform activities that adversely affect the environment. Consequently, the Entity implements remediation plans (which are generally approved by the competent authorities) that involve estimating the expenses incurred for this purpose.
      The estimated costs to be incurred could be modified due to changes in the physical condition of the affected work zone, the activity performed, laws and regulations, variations affecting the prices of materials and services (especially for work to be performed in the near future), as well as the modification of criteria used to determine work to be performed in the affected area, etc.
      The fair value of a liability for asset retirement obligations is recognized in the period incurred. The liability is measured at fair value and is adjusted to its present value in subsequent periods, as expense is recorded. The corresponding asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s useful life.
  • Reserve for purchase of own shares - Purchases and sales of shares are recognized directly in reserve acquisition of treasury shares at cost of acquisition and placement respectively. Any gain or loss is recognized in the net stock issuance premium.
  • Income taxes- The expense for income taxes represents the sum of current and deferred tax calculated as the higher of regular income tax (ISR) or the business flat tax (IETU). ISR is calculated based on taxable profit which differs from net income reported in the consolidated statement of comprehensive income due to income or expenses taxable or nontaxable in other periods and also items that are not taxable. IETU is calculated based on cash flows of each fiscal year, representing revenues, less deductions and certain tax credits. The income tax liability is calculated based on the promulgated or substantially approved tax rate at the end of the reporting period.
    Deferred taxes are calculated by applying the corresponding tax rate to temporary differences resulting from comparing the accounting and tax bases of assets and liabilities and including, if any, future benefits from tax loss carry forwards and certain tax credits. Deferred tax assets are recorded only when there is a high probability of recovery, to the extent that estimated taxable profits will be available to utilize such tax benefits. Deferred tax assets and liabilities are not recognized if temporary differences arise from goodwill or the initial recognition (different from a business combination) of other assets and liabilities in a transaction that will not affect the Entity’s taxable income or accounting profit.
    The Entity recognizes a deferred tax liability for taxable temporary differences related to its investments in subsidiaries, except when it is able to control the reversal of the temporary difference and it is likely that the latter will not be reversed in the foreseeable future. The deferred tax assets generated by the temporary differences associated with these investments are only recognized when it is likely that the Entity will generate sufficient future tax income to which these temporary differences can be applied and when they are expected to be reversed in the near future.
    The carrying value of a deferred tax asset must be reviewed at the end of each reporting period and must be decreased to the extent that the Entity considers that it will generate sufficient taxable profits to enable it to totally or partially recover the asset.
    Deferred tax assets and liabilities are calculated using the tax rates which the Entity’s expects to apply in the period in which the liability is settled or the asset is realized, based on the rates (and tax laws) which have been enacted or substantially enacted at the end of the reporting period. The valuation of deferred tax liabilities and assets reflects the tax effects that would be generated by the manner in which the Entity expects to recover or settle the carrying values of its assets and liabilities at the end of the reporting period.
    Grupo Carso has the authorization of the Secretary of Finance and Public Credit in Mexico to prepare its income tax on a consolidated basis, which includes the proportional taxable income or loss of its Mexican subsidiaries. For its part, the tax provisions of the foreign subsidiaries are determined based on the taxable income of each individual entity.
    Current and deferred income tax is recorded in the results of the year they are incurred, except when related to items recognized as other comprehensive income. In case of a business combination the tax effects are included within the business combination. Asset tax paid in prior years that is expected to be recoverable is recorded as a tax credit.
  • Direct employee benefits and at retirement - The costs incurred related to direct benefits and defined retirement benefit plans are recognized as expenses when employees have provided the services which grant them the right to these benefits.
    The seniority premium liability for all personnel, non-union personnel pensions and retirement payments treated as pensions are considered in defined benefit plans. The cost of these benefits is determined by using the projected unit credit method and the actuarial valuations prepared at the end of each reporting period. Actuarial gains and losses are immediately recognized in other comprehensive income, net of deferred tax, based on the net asset or liability recognized in the consolidated statement of financial position, so as to reflect the over- or underfunded status of employee benefit plan obligations. Similarly, past service costs are recognized in results when the plan is modified or when restructuring costs are incurred.
    Retirement benefit obligations recognized in the statement of financial position represent the current value of the defined benefit obligation adjusted according to actuarial gains and losses and the past service costs, less the fair value of plan assets. When plan assets exceed the liabilities of the defined benefit plan, they are valued according to the lower of: i) the defined benefit plan surplus, and ii) the present value of any economic benefits derived from the plan and available as future plan contribution reimbursements or reductions.
  • Revenue recognition - Revenue is measured at the fair value of the consideration received or receivable considering the amount of sales returns, discounts and other similar discounts or rebates. Revenues are recognized based on the criteria below:
    • Sale of goods - The sale of goods is recognized when the inherent risks and rewards are transferred to the customer, provided the respective income can be reliably measured, it is likely that the Entity will receive the economic benefits associated with the transaction, the costs that have been or will be incurred to perform the transaction can be reliably measured, the Entity is not continuously involved in the ownership of the goods and does not retain effective control over them. Generally, revenues recognition coincides with the date on which the goods are delivered and ownership is legally transferred to the customer.
    • Finance income on credit sales - Finance income on credit sales recognized when it is accrued and is generated by credit card transactions (Sanborns, Sears, Saks, Dorian’s, Mixup and Corpti).
    • Services - Revenus from services provided are recognized when the service is rendered.
    • Rentals - Rental revenue is recognized on a straight-line basis as lease services are provided and maintenance fees are collected; these amounts are recognized throughout the period of the lease contract from which they are derived.
    • Long-term construction contracts - When can be estimated reliably the results of a construction contract revenue is recognized using the percentage-of-completion method based on costs incurred, taking into account the expected costs and revenues at the end of the project, as the activity takes place. Changes in the performance of work, and estimated profit, including those that may arise for prizes conclusion derived from projects in advance, contractual penalties and final agreements in contracts, are recognized as income in the periods in which revisions are made or approved by customers.
      Under different contracts, recognized revenues do not necessarily reflect the amounts billable to customers. Management periodically evaluates the fairness of its accounts receivable. In those cases in which the recovery of these amounts entails certain difficulties, additional allowances for doubtful accounts are created and applied to the results of the year in which they are determined. The estimate prepared for this reserve is based on management’s judgment and also considers prevailing circumstances when it is determined.
      Contract costs include labor, raw materials, subcontractor, project startup and indirect costs. The Entity periodically evaluates the fairness of the estimates used to determine the work completion percentage. If, as a result of this evaluation, the Entity considers that the estimated costs to be incurred until project conclusion exceed expected revenues, a provision is recognized for the estimated losses of the period in question. In the case of works projects financed by the Entity in which the contract value includes work execution and financing revenues, the net financial expense (income) needed for project development forms part of the respective contract costs, which are recognized in results based on project work completion. In this type of contract, the total project amount can be collected from the customer until the termination date by submitting periodic project work completion reports for the customer’s approval, which enable the Entity to obtain project financing when required.
    • Changes to construction contracts - Are recognized when the amount can be reliably quantified and there is reasonable evidence of approval by the customer. Revenues are recognized when claims can be measured reliably and when, derived from progress in the negotiations, there is reasonable evidence that the client will accept your payment.
    • Infrastructure concessions- Revenues from the operation of concession projects are recognized as concession service revenue in accordance with the respective recognition and measurement criteria. Normally, the prices for the service provided under concession agreements are regulated by the grantor. Changes in tariffs are not recognized until the date such changes enter into effect.
    • Dividends and interests- Dividend income from other investments is recognized once the right of shareholders to receive this payment has been established (when it is probable that the economic benefits will flow to the Entity and that the income can be reliably valued).
      Interest income from financial assets is recognized when earned and is probable that the economic benefits will flow to the Entity and the amount of revenue can be reliably valued. Interest income is generated primarily by the credit card operation in department stores.
  • Loyalty programs for customers - Awards are accounted for as a separate component of the initial sale transaction, measured at their fair value and recognized as deferred income in the statement of financial position, within other accounts payable and accrued liabilities. Deferred revenue is recognized in income once the award is redeemed or expires.
  • Interests in joint ventures- A joint venture is a contractual arrangement whereby the Entity and other parties undertake an economic activity that is subject to joint control. When a subsidiary entity undertakes its activities under joint venture arrangements directly, the Entity’s share of jointly controlled assets and any liabilities incurred jointly with other ventures are recognized in the financial statements of the relevant entity and classified according to their nature. Liabilities and expenses incurred directly in respect of interests in jointly controlled assets are accounted for on an accrual basis. Income from the sale or use of the Entity’s share of the output of jointly controlled assets, and its share of joint venture expenses, are recognized when it is probable that the economic benefits associated with the transactions will flow to/from the Entity and their amount can be measured reliably.
    The Entity reports its interests in jointly controlled entities using proportionate consolidation in the assets, liabilities, income and expenses of jointly controlled entities on a line-by-line basis.
  • Statement of cash flows - The indirect method is used for presenting cash flows from operating activities, such that the net income is adjusted for changes in operating items not resulting in cash receipts or disbursements, and for items corresponding to cash flows from investing and financing activities. Interest received is presented as an investing activity and interest paid is presented as a financing activity.
  • Earnings per share - (i) The basic earnings per common share is calculated by dividing the net consolidated profit attributable to the controlling interest by the weighted average of common outstanding shares during the year, and (ii) The basic profit per common share for discontinued operations is calculated by dividing the result for discontinued operations by the weighted average of common outstanding shares during the year.

6. Critical accounting judgments and key sources of uncertainty estimations

In applying the accounting policies (see Note 5), the Entity’s management makes judgments, estimates and assumptions about certain amounts of assets and liabilities in the financial statements. The estimates and associated assumptions are based on historical experience and other factors deemed relevant. Actual results could differ from those estimates.

The estimates and underlying assumptions are reviewed on a regular basis. Revisions to accounting estimates are recognized in the period of the revision and future periods if the revision affects both current period and subsequent periods.

Critical accounting judgments and key sources of uncertainty in applying the estimations that may have a significant impact on the amounts recognized in the accompanying interim consolidated financial statements are as follows:

  • Inventory and accounts receivable allowances- The Entity use estimates to determine inventory and accounts receivable reserves. When calculating inventory reserves, the Entity considers production and sales volumes, as well as the demand for certain products. When determining the allowance for doubtful accounts, the Entity primarily considers the financial risk represented by each customer, unguaranteed accounts and significant collection delays based on established credit conditions.(See Notes 10 and 11 for further detail).
  • Property, machinery and equipment - The Entity reviews the estimated useful life of property, plant and equipment at the end of each annual period to determine the depreciation of these assets. Asset useful lives are defined according to the technical studies prepared by specialized internal personnel and with the participation of external specialists. As part of the adoption of IFRS, management prepared a detailed analysis to modify the useful life of certain components of property, plant and equipment components. The level of uncertainty related to useful life estimates is also linked to market changes and asset utilization based on production volumes and technological development.
  • Investment property -The Entity prepares an annual valuation of investment property with the assistance of independent appraisers. The valuation techniques are based on different methods including physical inspection, market and income approaches; the Entity has utilized the physical inspection approach for the value of investment properties included in the accompanying consolidated financial statements. The valuation methodology includes observable assumptions for properties which, while dissimilar, nonetheless involve the same geographic zones and commercial use. The Entity considers the highest and best use of its assets.
    The valuation techniques used by the Entity were not modified in 2012 and 2011. Entity management considers that the valuation methodologies and assumptions utilized are appropriate for determining the fair value of the Entity’s investment properties.
  • Impairment of long-lived assets - The carrying value of noncurrent assets is reviewed to detect indications of impairment; i.e., if certain situations or changing circumstances indicate that carrying values may not be recoverable. If indications of impairment are detected, the Entity performs a review to determine whether the carrying value exceeds its recovery value and is impaired. When applying asset impairment tests, the Entity must estimate the value in use assigned to property, plant and equipment and cash generating units, in the case of certain assets. Use value calculations require that the Entity determine the future cash flows which must be produced by cash generating units, together with an appropriate discount rate for calculating present value. The Entity utilizes cash flow projections by estimating market conditions, prices, production and sales volumes.
  • Valuation of financial instruments - The Entity uses valuation techniques for its financial instruments which include information that is not always based on an observable market to estimate the fair value of certain financial instruments. Note 14 contains detailed information on the key assumptions used to determine the fair value of the Entity’s financial instruments, as well as an in-depth sensitivity analysis of these assumptions. Entity management considers that the valuation techniques and assumptions it has utilized are suitable for determining the fair value of its financial instruments.
  • Contingencies - As the Entity is involved in certain legal proceedings, it evaluates the probability of a payment obligation arising. Accordingly, it considers the legal situation in effect at the estimate date and the opinion of its legal advisers; these evaluations are periodically reconsidered.
  • Employee benefits at retirement - The Entity uses assumptions to determine the best annual estimate of these benefits. Like the above assumptions, these benefits are jointly and annually determined in conjunction with independent actuaries. These assumptions include demographic hypotheses, discount rates, expected remuneration increases and future employee tenure, among other items. While the Entity considers that these assumptions are appropriate, any modification in this regard could affect the value of employee benefit assets (liabilities) and the statement of comprehensive income of the period in which any such modification takes place.
  • Revenue recognition for construction contracts: When can be estimated reliably the results of a construction contract revenue is recognized using the percentage-of-completion method based on costs incurred, taking into account the expected costs and revenues at the end of the project, as the activity takes place. Changes in the performance of work, and estimated yields, including those that may arise for prizes conclusion derived from projects in advance, contractual penalties and final agreements in contracts, are recognized as income in the periods in which revisions are made or approved by customers.
    Accordance with the terms of various contracts, revenue is recognized is not necessarily related to the amounts billable to customers. Management periodically evaluates the reasonableness of its receivables. In cases where there is evidence collection difficulty, additional allowances for doubtful accounts affecting income in the year they are determined are recognized. The estimate of the reserve is based on the best judgment of the Entity under the circumstances prevailing at the time of its determination.

7. Business combinations

  • Business acquisition - During 2011, Grupo Carso, through its direct subsidiary Carso Energy, S.A. de C.V., acquired TOC, which was accounted for using the acquisition method. The results of this acquired business have been included in the consolidated financial statements from the date of purchase. The details of the acquisition are as follows (see Note 3):
  • Consideration transferred
        Cash
    TOC $ 282,478

    The acquisition-related costs have been excluded from the consideration transferred and have been recognized as an expense in the period, within administrative expenses in the consolidated statements of comprehensive income.
  • Assets acquired and liabilities recognized at the date of acquisition
        Assets:
    Cash $ 197,820
    Investment in concession   84,658
    Total net assets $ 282,478

  • Goodwill arising on acquisition
        Consideration
    transferred
      Value of net
    assets acquired
      Goodwill
    TOC $ 282,478 $ 282,478 $ -

  • Net cash outflow on acquisition of subsidiaries
    Consideration paid in cash $ 282,478
    Less: cash balances acquired   197,820
    Net $ 84,658

8. Cash and cash equivalents

    2012   2011 January 1, 2011
Cash $ 1,272,218 $ 1,792,083 $ 1,174,317
Cash equivalents:
Banking paper   676,836   822,440   1,034,383
Government paper   1,961,267   803,811   588,604
Sight investments in US$   765,400   862,080   228,482
Bank notes   230,000   294,537   -
Bank acceptances   -   282,900   -
Current account   72,586   31,083   52,884
Daily investments of cash surpluses   16,431   8,960   8,611
Total $ 4,994,738 $ 4,897,894 $ 3,087,281


9. Investment securities held for trading

    2012   2011   January 1,2011
Fixed term investments $ 103,864 $ 111,656 $ 81,804

At December 31, 2012, investments in securities held for trading mainly consist of fixed maturity securities in euros, with monthly installments, the last in December 2013, with an average rate of 2.7%, which are valued at amortized cost less any impairment exists.


10. Accounts receivable

    2012   2011 January 1, 2011
Clients $ 14,045,222 $ 13,037,673 $ 11,703,047
Allowance for doubtful accounts   (483,960)   (427,278)   (432,321)
    13,561,262   12,610,395   11,270,726
Work completed to certify   3,199,975   2,097,575   2,250,487
Sundry debtors   178,668   473,835   960,407
Income tax recoverable   -   609,882   457,682
Value-added tax to be credited   -   -   667,503
IETU   214,883   260,621   215,743
Other taxes recoverable   146,581   126,267   81,955
Others   177,571   191,439   255,701
  $ 17,478,940 $ 16,370,014 $ 16,160,204

  • Clients
    The Entity organizes sales promotions for retail entities through which it grants credit to its customers for different periods which, on average, are 211, 218 and 224 days at December 31, 2012, 2011 and January 1, 2011, respectively. In the case of sales promotions with collection periods exceeding one year, the respective accounts receivable are classified as short-term because they form part of the Entity’s regular transaction cycle, which is a common industry practice. Maturities exceeding one year are $522,644 and $657,874 at December 31, 2012 and 2011, respectively, and $673,916 at January 1, 2011.
    The average credit period of revenues derived from the cable, electronics, auto and corporate sectors is 30 and 60 days; interest is not charged.
    Given the nature and diversity of project development periods, there is no average credit period for the operation of the infrastructure and construction sector; interest is not charged. The Entity does not maintain any collateral or other credit improvements as regards these balances; similarly, it does not have the legal right to offset them against amounts owed to the counterparty.
  • Past due but not impaired
    Accounts receivable from customers include amounts that are overdue at the end of the reporting period and for which the Entity has not recognized an allowance for bad debts as there has been no significant change in the customer’s credit rating and the amounts in question are still deemed to be recoverable. A summary of customer accounts receivable which are overdue, but are not considered impaired is detailed below:
        2012   2011 January 1, 2011
    90 to 120 days $ 224,460 $ 230,650 $ 151,103
    Past due more than 120 days   1,248,599   940,650   673,916
    Total   1,473,059   1,171,300   825,019

    The Entity carries out certain procedures to follow up on customers’ compliance with payments for which collateral was not provided and which only have guarantors. According to the Entity’s policies, if customer payments are delay, the respective credit line is suspended for future purchases. Similarly, in the event of more significant delays, the Entity implements out-of-court and legal measures to recover the outstanding balance. However, if such measures are unsuccessful, the respective credit line and account are canceled. The Entity has recognized an allowance for doubtful accounts equal to 100% of all uncollectible accounts receivable.
  • The allowance for doubtful accounts is as follows:
        2012   2011 January 1, 2011
    Receivables for sale of construction services $ (59,092) $ (4,152) $ (2,601)
    Receivables for sale of property and commercial services   (328,045)   (330,445)   (336,746)
    Customers by selling property and industrial services   (96,823)   (92,681)   (92,974)
      $ (483,960) $ (427,278) $ (432,321)

  • Reconciliation of the allowance for doubtful accounts is presented below:
        2012   2011
    Beginning balance $ (427,278) $ (432,321)
    Period accrual   (350,575)   (268,660)
    Write offs and cancelations   293,893   273,703
    Ending balance $ (483,960) $ (427,278)

  • Work completed pending certifification
        2012   2011 January 1, 2011
    Costs incurred on uncompleted contracts $ 15,031,441 $ 13,211,577 $ 10,764,736
    Estimated earnings   2,501,884   1,137,090   867,451
    Revenue recognized   17,533,325   14,348,667   11,632,187
    Less: Certifications to date   (13,873,694)   (11,462,500)   (8,302,448)
    Less: Advances received   (445,484)   (716,633)   (939,284)
    Less: Work completed unbilled long-term (1)   (14,172)   (71,959)   (139,968)
    Work completed to certify   3,199,975   2,097,575   2,250,487

    (1) At December 31, 2012 and 2011, the long-term unbilled project relates to the construction of the Eastern Emitter Tunnel, under various construction contracts executted with Constructora Mexicana de Infraestructura Subterránea, S.A. de C.V. Based on an estimated settlement date during 2014, the present value at December 31, 2012 of this receivable amounts to $13,401.

11. Inventories

    2012   2011 January 1,2011
Raw materials and auxiliary materials $ 3,030,711 $ 2,776,534 $ 2,956,983
Production-in-process   773,486   627,912   640,183
Finished goods   1,050,285   940,031   267,728
Merchandise in stores   8,762,282   8,018,928   6,981,011
Land and housing construction in progress   628,074   731,597   968,011
Allowance for obsolete inventories   (515,419)   (395,772)   (336,040)
    13,729,419   12,699,230   11,477,876
Merchandise in-transit   642,916   1,274,460   1,355,262
Replacement parts and other inventories   455,767   409,295   238,146
  $ 14,828,102 $ 14,382,985 $ 13,071,284

At December 31, 2012 and 2011, inventories written off directly to results in administrative expenses and/or other expenses amount to $83,552 and $32,688, respectively.

In the case of the retail sector, the Entity uses two estimates to determine potential inventory impairment losses; one of these is utilized for obsolete and slow-moving inventories, while the other is used for goods shrinkage.

The estimate for obsolescence and slow-moving inventories is determined based on prior-year experience by store and department, the displacement of goods on the market, their utilization at different locations, fashions and new product models. The Entity analyzes the possibility of increasing this reserve when goods have insufficient displacement and until such time as the entire cost is classified as an impairment loss.

The goods shrinkage estimate is determined based on the Entity’s experience and the results of cyclical physical inventory counts. The Entity adjusts these inventories according to the variable shrinkage percentages of different stores.

A reconciliation of the allowance for obsolete, slow moving and missing inventories is presented below:

    2012   2011
Beginning balance $ (395,772) $ (336,040)
Period accrual   (167,930)   (113,723)
Write offs and cancelations   48,283   53,991
Ending balance $ (515,419) $ (395,772)


12. State procurement and projects under implementation

A reconciliation of backlog at December 31, 2012, 2011 and 2010 as follows:

  Total
Balance at January 1, 2010 $ 22,448,996
New contracts and changes 2010   12,729,613
Less: Income Building 2010   (11,632,187)
Balance at December 31, 2010   23,546,422
New contracts and changes 2011   7,253,814
Less: Income Building 2011   (14,348,667)
Balance at December 31, 2011   16,451,569
New contracts and changes 2012   27,460,627
Less: Income Building 2012   (17,533,325)
Balance at December 31, 2012 $ 26,378,871


13. Financial risk management

The Entity is exposed to market, operating and financial risks as a result of its use of financial instruments. These include interest rate, credit, liquidity and exchange rate risks, which are managed in a centralized manner by the corporate treasury of Grupo Carso. The Entity seeks to minimize its exposure to these risks by contracting hedges based on derivative financial instruments. The use of financial derivatives is governed by the Entity policies approved by the board of directors, which provide written principles of recruiting them. Compliance with policies and exposure limits is reviewed by the internal auditors on a continuous basis.

The different financial instrument categories and amounts at December 31, 2012, 2011 and January 1, 2011, are detailed below:

    2012   2011 January 1, 2011
Financial assets
Cash and cash equivalents $ 4,994,738 $ 4,897,894 $ 3,087,281
At amortized cost:
• Held-to-maturity financial assets   103,864   111,656   81,804
Measured at fair value:
• Derivative financial instruments   304,552   316,141   503,499
Loans and receivables   17,562,112   16,522,585   28,751,645
Due from related parties   2,275,154   1,666,658   1,562,207
Financial liabilities
At amortized cost:
• Loans with financial institutions and long-term debt $ 14,413,046 $ 10,761,309 $ 24,749,644
• Payables to suppliers   9,359,032   8,718,411   6,903,805
• Due to related parties   975,923   1,017,052   1,941,484
• Other liabilities   3,053,966   2,127,687   1,340,293
Measured at fair value:
• Derivative financial instruments   979,067   933,631   550,140

The Board of Directors establishes and monitors the policies and procedures used to measure risks, which are described below:

  • Capital risk management - The Entity manages its capital to ensure that it will continue as a going concern, while it maximizes returns to its shareholders through the optimization of the balances of debt and equity. The capital structure of the Entity is composed by its net debt (mainly the bank loans, in Note 21 and debt securities detailed in Note 23) and stockholders’ equity (issued capital, capital reserves, retained earnings and non-controlling equity detailed in Note 25). The Entity is not subject to any kind of capital requirement.
    Management reviewed monthly its capital structure and borrowing costs and their relation to EBITDA (defined in this case as earnings before taxes, interest, exchange rate fluctuations, valuation of derivative financial instruments, depreciation and amortization) in connection with the preparation of financial projections as part of the business plan submitted to the Board of Directors and shareholders. The Entity’s policy is to maintain a net debt ratio of no more than three times EBITDA, determined as the ratio of net debt to EBITDA of the last 12 months.
    The net debt ratio of the Entity is presented below:
        2012   2011
    Loans with financial institutions and other $ 14,413,046 $ 10,761,309
    Due to related parties   975,923   1,017,052
    Cash and cash equivalents   (4,994,738)   (4,897,894)
    Held-to-maturity financial assets   (103,864)   (111,656)
    Net debt with financial institutions   10,290,367   6,768,811
    EBITDA   10,604,914   8,329,880
    Net debt ratio   0.97   0.81
    EBITDA $ 10,604,914 $ 8,329,880
    Interest on debt   815,206   775,298
    Interest Coverage Ratio   13.01   10.74

  • Interest rate risk management- The Entity is exposed to interest rate risks from customer loans and financial debt contracted at variable rates. The Entity has short-term loans primarily for working capital and in some cases has long-term loans that are intended for certain projects whose completion will meet their obligations, and in some cases, depending on the proportion of short-term debt and long term, are contracted interest rate hedges (swap contracts).Hedging activities are regularly evaluated to ensure that they are properly aligned with interest rates and the respective risks and to facilitate the application of more profitable hedge strategies. Hedge contracts are detailed in Note 15.
    The Entity’s exposure to interest rate risks is primarily based on the Mexican Interbank Equilibrium Offered rate (TIIE) applicable to financial liabilities and its customer portfolio. Accordingly, it periodically prepares a sensitivity analysis by considering the cost of the net exposure from its customer portfolio and financial liabilities derived that earn and bear interest at variable interest rates; it also prepares an analysis based on the amount of outstanding credit at the end of the period.
    If the TIIE interest rate increased or decreased by 100 basis points in each reporting period and all other variables remained constant, the pretax profit for the years 2012 and 2011 would have increased decreased by $68,689 and $74,865, respectively.
  • Exchange risk management- The functional currency of the entity is primarily the Mexican peso. Accordingly, it is exposed to currency risk Mexican peso against U.S. dollar that arise in connection with retail operations and financing. In some cases, these same operations give a natural hedge, while in other cases, currency forwards are entered into in order to hedge such operations. Because the Entity has investments in foreign subsidiaries, it is exposed to the risk of foreign currency translation. The foreign operations maintain monetary assets and liabilities denominated in various currencies, mainly the U.S. dollar, euro and Brazilian real, resulting in exposure to foreign exchange risk, which is naturally hedged by the same business operations. The carrying values of monetary assets and liabilities denominated in foreign currency and which primarily generate exposure for the Entity at the end of the reporting period, are as follows (figures in thousands):
      Liabilities Assets
      2012 2011 January 1, 2011 2012 2011 January 1, 2011
    U.S. dollars 557,528 544,856 939,880 575,900 424,184 443,624
    Brazilian real 22,913 26,156 35,484 39,549 84,317 35,263
    Colombian peso 20,338,494 21,510,882 12,736,728 26,921,088 16,986,658 9,844,170
    Peruvian New Sol 34,565 14,191 32,693 66,525 31,547 38,400

    The following table indicates the Entity’s sensitivity to a 10% increase or decrease of the Mexican peso versus the US dollar. This percentage is the sensitivity rate used to internally report the exchange rate risk to key management personnel and also represents management’s evaluation of the possible fair value change to exchange rates. The sensitivity analysis only includes monetary items denominated in foreign currency and adjusts their conversion at the end of the period by applying a 10% fluctuation; it also includes external loans. A negative or positive figure, respectively (as detailed in the following table), indicates a (decrease) or increase in net income derived from a decrease in the value of the Mexican peso of 10% with regard to the US dollar (figures in thousands):
      2012 2011 1 de enero de 2011
    U.S. dollars 23,902 (156,995) (645,634)
    Brazilian realo 21,643 75,668 (287)
    Colombian peso 8,564,020 (5,886,060) (3,763,246)
    Peruvian New Sol 41,580 22,580 7,424

  • Credit risk management - The credit risk refers to the situation in which the borrower defaults on its contractual obligations, thereby generating a financial loss for the Entity and which is essentially derived from customer accounts receivable and liquid funds. The credit risk affecting cash and cash equivalents and derivative financial instruments is limited because the counterparties are banks with high credit ratings issued by credit rating agencies. The Entity’s maximum credit risk exposure is represented by the balance in the statement of financial position. The other exposure to credit risk is represented by the balance of each financial asset principally in trade receivables. The Entity sells its products and /or services to customers who have demonstrated financial solvency, and periodically assesses the financial condition of its customers and maintains billing insurance contracts for domestic and export sales. Therefore, the Entity does not believe there is a significant risk of loss due to a concentration of credit in its customer base in the retail sector, as they are diluted by more than 1,762,000 customers, which do not represent a concentration of risk. In regards to industrial and infrastructure and construction, although the credit concentration risk is higher accounts receivable are covered by collections insurance in some cases. The Entity also believes that potential credit risk is adequately covered by its allowance for doubtful accounts, which represents its estimate of incurred losses related to impairment of accounts receivable (see Note 10).
  • Liquidity risk management- Corporate Treasury has the ultimate responsibility for liquidity management, and has established appropriate policies to control this through monitoring of working capital, managing short, medium and long-term funding requirements, maintaining cash reserves and available credit lines, continuously monitoring cash flows (projected and actual), and reconciling the maturity profiles of financial assets and liabilities.
    The following table details the remaining contractual maturities of the Entity’s non-derivative financial liabilities, based on contractual repayment periods. The table has been designed based on un-discounted projected cash flows of financial liabilities based on the date on which the Entity must make payments. The table includes both projected cash flows related to interest and capital on financial debt in the statements of financial position. Where the contractual interest payments are based on variable rates, the amounts are derived from interest rate at the end of the period.
    The amounts contained in the debt to credit institutions include interest rate instruments and fixed as detailed in Note 21. If changes in variable interest rates differ to those estimates of interest rates determined at the end of the reporting period under review, is presented at fair value.
    The Entity expects to meet its obligations with cash flows from operations and resources received from the maturity of financial assets. Additionally, the Entity has access to credit lines with various banks and debt securities programs.
    As of December 31, 2012 Weighted
    average effective
    interest rate
      3 months   6 months   1 year   Between
    1 and 3years
      More than 3 years   Total
    Loans with financial institutions and others MN 5.1%                        
      US 1.3%                        
      EU 0.8%                        
      RA 5.5%                        
      PA 17.5% $ 9,341,554 $ 9,726 $ 19,452 $ 42,284 $ 5,000,030 $ 14,413,046
    Payables to suppliers     9,202,136   156,896   -   -   -   9,359,032
    Derivative financial instruments     5,441   1,310   2,123   201   969,992   979,067
    Due to related parties     975,923   -   -   -   -   975,923
    Total   $ 19,525,054 $ 167,932 $ 21,575 $ 42,485 $ 5,970,022 $ 25,727,068

    As of December 31, 2011 Weighted
    average effective
    interest rate
      3 months   6 months   1 year   Between
    1 and 3years
      More than 3 years   Total
    Loans with financial institutions and others MN 4.1%                        
      US 1.5%                        
      EU 0.8%                        
      RA 5.5%                        
      PA 27.9% $ 10,621,792 $ 11,867 $ 23,733 $ 94,977 $ 8,940 $ 10,761,309
    Payables to suppliers     8,549,419   168,992   -   -   -   8,718,411
    Derivative financial instruments     921,722   4,584   3,345   3,980   -   933,631
    Due to related parties     1,017,052   -   -   -   -   1,017,052
    Total   $ 21,109,985 $ 185,443 $ 27,078 $ 98,957 $ 8,940 $ 21,430,403

    As of January 1, 2011 Weighted
    average effective
    interest rate
      3 months   6 months   1 year   Between
    1 and 3years
      More than 3 years   Total
    Loans with financial institutions and others MN 5.9%                        
      US 1.2%                        
      EU 1.9%                        
      RA 5.5%                        
      PU 8.8% $ 17,166,980 $ 8,256 $ 7,432,834 $ 87,379 $ 54,195 $ 24,749,644
    Payables to suppliers     6,903,805   -   -   -   -   6,903,805
    Derivative financial instruments     496,689   -   53,451   -   -   550,140
    Due to related parties     1,941,484   -   -   -   -   1,941,484
    Total   $ 26,508,958 $ 8,256 $ 7,486,285 $ 87,379 $ 54,195 $ 34,145,073

  • Market risk - The Entity’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates and commodities. The Entity enters into a variety of derivative financial instruments to manage its exposure to foreign currency risk and interest rate risk, including:
    • Forward foreign exchange contracts to hedge the exchange rate risk arising on the export of products and loans in other currencies.
    • Swaps interest rate swaps to mitigate the risk of rising financing cost.
    • Forward foreign exchange contracts to hedge the exchange rate risk arising on translation of investment in a foreign operation with functional currency different from the Mexican peso.
    • Commodities contracts to hedge risks of fluctuations in the prices of certain metals.
    Exposure to market risk is measured using sensitivity analysis. There have been no changes in exposure to market risks or the manner in which those risks are being managed and measured.
    If commodities prices had an increase and / or decrease of 10% in each reporting period and all other variables held constant, income before tax for the years 2012 and 2011 would have (decreased) increased by approximately $ 7,808 and $ 18,324, respectively.

14. Fair value of derivative financial instruments

The fair value of financial instruments presented below has been determined by the Entity using available market information or other valuation techniques that require judgment in developing and interpreting the estimates of fair values also makes assumptions that are based on market conditions existing at each of the dates of the statement of financial position. Consequently, the estimated amounts presented are not necessarily indicative of the amounts the Entity could realize in a current market exchange. The use of different assumptions and / or estimation methods may have a material effect on the estimated fair value amounts.

Financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels ranging from 1 to 3 based on the degree to which the fair value is observed are:

  • Level 1 of fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
  • Level 2 of the fair value measurements are those derived from indicators other than quoted prices included within Level 1 but including indicators that are observable for the asset or liability, either directly or indirectly quoted prices meaning derived from these prices; and
  • Level 3 of fair value measurements are those derived from valuation techniques that include indicators for the asset or liability that are not based on observable market data (unobservable indicators)

The amounts of cash and cash equivalents of the Entity, as well as accounts receivable and payable to third parties and related parties, and the current portion of loans from financial institutions and long-term debt approximate their fair value because they short-term maturities. The long-term debt of the Entity are recorded at amortized cost and debt is interest at fixed and variable rates that are related to market indicators.

To obtain and disclose the fair value of long-term debt using quoted market prices or quotations for similar instruments operators. To determine the fair value of financial instruments using other techniques such as estimated cash flows, considering the dates flow curves intertemporal market and discounting these flows with rates that reflect the risk of the counterparty and the risk of the Entity for the reference period. The fair value of interest rate swaps is calculated as the present value of estimated net cash flows in the future. The fair value of currency futures is determined using quoted forward exchange rates at the date of statement of financial position.

The carrying amounts of financial instruments by category and their estimated fair values are as follows:

  December 31, 2012 December 31, 2011 Jaunary 1, 2011
    Carrying
amounts
  Fair value   Carrying
amounts
  Fair value   Carrying
amounts
  Fair value
Financial assets:
Cash and equivalent
cash
$ 4,994,738 $ 4,994,738 $ 4,897,894 $ 4,897,894 $ 3,087,281   3,087,281
Available-for-sale
instruments:
Fixed-term securities   103,864   103,864   111,656   111,656   81,804   81,804
Derivative financial
instruments (i)
  610   610   316,141   316,141   503,499   503,499
Loans and receivables:
Customers and others   19,837,266   20,242,763   18,189,243   18,175,920   30,313,852   30,246,778
Trade and notes accounts
payable:
Notes payable to financial
institutions including
current portion of
ong-term debt
and others
  (6,914,076)   (6,914,076)   (5,929,992)   (5,929,992)   (19,768,703)   (19,768,703)
Debt securities   (7,498,970)   (7,508,108)   (4,831,317)   (4,831,317)   (4,980,941)   (4,980,941)
Trade accounts
payable
  (9,359,032)   ( 9,359,032)   (8,718,411)   (8,714,593)   (6,903,805)   (6,900,782)
Due to related
parties
  (975,923)   (975,923)   (1,017,052)   (1,017,052)   (1,941,484)   (1,941,484)
Accrued expenses   (3,050,252)   (3,050,252)   (2,169,830)   (2,169,830)   (1,282,020)   (1,282,020)
Total $ (2,861,775) $ (2,465,416) $ 848,332 $ 838,827 $ (890,517) $ (820,420)

The fair values shown at December 31, 2012, 2011 and January 1, 2011, except for the receivables to commercial customers and debt securities approximate their carrying value because the values observed in the market are very similar to those registered in this period.

(i) Represents financial instruments that are measured at fair value after initial recognition. Based on the fair value hierarchy described above, these instruments qualify as Level 2 measurements given the assumptions derived from other than quoted prices, but that are observable for the asset or liability, and include either directly or indirectly quoted prices that is derived from these prices. During the years ended December 31, 2012 and 2011 there were no transfers between levels.


15. Financial derivative instruments

The purpose of contracting financial derivative instruments is: (i) to partially cover the financial risks of exposure to exchange rates, interest rates, and prices of natural gas and of certain metals; or (ii) to realize financial returns due to the behavior of the underlying. The decision to contract an economic financial hedge is based on market conditions, the expectation of such instrument at a given date, and the domestic and international economic context of the economic indicators that influence the Entity’s operations.

The transactions performed with foreign exchange and/or interest rate forwards and swaps; as well as embedded derivatives, are summarized below:

    Notional   Valuation as of Deciember 31, 2012        
Instrument Designated as Amount   Unit Maturity Asset (liability) Net income
of the year
Income of prior year Gain (loss) on
settlement
Dollar forwards Purchase 1,612,500   Dollars                  
During 2012 $ -   $ - $ - $ (291,575)        
Dollar forwards Sale 2,099,000   Dollars During 2012   -   -   -   (724,700)
TIIE swaps to fixed rate Purchase 8,600,000   Pesos May 2017 to may 2027   (969,992)   258,611   711,381   134,535
TIIE swaps to fixed rate Purchase 500,000   Pesos During 2012   -   -   -   79,700
TIIE swaps to fixed rate Purchase 266,667   Pesos During 2012   -   -   -   59
TIIE swaps to fixed rate Sale 1,700,000   Pesos June 2017 and may 2018   284,858   (22,944)   (261,914)   (74,096)
Embedded N/A 25,540   Dollars 2015 and 2020   14,676   37,615   (52,291)   -
Total           $ (670,458) $ 273,282 $ 397,176 $ (876,077)
Total at December 31, 2012           $ (600,595) $ 280,525 $ 320,070 $ 40,373
Total at December 31, 2011           $ (76,811) $ 553,528 $ (416,134) $ 206,529

Open and closed transactions with hedge forwards to purchase foreign currency are summarized below:

    Nocional   Valuation at December 31, 2012    
Instrument Intencionalidad Amount (‘000) Unit Maturity   Asset (liability)   Comprehensive
income
  Gain (loss) on
settlement
Euro forwards purchase   5,650 Euro January, 2013 to December, 2015 $ (2,667) $ 1,867 $ -
Euro forwards purchase   3,023 Euro During 2012   -   -   3,602
Forwards de dólar canadiense venta   570 Canadian Dollar During 2012   -   -   (196)
Total         $ (2,667) $ 1,867 $ 3,406
Total at December 31, 2011         $ (7,825) $ 5,478 $ (3,415)
Total at January 1, 2011         $ - $ 591 $ -

The transactions opened and settled with hedge swaps to purchase metals:

    Nocional   Valuation at December 31, 2012    
Instrument Notional Amount (‘000) Unit Maturity   Asset (liability)   Comprehensive
income
  Gain (loss) on
settlement
Copper Swaps   678 Tons January to December 2013 $ (1,872) $ 1,310 $ -
Copper Swaps   2,665 Tons During 2012   -   -   1,494
Swaps de aluminio   300 Tons January to August 2013   482   337)   -
Swaps de aluminio   4,775 Tons During 2012   -   -   9,248
Total         $ (1,390) $ 973 $ 10,742
Total at December 31, 2011         $ (9,070) $ 6,349 $ 2,028
Total at January 1, 2011         $ 30,170 $ (20,290) $ (38,639)


16. Property, plant and equipment

The reconciliation between the carrying amount at the beginning and end of the year 2012 and 2011 is as follows:

    Balances as of
January 1, 2012
  Additions   Retirements / disposals   Reductions due to sale
between subsidiaries
  Transfers   Translation effect   Balances as of
December 31, 2012
Investment:
Land $2,484,463 $7,488 $109,573 $ - $31,082 $(15,620) $2,616,985
Buildings and leasehold improvements   11,290,593   409,519   (92,055)   -   208,019   (43,160)   11,772,916
Machinery and equipment (1)   17,060,924   329,521   (304,273)   -   529,512   (258,394)   17,357,291
Furniture and equipment   3,218,762   120,798   (39,278)   -   13,126   (18,482)   3,294,926
Computers   1,480,593   99,089   (19,955)   -   59,066   (19,192)   1,599,601
Vehicles   992,828   124,260   (74,864)   -   26,259   (23,292)   1,045,191
Construction in progress   1,029,980   700,637   (165,048)   -   (834,356)   (18,751)   712,462
Total investment   37,558,143   1,791,312   (585,900)   -   32,708   (396,891)   38,399,372
Accumulated depreciation:
Buildings and leasehold improvements   (5,127,170)   (415,165)   21,415   -   (20,109)   43,350   (5,497,679)
Machinery and equipment   (8,342,589)   (554,853)   82,865   -   51,822   81,704   (8,685,045)
Furniture and equipment   (1,988,073)   (175,749)   16,978   -   2,535   1,926   (2,141,752)
Computers   (1,192,822)   (111,094)   18,737   -   (55,933)   (882)   (1,338,705)
Vehicles   (584,228)   (88,247)   60,910   -   (11,023)   8,097   (614,417)
Total accumulated depreciation   (17,234,882)   (1,345,108)   200,905   -   (32,708)   134,195   (18,277,598)
Impairment:
Land   -   -   -   -   -   -   -
Buildings and leasehold improvements   -   -   -   -   -   -   -
Machinery and equipment   (129,222)   -   -   -   -   8,899   (120,323)
Furniture and equipment   -   -   -   -   -   -   -
Computers   -   -   -   -   -   -   -
Vehicles   -   -   -   -   -   -   -
Accumulated impairment losses   (129,222)   -   -   -   -   8,899   (120,323)
Net investment $20,194,039 $446,204 $(384,995) $ - $ - $(253,797) $20,001,451

    Balances as of
January 1, 2011
  Additions   Retirements / disposals   Reductions due to sale
between subsidiaries
  Transfers   Translation effect   Balances as of
December 31, 2011
Investment:
Land $2,897,131 $40,122 $(215,431) $ - $(254,209) $16,849 $2,484,462
Buildings and leasehold improvements   10,518,246   561,738   (226,050)   -   438,598   (1,939)   11,290,593
Machinery and equipment (1)   14,553,716   360,771   (115,261)   -   1,971,367   290,332   17,060,925
Furniture and equipment   2,944,243   99,401   (15,671)   -   195,290   (4,501)   3,218,762
Computers   1,313,390   93,421   (30,059)   -   94,132   9,709   1,480,593
Vehicles   916,528   60,173   (66,891)   -   72,894   10,124   992,828
Construction in progress   1,729,368   1,557,875   (454,127)   -   (1,810,617)   7,481   1,029,980
Total investment   34,872,622   2,773,501   (1,123,490)   -   707,455   328,055   37,558,143
Accumulated depreciation:
Buildings and leasehold improvements   (4,827,260)   (433,342)   143,056   -   (74,340)   64,716   (5,127,170)
Machinery and equipment   (7,342,417)   (543,797)   180,018   2,000   (542,810)   (95,583)   (8,342,589)
Furniture and equipment   (1,835,561)   (79,714)   13,142   -   (94,417)   8,477   (1,988,073)
Computers   (1,068,002)   (65,314)   28,752   -   (103,310)   15,052   (1,192,822)
Vehicles   (539,784)   (203,854)   56,484   -   107,422   (4,496)   (584,228)
Total accumulated depreciation   (15,613,024)   (1,326,021)   421,452   2,000   (707,455)   (11,834)   (17,234,882)
Impairment:
Land   -   -   -   -   -   -   -
Buildings and leasehold improvements   -   -   -   -   -   -   -
Machinery and equipment   (114,459)   -   -   -   (321)   (14,442)   (129,222)
Furniture and equipment   (237)   -   -   -   237   -   -
Computers   (84)   -   -   -   84   -   -
Vehicles   -   -   -   -   -   -   -
Accumulated impairment losses   (114,780)   -   -   -   -   (14,442)   (129,222)
Net investment $19,144,818 $1,447,480 $(702,038) $2,000 $ - $301,779 $20,194,039

(1) During 2012, the Entity continued with its efforts to commercialize the platform oil drilling “Jack UP” and expanded its knowledge of the market for this asset while identifying different options for this equipment, among which include services and leasing arrangements (negotiations are in process at the date of issuance of these financial statements). The business options have been submitted to the Board of Directors for their consideration. Therefore, the asset has been included in the category of machinery and equipment rather than seeing as an inventory held for sale.


17. Investment properties

The Entity, through its subsidiaries, has two malls, Loreto and Cuicuilco located in Mexico City, which generate rental income that is recognized as leasing services are provided and amounted to $215,305 and $197,943 for the years ended December 31, 2012 and 2011, respectively.

Direct operating expenses including maintenance costs incurred in relation to the investment property are recognized in income and constitute approximately 41% and 42% of rental income for years ended December 31, 2012 and 2011, respectively.

The table below details the values of investment properties to each of the dates indicated:

    2012   2011   January 1,2011
Propiedades de inversión $ 1,534,811 $ 1,534,811 $ 1,481,399

The movement of investment properties is as follows:

    Balance at
December 31,
2011
  Fair value
increase
  Balance at
December 31
2012
  $ 1,534,811 $ - $ 1,534,811

    Balance at
January 1,
2011
  Fair value
increase
  Balance at
December 31,
2011
  $ 1,481,399 $ 53,412 $ 1,534,811


18. nvestment in shares of associated entities and others

  • The principal associated entities and their activities are as follows:
      Ownership percentage    
    Asociated 2012 2011   Activity
    Elementia, S. A. de C. V. (“Elementia”) 46.00 46.00   Manufacture and sale of high technology products
    for the cement, concrete, polyethylene, styrene,
    copper and aluminum production industries.
    Infraestructura y Transportes México, S.A. de C.V. (“ITM”) 16.75 16.75   Railroad transportation.
    Philip Morris México, S.A. de C.V. (“Philip Morris” 20.00 20.00   Manufacture and sale of cigarettes.

  • The recognition of the equity method on the main associated entities and income derived from other investments was as follows:
      2012
        Stockholders
    equity
      Net income Ownership
    percentage
      Investment
    in shares
      Equity in
    income
    Elementia (1) $ 10,416,086 $ 325,256 46 $ 5,347,066 $ 149,583
    ITM (2)   24,283,411   4,354,952 17   4,513,820   729,453
    Philip Morris   4,088,992   2,985,714 20   817,798   597,143
    Grupo Telvista, S.A. de C.V.   2,122,350   176,747 10   212,235   17,675
    Others associated entities             533,262   54,850
    Total investment in shares of associated entities             11,424,181   1,548,704
    Others investments             2,491   2,994
    Total investment in shares of associated
    entities and others
              $ 11,426,672 $ 1,551,698

    (1) The investment in shares includes goodwill of $554,284.
    (2) The investment in shares includes a fair value complement of $446,349.

      2011
        Stockholders
    equity
      Net income Ownership
    percentage
      Investment
    in shares
      Equity in
    income
    Elementia (1) $ 8,819,583 $ (316,938) 46 $ 4,611,292 $ (145,765)
    ITM (2)   19,871,369   2,202,810 17   3,774,803   368,971
    Philip Morris   2,961,739   1,764,858 20   592,348   352,972
    Grupo Telvista, S.A. de C.V.   2,015,416   172,715 10   201,542   17,271
    Others associated entities             538,258   37,980
    Total investment in shares of associated entities             9,718,243   631,429
    Others investments             2,797   4,288
    Total investment in shares of associated
    entities and others
              $ 9,721,040 $ 635,717

    (1) The investment in shares includes goodwill of $554,284.
    (2) The investment in shares includes a fair value complement of $446,349.

19. Intangible assets

  Amortization
period
  Balance as of
December 31, 2011
  Additions   Additions due
to business
combination
  Balance as of
December 31, 2012
Cost:
Concession contract 10 $ 397,869 $ - $ - $ 397,869
Trademark use Indefinite   5,911   -   -   5,911
Total cost     403,780   -   -   403,780
ccumulated amortization:
Concession contract     (52,829)   (21,915)   -   (74,744)
Net cost   $ 350,951 $ (21,915) $ - $ 329,036

  Amortization
period
  Balance as of
January 1, 2011
  Additions   Additions due
to business
combination
  Balance as of
December 31, 2012
2011
Cost:
Concession contract 10 $ 296,878 $ 16,333 $ 84,658 $ 397,869
Trademark use Indefinite   5,911   -   -   5,911
Total cost     302,789   16,333   84,658   403,780
Accumulated amortization:
Concession contract     (10,965)   (41,864)   -   (52,829)
Net cost   $ 291,824 $ (25,531) $ 84,658 $ 350,951


20. Others assets

Other assets were as follows:

  Amortization
period
  2012   2011   January 1, 2011
Guarantee deposits   $ 130,839 $ 133,336 $ 138,798
Exploration expenses Indefinite   247,699   85,476   -
Goodwill Indefinite   91,051   91,051   91,051
Insurance 1 year   153,828   98,477   104,857
Recoverable expenses     82,415   44,356   -
Prepaid expenses 1 year   229,041   206,067   180,837
Installation costs     45,673   35,993   28,222
Others     51,936   58,981   227,391
      1,032,482   753,737   771,156
Accumulated amortisation:     (156,551)   (91,508)   (67,756)
    $ 875,931 $ 662,229 $ 703,400

    Guarante
deposits
  Exploration
expenses
  Goodwill   Insurance   Recoverable
expenses
  Prepaid
expenses
  Installation
costs
  Others   Total
Investment:
Balance as of January 1, 2011 $138,798 $91,051 $ - $104,857 $ - $180,837 $28,222 $227,391 $771,156
Acquisitions   -   -   85,476   -   44,356   25,230   7,771   -   162,833
Applications / Recoveries   (5,462)   -   -   (6,380)   -   -   -   (168,410)   (180,252)
Balance as of December 31, 2011   133,336   91,051   85,476   98,477   44,356   206,067   35,993   58,981   753,737
Acquisitions   -   -   162,223   55,351   38,059   22,974   9,680   -   288,287
Applications / Recoveries   (2,497)   -   -   -   -   -   -   (7,045)   (9,542)
Balance as of December 31, 2012 $130,839 $91,051 $247,699 $153,828 $82,415 $229,041 $45,673 $51,936 $1,032,482

    Guarante
deposits
  Exploration
expenses
  Goodwill   Insurance   Recoverable
expenses
  Prepaid
expenses
  Installation
costs
  Others   Total
Accumulated amortization:
Balance as of January 1, 2011 $ - $ - $ - $(52,483) $ - $ - $(15,273) $ - $(67,756)
Amortization   -   -   -   (13,874)   -   -   (1,276)   (8,602)   (23,752)
Balance as of December 31, 2011   -   -   -   (66,357)   -   -   (16,549)   (8,602)   (91,508)
Amortization   -   -   -   (62,797)   -   (3,160)   3,438   (2,524)   (65,043)
Balance as of December 31, 2012   -   -   -   (129,154)   -   (3,160)   (13,111)   (11,126)   (156,551)

The amortization recorded to income was $ 86,958 and $ 65,616 in 2012 and 2011, respectively, of which $ 56,023 is recognized as part of cost of sales for 2012.


21. Long-term debt

Long-term debt is as follows:

    2012   2011   January 1, 2011
a.
Syndicated loan for US 600,000, maturing in September 2011, bearing interest payable on a quarterly basis at interest rate equal to Libor plus 0.275%
$ - $ - $ 7,414,260
b.
Direct loan in different currencies mainly euros, with quarterly and semiannual maturities at variable rates, and final maturity in 2016
  81,218   151,348   132,092
c.
Debt securities issued in Mexican pesos with monthly maturities from March 2012 with interest rate of TIIE plus 0.53 and final maturity in 2017
  5,000,000   -   -
d. Other loans   1,379   2,198   44,558
    5,082,597   153,546   7,590,910
Less – current portion   (38,904)   (36,174)   (7,449,346)
Long-term debt $ 5,043,693 $ 117,372 $ 141,564

Maturities of long-term debt as of December 31, 2012 are as follows:

Payable for-    
2014 $ 39,870
2015   3,793
2016 and thereafter   5,000,030
  $ 5,043,693

Long-term debt accrues interest at variable rates. Interest rates for loans in Mexican pesos during 2012 stood at a weighted average of 5.32%, the average financing rate in euros for 2012 and 2011 was 1.24% and 1.84%, respectively.

The direct loan contracts establish affirmative and negative covenants for the borrowers. Additionally, certain financial ratios and percentages measured based on the Entity’s consolidated financial statements and the individual financial statements of consolidated subsidiaries must be maintained. All of these requirements have been met at the date of issuance of these consolidated financial statements.


22. Provision

The provisions presented below represent charges incurred during 2012 and 2011, or contracted services attributable to the period, which are expected to be settled within a period not exceeding one year. The final amounts to be paid and the timing of any outflow of economic resources involve uncertainty and therefore may vary.

  2012
    Opening
balance
  Additions   Provision
applied
  Reversals   Closing
balance
Contractor costs $ 1,189,424 $ 8,508,540 $ (7,827,723) $ (321,441) $ 1,548,800
Construction costs and other extraordinary   618,925   894,248   (666,774)   (384,909)   461,490
Environmental costs and plant closure   84,353   12,000   -   -   96,353
Employment relationships   55,882   134,784   (119,124)   -   71,542
Others   136,539   131,326   (118,377)   -   149,488
  $ 2,085,123 $ 9,680,898 $ (8,731,998) $ (706,350) $ 2,327,673

  2011
    Opening
balance
  Additions   Provision
applied
  Reversals   Closing
balance
Contractor costs $ 1,103,103 $ 7,117,034 $ (7,026,789) $ (3,924) $ 1,189,424
Construction costs and other extraordinary   368,866   1,414,246   (1,160,089)   (4,098)   618,925
Environmental costs and plant closure   84,353   -   -   -   84,353
Employment relationships   32,436   153,748   (127,332)   (2,970)   55,882
Others   178,939   284,186   (326,586)   -   136,539
  $ 1,767,697 $ 8,969,214 $ (8,640,796) $ (10,992) $ 2,085,123


23. Debt securities

On May 19, 2011, the Entity, through its subsidiary, Sears Operadora México, S.A. de C.V., issued unsecured debt securities in Mexican pesos under a two year program with a $2,500,000 limit, at interest rates ranging between 4.5% and 4.6%, and 28 day maturities. At December 31, 2012, the outstanding amount was $ 2,500,000 maturing on January 2, 2013.

Debt securities contain positive and negative covenants, which have been complied with to date.



24. Retirement benefit plans

The Entity has plans for retirement, death or total disability payments for non-union employees in most of its subsidiaries. It also maintains seniority premium plans for all employees as stipulated in their employment contracts. The related liabilities and the annual benefit costs are calculated by an independent actuary on the basis of formulas defined in the plans, using the projected unit credit method. The present value of these obligations and the rates used for their calculation are:

    2012   2011
Vested benefit obligation $ (914,668) $ (747,394)
Non-vested benefit obligation   (1,934,747)   (1,798,091)
Defined benefit obligation   (2,849,415)   (2,545,485)
Plan assets at fair value   3,482,987   3,203,038
Net projected asset $ 633,572 $ 657,553
Contributions to plan assets $ 120,454 $ 92,307

The rates used in actuarial calculations were as follows:

  2012
%
2011
%
Discount of the projected benefit obligation at present value 7.02 7.02
Salary increase 5.48 5.45
Future pension increase 7.08 7.17

Net period cost comprises the following:

    2012   2011
Service costs $ 175,610 $ 156,502
Interest cost   176,172   168,666
Expected yield on plan assets   (231,411)   (220,608)
Amortization of unrecognized prior service costs   1,125   6,222
Actuarial gains and losses – net   15,181   (19,194)
Effect of reduction or early liquidation (other than a restructuring or discontinued operation)   (45,880)   (57,078)
Net period cost   90,797   34,510

Changes in the present value of the defined benefit obligation:

    2012   2011
Changes in the present value of the defined benefit obligation at January 1 $ (2,545,485) $ (2,410,292)
Service costs   (175,610)   (156,502)
Interest cost   (176,172)   (168,666)
Actuarial (losses) and gain – net   (22,713)   154,996
Benefits paid   70,565   34,979
Present value of the defined benefit obligation $ (2,849,415) $ (2,545,485)

Changes in the present value of plan assets in the current period:

    2012   2011
Opening fair value of plan assets $ 3,203,038 $ 3,040,908
Expected yield on plan assets   231,411   220,608
Actuarial losses – net   (9,029)   (131,775)
Contributions to plan   120,455   106,165
Benefits paid   (70,565)   (34,979)
Others   7,677   2,111
Closing fair value of plan assets $ 3,482,987 $ 3,203,038

The main categories of investments are:

  Plan assets fair value
    2012   2011
Equity instruments $ 1,937,892 $ 1,804,452
Debt instruments $ 1,098,190 $ 976,842
Properties $ 446,905 $ 421,744
Weighted average expected $ 374,936 $ 322,378

The overall expected rate of return is a weighted average of the expected returns of the various categories of plan assets. The evaluation of the directors on the expected returns is based on historical return trends and analysts’ predictions on the market for assets over the life of the related obligation.

Employee benefits granted to key management personnel and / or directors of the Entity were as follows:

    2012   2011
Short-term benefits $ 139,417 $ 156,260
Defined benefit plans   5,803   6,179
Other long-term benefits   320,170   272,460


25. Stockholders’ equity

  • The historical amount of subscribed and paid-in common stock of Grupo Carso as of December 31, 2012, 2011 and January 1, 2011 is as follows:
      Number of shares Amount
      2012 2011 January 1 2011   2012   2011   January 1
    2011
    Series A1 2,745,000,000 2,745,000,000 2,745,000,000 $ 644,313 $ 644,313 $ 644,313
    Treasury shares repurchased (455,198,300) (453,497,800) (442,250,000)   (106,845)   (108,141)   (103,806)
    Historical capital stock 2,289,801,700 2,291,502,200 2,302,750,000 $ 537,468 $ 536,172 $ 540,507

    Common stock consists of ordinary, nominative and no par value shares.
    Pursuant to a general ordinary stockholders’ meeting on April 26, 2012, the payment of a dividend was approved by the shareholders for the amount of $0.60 per share, payable in two exhibitions of $0.30 per share each, on May 15 and October 16, 2012. The total payment was $1,373,881.
    Pursuant to a general ordinary stockholders’ meeting on April 26, 2011, the payment of a dividend was approved by the shareholders at the amount of $0.50 per share, payable in two exhibitions of $0.25 per share each, on May 18 and October 18, 2011. The total payment was $1,148,647.
  • Retained earnings include the statutory legal reserve. Mexican General Corporate Law requires that at least 5% of net income of the year be transferred to the legal reserve until the reserve equals 20% of capital stock at its historical amount (nominal pesos). The legal reserve may be capitalized but may not be distributed unless the Entity is dissolved, and must be replenished if it is reduced for any reason. At December 31, 2012 and 2011 and January 1, 2011, the legal reserve of Grupo Carso is $381,635 (nominal pesos) and is presented as part of retained earnings.
  • Stockholders’ equity, except restated paid-in capital and tax retained earnings, will be subject to income tax payable by the Entity at the rate in effect upon distribution. Any tax paid on such distribution may be credited against annual and estimated income taxes of the year in which the tax on dividends is paid and the following two fiscal years.
  • The balances of the stockholders’ equity tax accounts as of December 31 are:
        2012   2011   January 1, 2011
    Contributed capital account $ 4,402,746 $ 4,213,157 $ 4,097,640
    Consolidated net tax income account   43,067,134   35,419,518   30,360,060
    Total $ 47,469,880 $ 39,632,675 $ 34,457,700

26. Balances and transactions in foreign currency

At December 31, 2012 and 2011 and January 1, 2011, the assets, liabilities and transactions in foreign currency other than the functional currency of the reporting unit, converted to U.S. dollars, are as follows:

  Thousands of U.S. dollars
  2012 2011 January 1, 2011
Monetary assets 485,012 450,257 404,999
Short-term monetary liabilities
Short-term monetary liabilities (411,851) (573,114) (1,048,731)
Long-term monetary liabilities (3,252) (8,239) (11,456)
Total (415,103) (581,353) (1,060,187)
Net monetary asset (liability) position 69,909 (131,096) (655,188)

Transactions denominated in foreign currency in thousands of U.S. dollars were as follows, excluding purchases of machinery and equipment are:

  Thousands of U.S. dollars
  2012 2011
Export sales 465,527 443,596
Foreign sales of subsidiaries 373,302 388,109
Interest income 639 911
Interest paid (4,272) (3,718)
Purchases (537,118) (1,029,197)
Others (237,771) (203,301)
Net 60,307 (403,600)

The prices of the main products of the Entity are based on behavior of the same in the international market.

The exchange rates in effect at the dates of the consolidated financial statements and at the date of the independent auditors’ report are as follows:

    2012   2011   January 1,
2011
  April 3,
2013
U.S. Dollar $ 13.0101 $ 13.9787 $ 12.3571 $ 12.2728


27. Transactions and balances with related parties

  • Balances receivable and payable with related parties are as follows:
        2012   2011   January 1,
    2011
    Receivable
    Minera Real de Ángeles, S.A. de C.V. $ 407,400 $ - $ 109,969
    Teléfonos de México, S.A.B. de C.V.   315,486   293,001   236,698
    Delphi Packard Electric Systems, Inc.   267,682   204,147   126,623
    América Móvil Perú, S.A.C.   211,947   86,943   22,929
    Minera San Francisco del Oro, S.A. de C.V.   160,861   23,864   172,126
    Concesionaria de Carreteras, Autopistas y Libramientos República, S.A. de C.V.   127,573   9,714   -
    Empresa Brasileira de Telecomunicacoes, S.A.   92,017   70,051   -
    Telmex Colombia, S.A.   78,586   -   49,082
    Constructora de Inmuebles PLCO, S.A. de C.V.   53,855   -   -
    Net Servicios de Comunicacao, S.A.   48,549   32,330   -
    Entidad de Teléfonos y Bienes Raíces, S.A. de C.V.   44,222   19,218   20,012
    Inmuebles General, S.A. de C.V.   36,615   35,957   76,472
    Minera Tayahua, S.A. de C.V.   35,379   -   1,810
    AMX Argentina, S.A.   28,537   38,500   4,310
    Bienes Raíces de Acapulco, S.A. de C.V.   26,698   82,516   -
    Entidad Dominicana de Teléfonos, C. por A.   22,953   66,456   69,973
    Uninet, S.A. de C.V.   21,978   -   26,184
    Inmobiliaria para el Desarrollo de Proyectos, S.A. de C.V.   21,435   -   -
    Renta de Equipo, S.A. de C.V.   20,291   233   17,823
    Telecomunicaciones de Guatemala, S.A.   19,395   5,873   21,632
    Consorcio Red Uno, S.A. de C.V.   18,982   -   19,927
    Ecuador Telecom, L.L.C.   18,229   8,641   16,636
    Empresa Nicaragüense de Telecomunicaciones, S.A.   18,013   4,075   18,318
    Alquiladora de Casas, S.A. de C.V.   15,670   178   -
    Telmex Argentina, S.A.   14,939   26,214   20,877
    Consorcio Ecuatoriano de Telecomunicaciones, S.A.   14,009   28,586   2,944
    Fundación Teléfonos de México, A.C.   9,649   13,352   305
    Nacional de Cobre, S.A. de C.V.   6,216   28,931   27,053
    Entidad de Telecomunicaciones del Salvador   5,727   10,975   7,829
    Elementia, S.A.   4,579   11,774   23,565
    Inmobiliaria Aluminio, S.A. de C.V.   4,108   54,457   4,973
    Claro, S.A.   3,414   67,265   4,702
    Infraestructura y Saneamiento Atotonilco, S.A. de C.V.   2,932   59,959   -
    Atrios de Chapultepec, S.A. de C.V.   2,111   16,419   -
    Telmex Perú, S.A.   2,001   23,129   -
    Construcción, Conservación y Mantenimiento Urbano, S.A. de C.V.   12   18,959   -
    Embratel TV Sat Telecomunicacoes, LTDA.   10   15,133   -
    Concesionaria de Autopistas, Libramientos del Pacífico Norte, S.A. de C.V.   -   49,130   -
    Inmobiliaria las Trufas, S.A. de C.V.   -   14,695   -
    Páginas Telmex Perú, S.A.C.   -   25,500   -
    Promotora Inmobiliaria Fresno, S.A. de C.V.   -   29,418   5,553
    Selmex Equipos Industriales, S.A. de C.V.   -   56,230   -
    Zentrum Zistemaz, S.A. de C.V.   -   39,873   -
    Autopista Arco Norte, S.A. de C.V.   4,461   -   123,784
    AMX Paraguay, S.A.   4,083   4,209   11,826
    Radiomóvil Dipsa, S.A. de C.V.   3,473   -   39,982
    Telmex USA, L.L.C.   340   174   20,762
    Servicios Minera Real de Ángeles, S.A. de C.V.   336   -   47,916
    Entidad Internacional Minera, S.A. de C.V.   5   -   28,692
    CTE Telecom Personal, S.A. de C.V.   2   2   25,259
    CFC Concesiones, S.A. de C.V.   -   -   15,760
    Concesionaria de Vías Troncales, S.A. de C.V.   -   -   36,071
    Construcciones y Servicios Frisco, S.A. de C.V.   -   -   11,908
    Telmex, S.A. de C.V.   -   -   33,723
    Other   80,394   90,577   58,199
      $ 2,275,154 $ 1,666,658 $ 1,562,207

        2012   2011   January 1,
    2011
    Payable-
    Concesionaria de Carreteras y Libramientos del Pacífico Norte, S.A. de C.V. $ 312,245 $ - $ 1,048
    Minera María, S.A. de C.V.   152,553   -   187,506
    Sears Brands Management   76,875   -   -
    Centro Histórico de la Cd. De México, S.A. de C.V.   70,482   -   -
    Concesionaria Autopista Guadalajara-Tepic, S.A. de C.V.   61,811   -   -
    Comunicación Celular, S.A. de C.V.   48,566   31,454   -
    Constructora MT Oaxaca, S.A. de C.V.   48,256   -   -
    Inmuebles Srom, S.A. de C.V.   29,649   76,526   -
    Constructora Mexicana de Infraestructura Subterránea, S.A. de C.V.   26,437   -   49,667
    Cleaver Brooks de México, S.A. de C.V.   23,972   -   12,380
    América Movil, S.A. de C.V.   13,278   133   -
    Fundación Centro Histórico de la Ciudad de México, S.A. de C.V.   11,965   230   -
    Inmose, S.A. de C.V.   11,374   5,512   -
    Asociación Pediátrica, S.A. de C.V.   11,343   -   -
    Dorians Tijuana, S.A. de C.V.   8,674   470,767   -
    Inmuebles Sercox, S.A. de C.V.   956   18,609   -
    Inmuebles Corporativos e Industriales CDX, S.A. de C.V.   359   17,492   -
    Inmuebles Industriales Meisac, S.A. de C.V.   34   22,411   -
    Administradora de Inmuebles Centro Histórico, S.A. de C.V.   -   61,135   -
    Hubard, y Bourlon, S.A. de C.V.   -   21,393   -
    Minera Real de Ángeles, S.A. de C.V.   -   108,518   -
    Minera Tayahua, S.A. de C.V.   -   60,451   -
    Radiomovil Dipsa, S.A. de C.V.   -   39,021   -
    Inmobiliaria las Trufas, S.A. de C.V.   8,755   -   27,405
    Philip Morris México, S.A. de C.V.   6,976   8,685   22,569
    Distribuidora Telcel, S.A. de C.V.   3,288   2,816   29,397
    Fianzas la Guardiana Inbursa, S.A. de C.V.   613   875   89,100
    Patrimonio Inbursa, S.A. de C.V.   186   -   920,610
    Alquiladora de Casas, S.A. de C.V.   -   -   65,076
    Claro CR Telecomunicaciones, S.A.   -   7,596   23,038
    Construcción, Conservación y Mantenimiento Urbano , S.A. de C.V.   -   -   15,297
    Impulsora del Desarrollo y el Empleo en América Latina, S.A.B. de C.V.   -   -   49,075
    Inmuebles y Servicios Mexicanos, S.A. de C.V.   -   -   411,552
    Oceanic Digital Jamaica, LTD.   -   -   21,516
    Other   47,076   63,428   16,248
      $ 975,923 $ 1,017,052 $ 1,941,484

    • The amounts pending are unsecured and will be settled in cash. No guarantees have been given or received. No expense has been recognized in the current period or prior periods regarding bad or doubtful debts relating to amounts owed by related parties.
    • Transactions with related parties, carried out in the ordinary course of business, were as follows:
        2012   2011
    Sales $ 21,335,324 $ 14,451,297
    Interest income   -   306,381
    Purchases   (3,109,469)   (2,164,076)
    Prepaid insurance   (132,037)   (114,828)
    Lease expenses   (538,587)   (520,498)
    Interest expenses   (5,882)   -
    Services rendered   (376,280)   (368,414)
    Other income, net   (181,017)   (137,468)
    Purchases of fixed assets   (57,135)   (61,591)

  • Transactions with associated companies, carried out in the ordinary course of business, were as follows:
        2012   2011
    Sales $ 1,273,153 $ 1,184,181
    Acquired services   91,315   169,590
    Rentals collected   25,687   25,703
    Interest income   -   75
    Purchases   (177,053)   (205,963)
    Interest expense   (638)   (41)
    Other income, net   (4,427)   (7,328)
    Purchases of fixed assets   (3,030)   (35,601)

  • Borrowings from financial institutions includes balances with Banco Inbursa, S.A. of $34,069 and $872,000 as of December 31, 2012 and 2011, respectively; which accrue interest at a variable rate based on general market conditions (5.80% as of December 31, 2012).
  • The accounts receivable include a long-term loan granted in December 2010 to related parties of $11,943,260, which bore interest at an annual variable rate of TIIE + 2.25. In addition, the Entity granted a revolving credit line facility on the same date of US$45,000 equivalent to $556,069, which bore interest at an annual variable rate of LIBOR + 2.5. Both loans had an original maturity date on December 2015; however, they were liquidated in advance during the first half of 2011.

28. Cost and expenses by nature

  2012
Concepto   Cost of sale   Distribution
and selling
  Administrative   Total
Wages and salaries $ 3,167,454 $ 2,624,954 $ 1,457,472 $ 7,249,880
Employee benefit   311,145   1,880,112   260,511   2,451,768
Raw material   20,701,227   -   -   20,701,227
Manufacturing expenses   4,177,496   -   -   4,177,496
Finished goods   32,514,518   -   -   32,514,518
Advertising   -   383,984   1,108   385,092
Insurance   89,471   73,559   37,227   200,257
Freight   -   271,136   -   271,136
Fees   13   52,909   108,687   161,609
Maintenance   2,821   384,306   84,504   471,631
Plant costs   -   31,911   251,752   283,663
Vigilance   -   111,044   33,317   144,361
Lease   -   1,111,295   82,480   1,193,775
Phone   -   62,966   72,900   135,866
Electricity   -   638,625   7,054   645,679
Credit card fees   -   53,154   -   53,154
Others   96,531   1,453,736   853,796   2,404,063
Subtotal   61,060,676   9,133,691   3,250,808   73,445,175
Depreciation   699,677   617,371   28,060   1,345,108
Total $ 61,760,353 $ 9,751,062 $ 3,278,868 $ 74,790,283

  2011
Concept   Cost of sale   Distribution
and selling
  Administrative   Total
Wages and salaries $ 2,802,005 $ 2,452,267 $ 1,417,009 $ 6,671,281
Employee benefit   302,528   1,749,104   249,101   2,300,733
Raw material   22,594,482   -   -   22,594,482
Manufacturing expenses   3,466,562   -   -   3,466,562
Finished goods   29,401,841   -   -   29,401,841
Advertising   -   345,214   616   345,830
Insurance   23,094   78,378   31,124   132,596
Freight   -   235,980   -   235,980
Fees   -   50,096   113,517   163,613
Maintenance   -   442,642   85,610   528,252
Plant costs   -   19,465   269,829   289,294
Vigilance   -   105,233   34,153   139,386
Lease   -   1,004,412   85,257   1,089,669
Phone   -   58,307   75,934   134,241
Electricity   -   600,587   9,597   610,184
Credit card fees   -   147,032   -   147,032
Others   72,020   1,161,725   870,352   2,104,097
Subtotal   58,662,532   8,450,442   3,242,099   70,355,073
Depreciation   730,057   571,692   24,272   1,326,021
                 
Total $ 59,392,589 $ 9,022,134 $ 3,266,371 $ 71,681,094


29. Other (income) expenses - net

    2012   2011
Loss from sale of subsidiary shares $ - $ 105,206
Provision for legal dispute (1)   -   312,507
Sales of materials and waste   (116,569)   (129,456)
Loss (income) on sale of fixed asset   9,453   (19,134)
Other, net   28,104   50,772
  $ (79,012) $ 319,895

(1) The amount corresponds to the complement of a provision recorded during 2009, relating to a lawsuit against the Entity from foreign distributor, Porcelanite, S.A. de C.V. (former subsidiary), whose outcome resulted in a cash disbursement of $678,150 (US$58,166) that took place during the second quarter of 2011.


30. Income taxes

The ISR is based on the fiscal year profits; which differs from the net income reported in the consolidated statement of comprehensive income due to temporary differences including timing differences with respect to the recognition of taxable or deductible revenues or expenses and permanent items that are never taxable or deductible. The liabilities for current tax is calculated using enacted tax rates or rates that are substantially approved at the end of the period in jurisdictions in which the Entity and its subsidiaries are subject to tax.

The Entity is subject to ISR and IETU in Mexico.

The ISR rate during 2012 and 2011 was 30%. in 2013 decreased to 29% and will be 28% from 2014. The Entity pays ISR, together with its subsidiaries on a consolidated basis, beginning in fiscal year 1994.

IETU - Revenues, as well as deductions and certain tax credits, are determined based on cash flows of each fiscal year. Beginning in 2010 the IETU rate is 17.5%. In addition, as opposed to ISR, the parent and its subsidiaries will incur IETU on an individual basis.

Income tax incurred will be the higher between ISR and IETU.

Based on financial projections, the Entity and most of its subsidiaries, determined that they will essentially pay ISR, and therefore only recognize deferred ISR. During 2012 and 2011 nor the Entity or its subsidiaries caused IETU.

  • ISR consists of the following:
        2012   2011
    ISR:
    Current $ 3,358,835 $ 2,219,067
    Deferred   (405,711   (332,088)
    IETU:
    Current   14,610   6,605
    Deferred   -   777
      $ 2,967,734 $ 1,894,361

  • The main items comprising the liability balance of deferred ISR are:
        2012   2011   January 1,
    2011
    ISR deferred (asset) liability:
    Property, machinery and equipment $ 1,917,078 $ 1,934,296 $ 1,847,948
    Inventories   205,299   202,842   497,283
    Accounts receivable from installment sales   276,560   340,846   389,160
    Advances from customers   (617,654)   (138,792   (330,014)
    Natural gas and metals swaps and forwards   (202,355)   (168,941)   (89,310)
    Revenues and costs by percentage-of-completion method   234,745   (86,767   (2,083)
    Allowances for assets and reserves for liabilities   (706,036)   (379,096)   (123,059)
    Other, net   (31,876)   (87,106)   (36,753)
    Deferred ISR on temporary differences   1,075,761   1,617,282   2,153,172
    Effect of tax loss carry-forwards   (158,984)   (233,052)   (49,105)
    Difference income tax payable for CUFIN   195,123   195,123   195,123
    Share losses   -   (28,929)   (39,865)
    Defoerred ISR payment (long-term CUFINRE)   19,262   18,979   18,687
        1,131,162   1,569,403   2,278,012
    Total deferred tax asset   120,929   145,641   77,966
    Total deferred income taxes liability $ 1,252,091 $ 1,715,044 $ 2,355,978

  • The movements of deferred tax liability during the year are as follows:
        2012   2011
    Opening balance $ 1,569,403 $ 2,278,012
    ISR applied to results   (405,711)   (332,088)
    Consolidation effect   (32,530)   (376,521)
    Closing balance $ 1,131,162 $ 1,569,403

  • Following is a reconciliation of the statutory and effective ISR rates expressed as a percentage of income before taxes on income:
      2012
    %
    2011
    %
    Statutory rate 30 30
    Add (deduct) the effect of permanent differences -
    Nondeductible expenses - 1
    Inflation effects 1 1
    Share in income of associated companies (4) (3)
    Effective rate 27 29

  • Unapplied tax loss carryforwards of Grupo Carso, S.A.B. de C.V. and its subsidiaries for which a deferred income tax asset and an advanced income tax payment, respectively, have been recognized, may be recovered provided certain requirements are fulfilled. Their maturities and restated amounts at December 31, 2012 are as follows:
    Year of
    expiration
      Tax loss
    carryforwards
    2018 $ 82,396
    2019   278
    2020   20,244
    2021   546
    2022 and thereafter   110,518
        213,982
    Tax loss carryforward of foreing subsidiary without expiration term   276,661
    Total $ 490,643


31. Assets held for sale

The Entity decided to sell the shares in its subsidiaries Hubard y Bourlon, S.A. de C.V., Ingenieria HB, S.A. de C.V., Selmec Equipos Industriales, S.A. de C.V. and CILSA Panamá, S.A. Therefore, in the consolidated statement of financial position as of January 1, 2011, the assets and liabilities of those subsidiaries are classified as held for sale and included within short term and long-term assets and liabilities from discontinued operations.

The statements of financial position at December 31, 2012 and 2011 of the spun-off subsidiaries and /or disposed operations, are summarized as follows:

    2011   January 1,
2011
Current assets:
Cash and cash equivalents $ 7,029 $ 201,078
Accounts receivable – net   -   8,999
Inventories – net   51,203   389,177
Other accounts receivables   2,669   347,800
Total current assets   60,901   947,054
Property, machinery and equipment   15,632   165,487
Other assets   -   226,873
Total long term assets   15,632   392,360
Total assets $ 76,533 $ 1,339,414
Current liabilities:
Short-term debt $ - $ 218,498
Trade accounts payable   -   431,583
Accrued expenses, taxes and others   -   374,798
Total current liabilities   -   1,024,879
Long-term debt   -   6,022
Deferred income taxes   -   9,200
Total long-term liabilities   -   15,222
Total liabilities $ - $ 1,040,101

Furthermore, the operations of the disposed subsidiaries are presented separately in the consolidated statement of comprehensive income as discontinued operations.

The following are relevant income statement figures of the discontinued operations for the periods they were held. Such amounts correspond to Hubard y Bourlon, S.A. de C.V., Ingenieria HB, S.A. de C.V., Selmec Equipos Industriales, S.A. de C.V. and CILSA Panamá, S.A. to December 31, 2012 and 2011:

    2012   2011
Net sales $ 66,298 $ 86,230
Costs and expenses   72,010   30,665
Operating expenses   1,152   4,861
Other income (expenses), net (1)   12,646   229,484
Net comprehensive financing result   -   (36)
Income before taxes   5,782   280,152
Income taxes   -   (11,827)
Net income $ 5,782 $ 291,979

(1) Includes accounting profit on shares sales of $92,040 for Hubard y Bourlon, S.A. de C.V, an accounting loss of ($69) for Ingeniería HB, S.A. de C.V., an accounting profit of $78,228 for Selmec Equipos Industriales, S.A. de C.V. and an accounting profit of $51,390 for Cilsa Panamá, S.A.


32. Commitments

  • At December 31, 2012, in the Industrial and Construction and Infrastructure sectors have contractual commitments related to the leasing of machinery and equipment and real estate operating leases in the amount of $1,389,740.
    Maturities of contractual commitments expressed in Mexican pesos at December 31, 2012, are as follows:
    Years    
    2013 $ 1,009,306
    2014   87,578
    2015   91,524
    2016 and thereafter   201,332
      $ 1,389,740

    The rents paid were $70,833 and $50,008, for the years ended December 31, 2012 and December 31, 2011, respectively.
    • Retail sector:
      • As of December 31, 2012, contracts have been executed with suppliers for the remodeling and construction of some of its stores. The amount of the commitments contracted in this regard is approximately $1,150,790.
      • Furthermore, as of December 31, 2011, the Entity and its subsidiaries have entered into lease agreements in 302 of its stores (Sears, Saks, Sanborn Hermanos, Sanborn’s - Café, Mix-Up, Discolandia, I Shop, Comercializadora Dax, Corpti and Sanborns Panama). The leases are for non-cancelable periods range between one and 20 years. The rental expense during 2012 and 2011 was $1,200,031 and $1,110,631, respectively; also, the Entity and its subsidiaries, acting as lessees, have contracts whose terms range from between one to 15 years and the amount of rental income in 2012 and 2011 was $242,839 and $219,272, respectively.
        • The amount of rentals payable according to its due date amount to:
        Maturity   December 31,
        2012
        1 year $ 289,984
        1 to 5 years   1,214,782
        More than 5 years   2,055,020
          $ 3,559,786

        • The amount of rentals receivable according to their due date amount to:
        Maturity   December 31,
        2012
        1 year $ 14,0410
        1 to 5 years   115,728
        More than 5 years   138,031
          $ 268,169

      • Sears Operadora México, S.A. de C.V. (formerly Sears Roebuck de México, S.A. de C.V.) and Sears Roebuck and Co., recently signed an agreement whereby they have decided to extend under the same terms the Brand Use License Contract and the Merchandise Sale and Advisory Contracts governing the commercial relationship between them, which establishes the payment of 1% of the revenues from merchandise sales, and allows the use of the Sears name both in its corporate name and in its stores, and the exploitation of the brands owned by Sears Roebuck and Co. The agreement will be in effect up to September 30, 2019, but allows for a seven-year extension under the same conditions, unless one of the parties decides not to do so, in which case it must notify the other party two years in advance.
      • Based on an agreement signed on September 12, 2006, the Entity executed a contract for the payment of consulting and brand use license for an initial term of 15 years with a 10 year renewal option, establishing the minimum annual payment of US $500, and allowing the use of the name Saks Fifth Avenue both in its corporate name and in its stores.
    • Construction and infraestructure sector:
      • In June 2012, Operadora signed contracts with Pemex Exploración y Producción (“PEP”), resulting from the allocation of public works for the manufacture of three offshore production fields in the Campeche EK-A2, KU Ayatsil-A and-B. The amount of these contracts is US$ 205 million, and will run over a period of approximately 17 months. The scope of the contract covers the engineering, procurement, construction, loading and mooring platforms, one octopod type.
      • During 2011, Operadora signed contracts for the manufacture of two fixed marine oil rigs with Pemex Exploración y Producción (PEP), for $247,000 and $381,000, respectively. Both platforms were finished during 2012.
      • In January 2010, PEP allocated through a direct award to Servicios Integrales GSM, S.A. de C.V. (GSM) and Operadora, both subsidiaries of CICSA, the drilling and termination work of 100 wells of the Tertiary field in the south region of Mexico. The amount of the construction contract was $1,028,380, plus US$159,406, and must be concluded in December 2012. As of December 31, 2012, the project is 59% completed under the original terms of this contract. In the final quarter of 2011, an addendum was assigned to this contract for the drilling of 33 steam injection wells apart from those currently in process, for an approximate value of US $95,000, on which work will begin in the first quarter of 2012. At December 31, 2012, has an advance of approximately 80%. Upon completion of the originally contracted work, addenda have been signed for the construction of a greater number of wells, for a total of 125.
      • In 2009, through Operadora, the Entity began construction of a Jack Up (mobile drilling platform for oil wells at sea), which is near completion at the date of issuance of these financial statements, with only the commissioning of equipment pending. Currently the Entity is in the process of selling it through companies specializing in this type of equipment. During 2012 the Entity continued marketing efforts, which deepened in the knowledge of this market and identified different options for this equipment, among which are the provision of services and leasing options that the Board of Directors of the Entity agreed to consider. Based on the above it was decided to classified under the caption of Property, plant and equipment. (See note 16).
      • In July 2009, PEP awarded GSM and Operadora the construction contract for the “Integrated work for the drilling of wells in the Gulf Terciary Oil”. The value of such contract is approximately $203,528, plus US$119,897, and will be performed in approximately 2 years. In September 2009, work began on this drilling project for 144 oil wells and has finished at the date of issuance of these financial statements. However, during 2012, the Entity signed an extension to the contract for up to 244 wells that are about to complete.
      • In February 2012, through Operadora, the Entity won a concession contract for the construction, operation, exploitation, conservation and maintenance of the 111 kilometer, type a-4 Southern Guadalajara highway that extends from the Zapotlanejo junction of the Zapotlanejo – Guadalajara highway to the Arenal junction of the Guadalajara – Tepic highway. Under this concession contract, the Entity will provide construction services. The value of the contract is $5,977 million and fixed price contract is $35 million.
      • In May 2010, the SCT, a Federal Government agency, signed a concession title with the subsidiary Autovía Mitla Tehuantepec, S.A. de C.V. for $9,318,200, to construct, exploit, operate, conserve, maintain, modernize and expand the Mitla-Entronque Tehuantepec II federal highway, which is 169 km in length. For the construction of this highway, the special purpose entity Constructora MT de Oaxaca, S.A. de C.V. (MT) was created in December 2010, of which 40% is owned by Operadora. MT signed a contract in September 2011 with the concessionaire for the construction of this highway with value of $9,318,200. At the date of issuance of these financial statements began with some executive and project work in some sections, pending release of the rights of way.
      • In January 2010 CICSA announced that it was awarded a contract for the construction and operation of the Wastewater Treatment Plant at Atotonilco, Tula, Hidalgo, in which CICSA, through Infraestructura y Saneamiento de Atotonilco, S.A. de C.V., a consortium created at the end of 2010, would participate in the development of the structural and architectural engineering and in the civil construction project worth $2,050,000 (including VAT). The Atotonilco Plant will be the largest in Mexico and one of the largest in the world with a capacity of 35 m³ per second (m3/s) for the treatment of wastewater in the Metropolitan Zone of the Mexico City, cleaning 23 m3/s during the dry season and another 12 m3/s more in the rainy season, by means of a physical-chemical process module. As of December 31, 2012, this project is 80% completed.
      • In December 2009 Operadora announced that it entered into a lump sum contract with the decentralized state agency named Sistema de Autopistas, Aeropuertos, Servicios Conexos y Auxiliares del Estado de México (SAASCAEM) for the modernization of the Tenango-Ixtapan de la Sal Highway, from Km 1+100 to Km 32+630, in the State of Mexico. The construction project consists of expanding the highway from two to four lanes, including earth grading work, drainage, structures, asphalting, construction and upgrades of junctions for a total length of 31.6 km. The contract amount is approximately $492,162 and will be performed over a 20 month period. At the date of the financial statements has an advance of about 85% and presents a suspension derived from a shelter by residents of a section of the project.
      • In October 2009 Operadora announced that it has reached agreement with Impulsora Del Desarrollo y el Empleo en América Latina, S.A.B. de C.V. (“IDEAL”) (a related party) to perform the construction and modernization work on the “Proyecto Pacífico Norte”, which consists of: (i) The Southern Bypass of Culiacan and the Mazatlan Bypass and its connecting branches, and (ii) The Mazatlan-Culiacan High Specification Highway and the related modernization work. The work to be performed is worth a total of $3,678,200, divided into three parts; the Culiacan Bypass for $1,590,844, in which the work were completed during 2011, the Mazatlan Bypass for $1,587,356, in which the Entity started the construction in certain trams and present an advance of 20% and modernization work for $500,000; the latter will be performed after the first two phases have been concluded.
      • In April 2009, Operadora executed a contract with CFC Concesiones, S.A. de C.V., a subsidiary of IDEAL, a related party, to perform the construction of the second leg of the Northeast Bypass of the Metropolitan Zone of the City of Toluca, which is 29.4 km long, through the municipalities of Lerma, Toluca, Otzolotepec, Xonacatlan, Temoaya and Almoloya de Juarez, over a one-year period. The value of the contract is approximately $750,675. At the date of issuance of these financial statements, the work has been completed and the final release documentation is being prepared.
      • In November 2008, through a consortium formed with other companies, CICSA signed the contract for the construction of the Eastern Emitter Tunnel, which will recover drainage capacity in the Metropolitan Zone of Mexico City and ensure the normal operation of deep drainage maintenance programs, thus eliminating the risk of flooding during the rainy season. The National Water Commission, the Federal District Government and the Government of the state of Mexico, through Trust number 1928, given the need for such construction projects and considering the technical capacity and experience of the Mexican companies which comprise the consortium, made a direct award in accordance with the related Law of Public Works and Services, to assign such project to the company named Constructora Mexicana de Infraestructura Subterránea, S.A. de C.V. (COMISSA), whose shareholders are: CICSA with 40% of the equity, Ingenieros Civiles Asociados, S.A. de C.V. (ICA), Construcciones y Trituraciones, S.A. de C.V. (COTRISA), Constructora Estrella, S.A. de C.V. (CESA) and Lombardo Construcciones, S.A. de C.V. (LOMBARDO). The original amount of this contract was $9,595,581, which has since been increased to $13,803,516 for additional authorized work. At the date of the financial statements the project is 70% completed, including the aforementioned increases, and CICSA’s share is $4,865,443.
        The project began engineering and construction work under a mixed public works scheme on the basis of unit prices, lump sum and fixed term, which must be concluded in September 2012. However, with the authorizations made after the construction work ended, the deadline was extended to October 2014. The contract stipulates the construction of a tunnel 7 meters (m) in diameter, approximately 62 kilometers (km) long and with a capacity of 150 m³ per second.
      • In the third quarter of 2008, a consortium made up of Operadora and other companies outside the Group, Constructora El Realito, S.A. de C.V., was awarded the contract to perform the work involving the design, development and engineering and construction of the El Realito dam, which will supply drinking water to the Metropolitan zone of San Luis Potosi, located on the river Santa Maria, in the municipality of San Luis de La Paz, Guanajuato State. The original amount of this contract was $549,748, which has since been increased to $678,000, for additional authorized work, of which Operadora has a 52% share and is expected to be finished within three years. At the date of the financial statements, this project is completed
        In the second quarter of 2008, the consortium in which CICSA participates together with ICA and Alstom Mexicana, S.A. de C.V., was awarded the project to construct Line 12 of the Mexico City subway system (also known as Golden Line), which will cover a distance of approximately 24 km (from Mixcoac to Tlahuac). This assignment was made by the General Public Works Office for Transportation of the Federal District Government by means of an international public tender. The amount of the respective contract is $15,290,000. CICSA’s share is 25% of the value of the civil engineering work of such Project. During 2012, the work was completed.
      • In 2012, the subsidiary, Grupo PC won a series of contracts for the construction of the project called Plaza Carso II, which consists of various commercial and residential buildings, initially worth $1,0624,400.
      • During 2012 and 2011, Grupo PC reached agreements for the construction of 3 Star Medica hospitals in Queretaro State, Private Child Mexico City and Chihuahua State worth $565,700. At the end of 2012, is completed and delivery process of Queretaro, and began Private Child. Is expected to begin with the Chihuahua in 2013.
      • In July 2010, the subsidiary, Grupo PC signed a $319,000 contract for the construction of Building C-4 (Safety City) in Mexico City. At December 31, 2011, this project was completed.
      • During 2010, the Entity signed a contract to build a mall in the city of San Luis Potosi for $500,000, which was subsequently increased to $575,000 due to new requirements. This project was completed in 2012.
        In 2009, the subsidiary, Grupo PC started work on the construction of Luna Parc Star Medica hospital in Cuautitlan Izcalli, State of Mexico, in connection with a contract worth$134,560. The work on this project was completed in November 2010. At the date of issuance of these financial statements, the Entity is in the process of settlement documents.
      • During October 2007, CICSA signed a contract with the Junta Municipal de Agua y Saneamiento de Juarez (JMAS), Chihuahua, to carry out the construction, maintenance, preservation and operation of the Acueducto Conejos Medanos which supplies drinking water to the city of Ciudad Juarez, in the State of Chihuahua. The construction work was worth $254,111 over two years, while the operating and maintenance services are worth $942,056 pesos and will be performed over 10 years, through the monthly payment of tariffs guaranteed by an administration trust which will be managed by JMAS over the contract term. In February 2010, the construction of this project was completed in accordance with the agreement and the project has already been opened and is in operation. Investment in this concession through a trust is presented in the consolidated statement of financial position as an intangible asset under concession.
        During 2012 and 2011, the Entity signed contracts and work orders with a related party in Mexico and Latin America, for amounts totaling $2,813,580 and $2,356,000, respectively, and U.S.$150 million and U.S.$86 million, respectively. The contracts include professional services for the construction and modernization of copper cabling networks (peers) and outside plant fiber optic networks and to build pipelines and install fiber optic cables, public works, and connections. Most of the projects contracted in Mexico were completed during 2012 and 2011, while projects in Latin America have been running on schedule and are estimated to be completed during 2013.
      • In December 2006, GSM signed a contract for the drilling and termination of 60 oil wells (including infrastructure work) in Villahermosa, State of Tabasco. The respective construction work began in February 2007 and was concluded during the first quarter of 2010. The contract amount is $1,432 million pesos (nominal value) plus US$280 million.
        In August 2008, an agreement was signed to extend the drilling contract mentioned in the previous paragraph, adding 60 additional wells to the original contract and extended the deadline for completion to 2010. At December 31, 2011, this contract has been concluded.

33. Contingency

  • As of the date of these financial statements, the Entity has judicial procedures in process with the competent authorities for diverse reasons, mainly for foreign trade duties, for the recovery of accounts receivable and of labor matters.
    The estimated amount of these judgments to December 31, 2012 amounts to $873,506, forwhich the Entity has recognized provisions $112,700 which is included in other liabilities in the consolidated statements of financial position. During 2012, the Entity made payments related to these matters of approximately $22,100. While the results of these legal proceedingss cannot be predicted with certainty, management does not believe that any such matters will result in a material adverse effect on the Entity’s financial position or operating results.
  • A proceeding is underway to investigate absolute monopoly practices in the public railroad freight market, filed by the Federal Anti-Trust Board (“Cofeco”) as a result of the sale of the common stock shares of Ferrosur, S.A. de C.V. and the acquisition of the common stock shares of Infraestructura y Transportes México, S.A. de C.V. Pursuant to such proceeding, the Cofeco determined that the absolute monopoly practices established in article 9, section I of the Federal Economic Competition Law had been committed by, among others, Grupo Carso, ordered the cessation of such monopoly practices and levied a fine on, among other companies, Grupo Carso for the amount of $82,200.
    Grupo Carso filed an indirect amparo lawsuit (seeking relief on constitutional grounds) against such ruling, which was sent to the Sixth District Court for Administrative Matters in the Federal District. The constitutional lawsuit was admitted and an interlocutory judgment dated July 15, 2009 ordered the collection of the fine imposed on Grupo Carso to be definitively suspended, on the understanding that such measure would go into effect subject to the prior deposit of the total amount of the fine with the Federal Treasury to guarantee the actual and potential tax liability pursuant to article 135 of the Ley de Amparo. Accordingly, the Company filed the respective deposit slip with the Federal Treasury, which was recorded as other assets on the accompanying consolidated balance sheet. The constitutional hearing was held on September 28, 2010. In the judgment issued by the trial court on December 16, 2010, the Sixth District Judge for Administrative Matters in the Federal District dismissed amparo lawsuit 887/2009-III, because it had no legal grounds and ruled that an action for annulment could be filed with the Federal Tax Court against the contested ruling issued by the Federal Antitrust Board. In response to such ruling, Grupo Carso, among other companies, filed a motion for review, admitted under docket number 262/2011 by the 13th Appeals Court for Administrative Matters of the First Circuit, which in its ruling of May 23, 2012 stayed the dismissal declared by the Sixth District Court and ordered the judgments to be sent to the Mexican Supreme Court to rule on an issue of constitutionality raised in the lawsuit. The Supreme Court, in its session held on October 17, 2012, accepted jurisdiction over the constitutional issue and sent the rulings back to the 13th Appeals Court for Administrative Matters to issue judgment on the other matters. In relation to these questions, the aforementioned motion has yet to be resolved.
  • The Entity is involved in legal proceedings related to mercantile, tax and labor matters. These matters have arisen in the normal course of business and they are normal for the industry in which the Entity participates. However, the matters are deemed to have a smaller than probable, but greater than remote probability of resulting in a loss to the Entity. Nevertheless, the Entity believes that these matters will not have a material adverse effect on its financial position or operating results.
  • Certain subsidiaries have pending judicial proceedings with the competent authorities for diverse reasons, mainly for taxes and accounts receivable collections. In the opinion of the officers and lawyer of the Entity, most of these matters will be resolved favorably. The results of any unfavorable outcomes will not result in a material adverse effect on the Entity’s financial position or results of operations.
  • At December 31, 2012 and 2011, the Entity has written guarantees, mainly on behalf of their clients, for $5,474,751 and U.S. $5,990 and $4,995,252 and U.S. $23,783, respectively, which were the amounts of liability in force in those periods.
  • Acting Covenants of title. In the normal course of the operations, the Entity is required to guarantee its obligations, mainly derived from construction contracts by means of letters of credit or deposits, regarding the compliance with contracts or the quality of the developed works.

34. Segment information

Information by operating segment is presented based on the management focus and general information is also presented by product, geographical area and homogenous groups of customers.

  • Analytical information by operating segment:
      2012
    Statements of financial position   Industrial   Commercial   Infrastructure and
    construction
      Others and
    eliminations
      Total
    consolidated
    Current assets:
    Cash and cash equivalents $ 852,259 $ 2,327,855 $ 484,649 $ 1,329,975 $ 4,994,738
    Accounts and notes receivable, net   3,844,490   8,844,083   5,586,845   (796,478)   17,478,940
    Total current assets   10,491,356   20,075,050   9,670,497   799,972   41,036,875
    Property, plant and equipment   3,689,238   8,808,288   6,914,348   589,577   20,001,451
    Other assets Net   228,153   28,694   185,601   433,483   875,931
    Total assets   20,808,673   31,201,517   17,851,636   7,000,488   76,862,314
    Current liabilities:
    Notes payable to financial institutions
    and current portion of long-term debt
      2,974,333   5,273,039   3,089,980   (1,967,999)   9,369,353
    Trade accounts payable   2,062,823   6,104,898   1,084,384   106,927   9,359,032
    Total current liabilities   6,398,210   14,811,534   8,485,971   (1,984,553)   27,711,162
    Long-term debt   42,314   -   1,379   5,000,000   5,043,693
    Total liabilities   6,656,257   15,972,727   8,601,877   3,750,864   34,981,725

      2011
    Statements of financial position   Industrial   Commercial   Infrastructure and
    construction
      Others and
    eliminations
      Total
    consolidated
    Current assets:
    Cash and cash equivalents $ 1,159,688 $ 2,049,562 $ 716,587 $ 972,057 $ 4,897,894
    Accounts and notes receivable, net   4,755,130   8,443,130   3,810,279   (638,525)   16,370,014
    Total current assets   11,558,141   18,716,071   7,741,415   927,028   38,942,655
    Property, plant and equipment   3,900,779   8,811,067   6,971,611   510,582   20,194,039
    Other assets Net   228,390   32,083   142,458   259,298   662,229
    Total assets   21,460,372   29,956,018   16,125,988   5,488,743   73,031,121
    Current liabilities:
    Notes payable to financial institutions
    and current portion of long-term debt
      3,907,940   1,372,936   1,816,818   3,546,243   10,643,937
    Trade accounts payable   2,180,158   5,558,941   977,763   1,549   8,718,411
    Total current liabilities   7,523,335   10,120,748   5,661,728   4,121,187   27,426,998
    Long-term debt   115,174   0   2,198   -   117,372
    Total liabilities   7,988,851   11,563,598   5,783,969   3,930,708   29,267,126

      2012
    Statements of Comprehensive Income   Industrial   Commercial   Infrastructure and
    construction
      Others and
    eliminations
      Total
    consolidated
    Net sales $ 25,851,754 $ 39,411,287 $ 17,533,325 $ 1,382,901 $ 84,179,267
    Cost of sales   22,521,422   23,818,767   14,352,159   1,068,005   61,760,353
    Distribution and selling   446,706   8,644,391   45,159   (3,105)   9,133,691
    Administrative   735,909   1,781,979   708,474   (86,717)   3,250,808
    Other (income) expenses – net   3,418   (92,289)   2,172   7,687   (79,012)
    Interest (income) expense– net   72,381   (1,602)   83,175   366,598   520,552
    Exchange gain (loss) – net   (254,235)   (10,220)   (54,936)   22,663   (296,728)
    Effects of valuation of financial
    instruments – net
      (23,399)   (45,134)   (450,843)   (91,666)   (611,042)
    Equity in income of associated
    companies
      (305,002)   -   (2,118)   (1,244,578)   (1,551,698)
    Income from income taxes   2,572,721   4,622,478   2,837,081   1,166,442   11,198,722
    Income taxes   744,304   1,324,580   790,166   108,684   2,967,734
    Income from discontinued operations   5,782   -   -   -   5,782
    Consolidated net income   1,834,199   3,297,898   2,046,915   1,057,758   8,236,770
    EBITDA (1)   2,401,953   5,225,703   2,737,544   239,714   10,604,914
    Depreciation   339,488   632,536   325,184   47,900   1,345,108

      2011
    Statements of Comprehensive Income   Industrial   Commercial   Infrastructure and
    construction
      Others and
    eliminations
      Total
    consolidated
    Net sales $ 27,621,800 $ 36,415,957 $ 14,348,667 $ 816,972 $ 79,203,396
    Cost of sales   24,525,284   21,773,912   12,521,572   571,821   59,392,589
    Distribution and selling   416,251   8,002,375   41,503   (9,687)   8,450,442
    Administrative   805,442   1,781,979   741,395   (86,717)   3,242,099
    Other (income) expenses Net   (39,966)   (86,717)   167,932   315,997   319,895
    Interest (income) expense Net   (30,883)   21,940   84,651   209,290   284,998
    Exchange gain (loss) Net   250,109   57,441   90,456   (48,689)   349,317
    Effects of valuation of financial
    instruments Net
      44,912   7,328   (36,369)   482,520   498,391
    Equity in income of associated
    companies
      102,425   -   (2,311)   (735,831)   (635,717)
    Income before income taxes   1,479,662   4,215,136   711,291   100,781   6,506,870
    Income taxes   367,355   1,263,955   327,568   (64,517)   1,894,361
    Income from discontinued operations   287,830   -   4,149   -   291,979
    Consolidated net income   1,400,137   2,951,181   387,872   165,298   4,904,488
    EBITDA (1)   2,248,994   4,916,525   1,137,424   26,937   8,329,880
    Depreciation   402,771   583,539   289,707   50,004   1,326,021

    (1) Reconciliation of EBITDA
        2012   2011
    Income before income taxes $ 11,198,722 $ 6,506,870
    Depreciation   1,345,108   1,326,021
    Interest income   (294,654)   (490,300)
    Interest expense   815,206   775,298
    Exchange gain (loss)   (296,728)   349,317
    Effects of valuation of financial instruments   (611,042)   498,391
    Equity in income of associated entities   (1,551,698)   (635,717)
    EBITDA $ 10,604,914 $ 8,329,880

    Cash flows from operating activities:
        2012   2011
    - Industrial $ 1,909,665 $ 1,473,640
    - Retail   3,345,197   3,289,709
    - Infrastructure and construction   2,049,380   1,691,413
    - Others and eliminations   359,164   399,550
    Total consolidated $ 7,663,406 $ 6,854,312

    Cash flows from investing activities
        2012   2011
    - Industrial $ (180,289) $ 12,976,839
    - Retail   (455,369)   (1,003,198)
    - Infrastructure and construction   (388,578)   (382,395)
    - Others and eliminations   241,839   (413,833)
    Total consolidated $ (782,397) $ 11,177,413

    Cash flows from financing activities:
        2012   2011
    - Industrial $ (1,977,497) $ (13,857,608)
    - Retail   (2,614,003)   (1,752,834)
    - Infrastructure and construction   (1,860,954)   (1,317,009)
    - Others and eliminations   (217,639)   527,256
    Total consolidated $ (6,670,093) $ (16,400,195)

  • General segment information by geographical area:
    The Entity operates in different geographical areas and has distribution channels in México, the United States and other countries through industrial plants, commercial offices or representatives.
    The distribution of such sales is as follows.
        2012 %   2011 %
    North America $ 4,053,003 4.82 $ 3,293,787 4.15
    Central and South America and the Caribbean   6,628,058 7.87   6,554,929 8.28
    Europe   313,819 0.37   361,599 0.46
    Rest of the world   49,221 0.06   72,152 0.09
    Total exports and foreign   11,044,101 13.12   10,282,467 12.98
    Mexico   73,135,166 86.88   68,920,929 87.02
    Net sales $ 84,179,267 100.00 $ 79,203,396 100.00

    The Entity has a wide variety of customers according to the category of products and services it offers; however, no particular customer represents more than 10% of net sales. The Entity offers its products and services in the following industries: energy, automotive, telecommunications, construction, electronics and general public mainly.

35. Explanation of transition to IFRS

As it is mentioned in the Note 2, the consolidated financial statements for the ended year as of December 31 2012 are the first financial statements that are compliance with the IFRS. The transition date to the IFRS is January 1 2011. In the preparation of the first financial statement with the IFRS, the transition rules have been applied to the figures reported previously of conformity with NIF. As it is described in the Note 2 of the financial statements, the Entity has applied the obligatory exceptions and it has chosen certain adoption options for the first time in conformity with the IFRS 1. The following reconciliations provide the quantification of the effects and the impact in the stockholders’ Equity as of the date of transition of January 1, 2011 and also as of December 31 2011, and in the comprehensive income for the year of transition that ended as of December 31 2011.

  • Reconciliation of Stockholders’ Equity
      Notes   2011   January 1,
    2011
    Total Stockholders’ Equity under NIF   $ 42,270,434 $ 38,790,807
    Adjustment to property, plant and equipment e,g   561,949   375,248
    Adjustment to other assets f   944,518   780,551
    Adjustment to goodwill j   -   (1,655)
    Cancellation of deferred PTU h   -   59,182
    Adjustment to employee benefits c   229,575   225,965
    Effect of deferred taxes d   (127,892)   (279,001)
    Total Stockholders’ Equity under IFRS   $ 43,878,584 $ 39,951,097

  • Reconciliation of comprehensive income
      Notes   December 31,
    de 2011
    Net income under NIF   $ 5,234,558
    Depreciation of property, plant and equipment g   (93,894)
    Correction to income tax e   (22,458)
    Other effects of transition to IFRS f, i   (213,718)
    Net income under IFRS     4,904,488
    Translation effect of foreign operations K   741,300
    Valuation of derivative financial instruments m   93,382
    Actuarial losses c   (86,163)
    Other comprehensive income effects f, i, j   24,676
    Comprehensive net income under IFRS   $ 5,677,683

The transition to IFRS has resulted in the following changes in accounting policies:

  • The effect to January 1, 2011 of all settings for the adoption of IFRS earnings were recorded, and the corresponding effect on the noncontrolling interest.
  • According to IAS 29, Financial Reporting in Hyperinflationary Economies, the effects of inflation should be recognized only in a hyperinflationary economy, which is identified by various characteristics of the economic environment of a country. The more objective criteria for a hyperinflationary economy is when cumulative inflation over three years approaches, or exceeds, 100%. Since the Entity and its principal subsidiaries are located in a non-hyperinflationary economic environment, the effects of inflation recognized under NIF to 2007 were canceled for non-hyperinflationary periods, except for assets that used the deemed cost exception under IFRS 1 as mentioned in Note 2.
  • NIF D-3, Employee Benefits, requires the recognition of a provision and expenditure for estimated employee termination benefits paid in connection with an offer made to encourage an employee’s voluntary resignation in virtually all circumstances. Under IAS 19, the recognition of a termination benefit liability is only recognized when certain conditions are met.
  • The Entity adjusted its deferred tax under IAS 12, Income Taxes, using the carrying value of assets and liabilities recognized under IFRS.
  • The Entity has elected to recognize certain properties in accordance with IAS 40, Investment Property, using the fair value model, which reflects the gains and losses in the income statement. Adjustments arise as the result of the reclassification of the properties from property, plant and equipment to investment property, and for the recognition of the effect of the valuation surplus at the date of transition.
  • At the date of transition, the Entity canceled the intangible assets that did not meet the requirements of IAS 38, Intangible Assets. Additionally, the Entity classified certain intangible assets existing at the date of transition with indefinite lives, canceling the accumulated depreciation at the date of transition.
  • In conformity with IAS 16, Property, Plant and Equipment, the Entity determined the most significant components of its real property and equipment; it subsequently adjusted the useful lives of these assets and the respective effect on accumulated depreciation. Additionally capitalized spare parts and supplies because it expects to use these items for more than one year. These items were formerly recognized as an expense at their acquisition date. Similarly, the Entity incurred certain expenses which did not qualify for capitalization as part of fixed assets under IFRS and were eliminated heron. Finally, there are assets that were valued considered fair value with appraisals made by independent actuaries.
  • In Accordance with IAS 19, Employee Benefits, the recognized PTU expense relates only to the current expense, which is incurred when, among other things, the employee has rendered service to an entity, and that the present obligation, legal or constructive, to make such payment, is a result of past events. Therefore the Entity eliminated deferred PTU balance from the transition date of the financial statements.
  • In accordance with IAS 18, Revenue, sales generated under the “interest-free installment sales” scheme must be recognized at their discounted value to separate the financing component of the sale. Subsequently, the Entity recognizes financing revenue over the period in which it receives payment for the goods, using the effective interest method.
  • In accordance with IAS 23, Borrowing Costs, interest paid eligible to be capitalized in qualifying assets, net of interest income generated by excess invested funds not yet used in these qualifying assets, should be capitalized from the date of adoption. However, IFRS 1, First-time adoption of IFRS, provides an optional exemption from retroactive application of IAS 23.
  • As discussed in Note 2, the Entity chose to zero out the accumulated translation adjustment related to foreign operations as of the transition date.
  • Under IFRIC 13, Customer Loyalty Programs, the fair value of the payment received for the initial sale must be allocated between the sale of the good or service and the value of the customer loyalty program component. Consequently, the Entity reclassified the provision for the deferred revenue related to the customer loyalty program component from cost of sales to be presented as an adjustment to revenue.
  • The debt issuance costs recognized in other assets under MFRS are reclassified and presented net of the related debt instrument in accordance with IAS 39, Financial Instruments: Recognition and Measurement.

36. Subsequents events

  • During the Ordinary and Extraordinary General Meeting of the Stockholders of Grupo Sanborns, the following resolutions were taken:
    • Initiate a Public Share Offering for the Entity’s fixed capital (i) in Mexico through Bolsa Mexicana de Valores, S.A.B. de C.V. and/or (ii) in the United States under rule 144A and/or regulation S of the 1933 Securities Act or any other applicable regulation, and on other foreign markets according to applicable laws, as deemed appropriate or necessary.
    • The Offering must be made according to the periods, terms and conditions determined by its representatives based on the supply and demand levels of the shares, the conditions prevailing on stock markets at the placement date and other relevant factors.
    • Effect a stock split of the shares representing Grupo Sanborns common stock by issuing two new shares for each current outstanding share, without implying a capital increase. Given that the share split has been irrevocably approved by Grupo Carso, its effects have been recorded retroactively in the consolidated financial statements of Grupo Sanborns as regards the disclosure of the number of shares and the profit per share.
    • Increase minimum fixed capital without withdrawal rights by an amount of up to $432,308 by issuing up to 432,308,236 ordinary, nominative Series “B-1” shares, to ensure that the Entity’s authorized minimum fixed capital without withdrawal rights remains at a total of up to $1,585,410, as represented by up to 2,382,000,000 ordinary, nominative Series “B-1” shares following the share split. All the shares subject to this increase will be offered for placement through the Offering at the placement price per share determined by Offering representatives. Any unsubscribed shares will be held by the treasury.
    • Amend the Entity’s Corporate Bylaws to fulfill the requirements established by the National Banking and Securities Commission (CNBV), in the understanding that the Entity’s new Corporate Bylaws will generally take effect as of that date, albeit with the exception of articles regarding its corporate denomination as a “public stock company”, which will take effect when the shares representing its common stock are registered with the National Securities Registry administered by the CNBV.
    The Entity has considered utilizing the resources generated by the public share offering for general corporate purposes including the expansion of new stores and restaurants, remodeling existing units, increasing working capital, financing operating needs, funding its development and expansion plan in an organic manner or through acquisitions, while also settling its current debt.
  • With a settlement date of February 13, 2013, Sanborns successfully placed shares for the gross amount of $10,511.4 million, while considering an over-assignment option for a further $837.2 million, which was paid on March 13, 2013.

37. New accounting principles

The IASB has published a series of new IFRS and amendments to the IAS, which were issued, but had not taken effect at the date of this report:

  • IFRS 9, Financial Instruments, apply from January 1, 2013, although early adoption is permitted. In August 2011, the IASB issued a proposed accounting standard entitled Mandatory Effective Date of IFRS, which proposes to change the effective date of IFRS 9 from January 1, 2013 to January 1, 2015.
  • IFRS 10, Consolidated Financial Statements
  • IFRS 11, Joint Arrangements.
  • IFRS 12, Disclosure of Interests in Other Entities.
  • IFRS 13, Fair Value Measurement.
  • IAS 27, Separate Financial Statements.
  • IAS 28, Investments in Associates and Joint Ventures

IFRS 9 requires that all recognized financial assets within the scope of IAS 39 be subsequently measured based on their applied cost or fair value. More specifically, debt investments in a business model intended to collect contractual cash flows exclusively composed by principal and interest on outstanding principal balances are generally measured according to their applied cost at the end of subsequent accounting periods. All other debt and capital investments are measured based on their fair value at the end of subsequent accounting periods.

In May 2011, a package of four standards involving consolidation, joint arrangements, associates and disclosures, including IFRS 10, IFRS 11, IFRS 12 and IAS 27 (according to the 2011 revision) was issued. The main requirements of these standards are described below:

IFRS 10, Consolidated Financial Statements. IFRS 10 replaces the parts of IAS 27, Consolidated and Separate Financial Statements, regarding consolidated financial statements. Additionally, Standards Interpretation Committee Interpretation No. 12, Consolidation-Special Purpose Entities, has been withdrawn due to the issuance of IFRS 10. Under IFRS 10, control is the only basis for consolidation. Furthermore, IFRS 10 includes a new definition of control which contains three elements: (a) power over an investee; (b) exposure or rights to variable returns from involvement with an investee, and (c) the investor’s ability to utilize this power over the investee to affect the amount of the investor’s returns. A large number of guidelines have been added to IFRS 10 to deal with complex scenarios.

IFRS 11, Joint Arrangements. IFRS 11 replaces IAS 31, Interests in Joint Ventures. IFRS 11 focuses on the manner in which an arrangement, in which two or more parties exercise joint control, must be classified. Under IFRS 11, joint arrangements are classified as joint operations or joint ventures, depending on the rights and obligations of the parties to the arrangements. In contrast, there are three types of joint ventures according to IAS 31: entities under joint control, assets under joint control and operations under joint control. Likewise, according to IFRS 11, joint ventures must be accounted for by using the equity method, while entities under joint control according to IAS 31 can utilize the equity or proportionate consolidation method.

IFRS 12, Disclosure of Interests in Other Entities. IFRS 12 is a disclosure standard applicable to entities holding equity in subsidiaries, joint ventures, associates and/or unconsolidated structured entities. In general terms, the disclosure requirements of IFRS 12 are more extensive than under current standards.

IFRS 13, Fair Value Measurement. IFRS 13 establishes a single body of guidelines for fair value measurements and the respective disclosures. This standard defines fair value, establishes its measurement framework and requires disclosures regarding these measurements. The scope of IFRS 13 is extensive because it is applicable to both financial instrument items and non-financial instrument items for which other IFRS require or permit fair value measurements and disclosures about fair value measurement. In general terms, the disclosure requirements of IFRS 13 are more extensive than under current standards.

These standards apply to years beginning on or after January 1, 2013. Earlier application is permitted provided that such standards are applied early at the same time.

The Entity expects that these standards are adopted in the consolidated financial statements for the year to start January 1, 2013, and is currently evaluating the impact these standards may have on them.


38. Authorization to issue the financial statements

On April 3, 2013, the issuance of the accompanying consolidated financial statements was authorized by C.P. Quintín Botas Hernández; consequently, they do not reflect events occurred after that date, and are subject to the approval of the Entity’s ordinary shareholders’ meeting, where they may be modified, based on provisions set forth in the Mexican General Corporate Law. The consolidated financial statements for the year ended December 31, 2011, were approved at the ordinary shareholders’ meeting that took place on April 26, 2012.