Arricano Real Estate PLC Interim Results -15-

On 20 August 2014, Arricano commenced legal proceedings before the District Court of Nicosia against Assofit, Stockman, Omniserve Ltd and Althor Property Investments Ltd ("Althor Property"). In the aforementioned process, Arricano succeeded in obtaining interim orders. The interim orders imposed restrictions on the transfer and/or otherwise alienation of Stockman's shares in Assofit as well on Stockman's voting and shareholding rights and inter alia, ordered Althor Property to transfer the shares it received to Assofit back to Stockman.

Given the fact that there are pending litigations with Stockman, the Group is not able to exercise significant influence over the investee. If the developments in the abovementioned litigations be not successful for the Company, then this may negatively influence the recoverable amount of the investment in Assofit. Management believes that the above mentioned litigations do not affect the Company's legal title to 49.97% of the nominal voting and ownership rights in the investee.

   (ii)       Legal case in respect of PrJSC Livoberezhzhiainvest

On 5 March 2014, PrJSC Dniprovska Prystan, acting through the asset manager(a bankruptcy receiver) as appointed by the court within its bankruptcy proceedings, filed a claim against PrJSC Livoberezhzhiainvest to nullify the ownership rights to the shopping centre "RayON" and to return the shopping centre to PrJSC Dniprovska Prystan. As at 30 June 2014, the carrying amount of the shopping centre "RayON" is USD 54,500 thousand (unaudited) (31 December 2013: USD 67,000 thousand). On 13 August 2014, the Kyiv administrative court ruled in favour of the Group. This decision may be further appealed. However, the Group's management believes that the claims of PrJSC Dnirpovska Prystan are not substantiated and the Group will be successful in defending the legitimacy of the abovementioned ownership rights in court.

   (iii)      Legal case in respect of Mezokred Holding LLC

On 17 April 2014, a claim was filed against Mezokred Holding LLC by a third party individual seeking to nullify the resolution issued by the Kyiv City Council, according to which the latter has approved the allocation to Mezokred Holding LLC of a land plot in Obolon District of Kyiv for the construction of a hypermarket and entitled Mezokred Holding LLC to lease this land plot for a period of 25 years. On 21 May 2014 and 15 July 2014, the Kyiv Administrative Court and the Kyiv Court of Appeal ruled against the Group. On 4 August 2014, the Group filed a cessation appeal to the Court of Appeal and this appeal was accepted by the court. As at the date that these consolidated interim condensed financial statements are authorised for issuance, no hearings of the court of cessation appeal were scheduled. On 6 August 2014, the public prosecutor filed a new claim against Mezokred Holding LLC to recognise the lease agreement for a land plot in Obolon District of Kyiv as invalid. The related hearings of the first instance court are scheduled for 12 September 2014. Management believes that court proceedings under the prosecutor's claim will be suspended until passing of the ruling of the court of cessation appeal in respect of the claim issued on 17 April 2014 and the Group will be successful in defending its title to the lease agreement for the land plot concerned in the court of cessation appeal. Should this not be the case, the Group may ultimately lose its lease rights for a land plot concerned and title to the related investment property. As at 30 June 2014, the fair value of the land plot and property under construction at Mezokred Holding LLC is USD 7,423 thousand and USD 756 thousand, respectively (refer to note 8) (unaudited).

Management is unaware of any other significant actual, pending or threatened claims against the Group.

   (e)     Taxation contingencies

The Group performs most of its operations in Ukraine and therefore within the jurisdiction of the Ukrainian tax authorities. The Ukrainian tax system can be characterized by numerous taxes and frequently changing legislation which may be applied retroactively, open to wide interpretation and in some cases are conflicting. Instances of inconsistent opinions between local, regional, and national tax authorities and between the Ministry of Finance and other state authorities are not unusual. Tax declarations are subject to review and investigation by a number of authorities that are enacted by law to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years, however under certain circumstances a tax year may remain open longer.

These facts create tax risks substantially more significant than typically found in countries with more developed systems. Management believes that it has adequately provided for tax liabilities based on its interpretation of tax legislation and official pronouncements. However, the interpretations of the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant. No provisions for potential tax assessments have been made in these consolidated financial statements.

   23      Related party transactions 
   (a)     Control relationships

The Group's major shareholders are Retail Real Estate S.A., Vunderbuilt S.A., Dragon - Ukrainian Properties and Development plc, Weather Empire Limited, Sigma Real Estate Limited, Rauno Teder and Jüri Põld. The Group's ultimate controlling party is Estonian individual Hillar Teder.

   (b)     Transactions with management and close family members

Key management remuneration

Key management compensation included in the consolidated interim condensed statement of profit or loss and other comprehensive income for the six months ended 30 June 2014 is represented by salary and bonuses of USD 253 thousand (unaudited) (six months ended 30 June 2013: USD 197 thousand (unaudited)).

The Director of the Company, Hillar Teder, indirectly controls 63.80% of the voting shares of the Company. Apart from this, the adult son of Hillar Teder controls 7.48% of the voting shares of the Company.

   (c)     Transactions and balances with entities under common control

Outstanding balances with entities under common control are as follows:

 
                                                              30 June                31 December 
                                                                 2014                       2013 
                                                          (unaudited) 
  (in thousands of USD) 
  Prepayment for investment property                                -                      7,267 
  Short-term loans receivable                                  40,477                     40,496 
  Trade receivables                                             7,276                     10,761 
  Other receivables                                             9,188                      9,654 
  Provision for impairment of trade and 
   other receivables from related parties                    (14,249)                   (17,282) 
 
                                                               42,692                     50,896 
 
  Other long-term liabilities                                       -                     10,000 
  Short-term loans and borrowings                              29,331                     30,309 
  Trade and other payables                                        338                        294 
  Payables for construction works                              18,526                     10,545 
  Advances received                                                59                         86 
  Other liabilities                                            20,147                     10,151 
 
                                                               68,401                     61,385

None of the balances are secured. The term and conditions of significant transactions and balances with entities under common control are described in notes 7, 9, 12 and 14.

Expenses incurred and income earned from transactions with entities under common control for the six months ended 30 June are as follows:

 
                                      2014           2013 
                               (unaudited)    (unaudited) 
  (in thousands of USD) 
 
  Interest expense                 (2,443)              - 
  Interest income                      581          2,396 
  Other operating expenses           (516)              -

During the six months ended 30 June 2014, construction works performed by entities under common control amounted to USD 12,940 thousand (unaudited) (six months ended 30 June 2013: nil).

Prices for related party transactions are determined on an ongoing basis. The terms of related party transactions may differ from market terms.

   (d)     Guarantees issued

The Group's related parties issued guarantees securing loans payable by Ukrainian subsidiaries of Arricano Real Estate PLC to the EBRD (loans payable by Grandinvest PrJSC, UkrPanGroup PrJSC), OJSC "Bank "St.Petersburg" (loans payable by LivoberezhzhiainvestPrJSC) and Oshchadbank (loan payable by Comfort Market Luks LLC). The guarantees cover the total amount of outstanding liabilities in relation to EBRD loans as at 30 June 2014 of USD 18,874 thousand (unaudited) (31 December 2013: USD 23,441 thousand), in relationship to OJSC "Bank "St.Petersburg" as at 30 June 2014 of USD 23,939 thousand (unaudited) (31 December 2013: USD 24,849 thousand) and in relation to Oshchadbank as at 30 June 2014 of USD 10,061 thousand (unaudited) (31 December 2013: USD 10,091 thousand).