2. Management judgements and key estimates and assumptions underlying the consolidated financial statements
When the financial statements are prepared, making of judgements, estimates and assumptions is required in certain matters, affecting the amounts of assets, liabilities and conditional liabilities on the consolidated statements of financial position as well as the amount of income and expenses in the income statement. The judgements, estimates and assumptions that have the most significant effects on preparation of the financial statements, are presented in the following.
In the process of applying the Group's accounting principles, management has made the following judgements, which have a significant effect on the amounts recognised in the consolidated financial statements.
- Classification of acquisitions. The Group acquires subsidiaries that own real estate. At the time of acquisition, the Group considers whether each acquisition represents the acquisition of a business or the acquisition of an asset. The Group considers whether the acquisition represents a business as defined in IFRS 3 Business combinations, i.e. whether an integrated set of activities and processes is acquired in addition to the property. When the acquisition of subsidiaries does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values, and no goodwill or deferred tax is recognised.
- Classification of properties. The Group determines whether a property is classified as investment property or inventory property. Investment property comprises land and buildings (primarily housing units) that are not occupied substantially for use by, or in the operations of, the Group, nor for sale in the ordinary course of business, but are held primarily to earn rental income and capital appreciation. These buildings are substantially rented to tenants and not intended to be sold in the ordinary course of business. Inventory property comprises property that is held for sale in the ordinary course of business. Principally, this includes land plots and residential property that the Group develops and intends to sell before or on completion of construction.
Key estimates and assumptions
Estimates and assumptions underlying the financial statements are based on the management’s historical experience, the best available information about the events at the reporting date, and other factors, such as expectations concerning the future that are considered reasonable under current circumstances. Due to the uncertainty involved, actual amounts may differ significantly from the estimates used in the financial statements. The changes in estimates, assumptions and the factors affecting them are followed in the Group by using both internal and external sources of information.
Revisions of accounting estimates are recorded for the period in which the estimate is revised if the change in the estimate only affects that period. If the change in the estimate affects both the period in which it is made and subsequent periods, the effect arising from the change in the estimate is correspondingly recorded in current and subsequent periods.
The key estimates and assumptions, which are considered to involve a significant risk of causing a material adjustment in future periods, are described below.
- The amount of provisions booked on property development projects requires estimates of the obligations arising from the projects. The amounts recorded as provisions are based on management’s assessment of the specific risks in each project. Key considerations in the management’s assessment include technical, contractual and legal aspects related to the project, as well as the Group’s prior experience on similar projects.
- The fair value of investment property is determined using recognised valuation techniques and the principles of IFRS 13 Fair Value Measurement. Due to the fact that market prices for properties are not observable on a quoted market, the fair value measurement for investment property is performed using indirect valuation techniques that require the use of several assumptions my the Group management. The significant methods and assumptions used by the Group in estimating the fair value of investment property are set out in Note 13.