Engro Fertilizers Limited Accounts 2011

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ENGRO FERTILIZERS LIMITED

FINANCIAL STATEMENTS

FOR'THE YEAR ENDED DECEMBER 31, 2010

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A.F. FERGUSON & CO.

A member firm of

A.F.Fergu50n & Co

Chartered Accountants

State Life Building No. 1·C 1.I.Chundrigar Road, P.O. Box 4716 Karachi-74000, Pakistan

Telephone: (021) 32426682-6/32426711-5

Facsimile: (021) 32415007/32427938

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AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of Engro Fertilizers limited as at December 3", 2010 and the related profit and loss account, statement of comprehensive income, statement of changes in equity and statement of cash flows, together with the notes forming part thereof, for the year then ended and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit.

It is the responsibility of the Company's management to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility is to express an opinion on these statements based on our audit.

We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the above said statements are free of any material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the above said statements. An audit also includes assessing the accounting policies and Significant estimates made by management, as well as, evaluating the overall presentation of the above said statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that:

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(a)

as more fully explained in note 47 to the financial statements, due to a fire at the Holding Company's old premises on August 19, 2007 certain records, documents and books of account of the Holding Company relating to prior years were destroyed. These included records of the Fertilizer Undertaking, which on demerger is part of the Company (note 1.3 to the financial statements). Records in electronic form remained intact and certain hard copy records relating to financial years 2005 and 2006 have not been recreated:

in our opinion, except for the matter referred to in paragraph (a), proper books of account have been kept by the Company as required by the Companies Ordinance, 1984

(c) in our opinion:

(b)

(i) tile balance sheet and the profit and loss account together with the notes thereon have been drawn up in conformity with the Companies Ordinance, 1984, and are in agreement with the books of account and are further in accordance with accounting policies consistently applied;

(ii) the expenditure incurred during tile year was for the purpose of the Company's business; and

(d)

(iii) the business conducted, investments made and the expenditure incurred during the year were in

accordance with the objects of the Company;

ill our opinion and to the best of our information and according to the explanations given to us, the balance sheet, profit and loss account, statement of comprehensive income, statement of changes in equity and statement of cash flows, together with the notes forming part thereof conform with the approved accountinq standards as applicable in Pakistan, and, give the information required by the Companies Ordinance, 1984, in the manner so required and respectively give a true and fair view of the state of the Company's affairs as at December 31, 2010 and of the profit, total comprehensive income, changes in equity and its cash flows for the year then ended; and

in our opinion, no zakat was deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980).

(e)

Karachi

Date: February 9, 2011

Engagement Partner: Imtiaz A.H, Laliwala

I Stores, spares and loose tools Stock-in-trade

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2009 (note 1.2)

.---------------- ----- R u p e es-------------------

ENGRO FERTILIZERS LIMITED BALANCE SHEET

AS AT DECEMBER 31,2010

(Amounts in tho us arid]

Note

2010

ASSETS

Non-Current Assets

Property, plant and equipment

4

84,370,221

Intangible assets

5

149,238

Long term loans and advances

6

111,515

84,630,974

Current Assets

Trade debts

7 3,392,080
8 895,457
9 352,944
10 3,702
20 2,638
11 2,609,327
12 .107,647
1,770,476
13 2,452,285
14 1,835,951
13,422,507
98,053,481
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II Deferred employee compensation expense

Derivative financial instruments

Loans, advances, deposits and prepayments

Other' receivables

Taxes recover-able

Sliort term investments

Cash and bank balances

TOT ALASSETS

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(Amounts in thousand)

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Note

2009 (note 1.2)

-- ---------------- -- -R u pees --- ---- -------------

16 11,144 [J]
10 58,673
17 (887,277)
3,729,052
2,911,592 (544)
13,639,592 (544) 2010

EQUITY & LIABILITIES

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Equity Share capital

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10,728,000

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Share premium

Employee share option compensation reserve Hedging reserve

Unappropriated profit / (Accumulated loss)

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Total Equity

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Liabilities

Non-Current Liabilities

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Borrowings

Subordinated loan from Holding Company Derivative financial instruments

Deferred liabilities

Employee housing subsidy

Retirement and other service benefits obligations

18 62,660,140
19 1,500,000
20 1,061,732
21 2,580,644
22 347,886
23 54,823
68,205,225 I

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Current Liabilities

Trade and other pay abies Accrued interest / mark-up Current portion of:

- borrowings

- other service benefits obligations

Short term borrowings Derivative financial instruments

24 3,911,349
25 1,981,620
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8,651,51;6
23 20,6~'~ !
26 970,1,~L! I
20 673,387 I
16,208,664
84,413,889
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98,053,481 I

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Total Liabilities

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Contingencies and Commitments

TOTAL EQUITY & LIABILITIES

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The annexed notes from 1 to 49 form an integral part of these financial statements.

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Khalid S. Subhani Chief Executive

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Director

544

544

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ENGRO FERTILIZERS LIMITED PROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED DECEMBER 31, 2010

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(Amounts in thousand except for earnings per share)

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Net sales

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Cost of sales

Gross profit

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Selling and distribution expenses

Administrative expenses

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Other operating income

Other operating expenses Finance costs

Profit before taxation

Taxation

Profit for the year

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Earnings per share - basic and diluted

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The annexed notes from 1 to 49 form an integral part of these financial statements.

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Khalid S. Subhani

Chief Executive

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Note

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29

30

31

32

33 34

35

36

2010 Rupees

19,017,508

(10,107,820)

8,909,688

(1,727,476)

(564,030)

6,618,182

455,041

(575,071) (1,292,161 ) (1,867,232)

5,205,991

(1,476,395)

3}29,596

3.48

Director

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STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2010

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Profit for the year

Other comprehensive income

Hedging reserve - cash flow hedges

Losses arising during the year

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Less: Adjustment for amounts transferred to initial carrying amount of hedged items (Capital work in progress)

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Income tax (Oeffered) relating to hedging reserve

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Other comprehensive income for the year, net of tax

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Total comprehensive income for the year

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The annexed notes from 1 to 49 form an integral pan of these financial statements.

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Khalid S, Subhani

Chief Executive

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2010 Rupees

3,729,596

1.251,390

(1,678.402)

(427,012)

149,454

(277,558)

3,452,038

Director

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ENGRO FERTILIZERS LIMITED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED DECEMI3ER 31, 2010

(Amounts in thous an,,)

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Movement during the period June 29, 2009,

the date of incorporation, to December 31,2009

Transactions with owners

7 shares of RS.10 each issued to nominated Directors of Engro Corporation Limited (formerly Engro Chemical Pakistan Limited), the Holding Company

Total comprehensive loss for the period ended December 31, 2009

Balance as at December 31,2009

Transactions with owners

Transfer of Fertilizer Undertaking (note 1.4)

9.999,993 shares of Rs 10 each Issued to the Holding Company

Transfer of hedging reserve from the Holding Company

Other transactions with owners

Issue of share options \0 employees, net of share options lapsed (note 10,2)

[Jonus shares issued during second quarter of the year In the ratio of 2,680 shares for every 100 shares held

Bonus shares issued during fourth quarter of the year in the ratio of 260 shares for every 100 shares held

Total cornprchensrvo income for tile year ended December 31,2010

Profit for the year

Other comprehensive income

- cash flcw hedges, net of tax

Balance as at December 31,2010

The annexed noles from 1 to 49 form an integral part of'

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Employees Unappropriated
Share Share share option Hedging profit I Total
capital premium compensation reserve (Accumulated
reserve loss)
-------------------------------------------------------------------------------Rupees-------------------------------------------------------------------
- - - -
- (544) (544)
- - (544) (544)
[3 0 DiD D 10,739,:-14
(609,719)
100,000 10,639,144 (609,719) 10,129,425
n - 58,673 :
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2,880,000 (2,880000) I . I'!
7,7 48,000 (7.748,000) 'LJ
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10,628,000 (10,628,000) , 58,673 I 58,673
10.72B,OOO 11,H4 58,673 (609,719) 10,188,098
CJ CJ c=J I (277 ,~58) I I 3,729,596 II 3,729,596
(277 ,558)
(277,558) 3,729,596 3,452,O~8
10,728,000 11,144 58,673 (887,277) ~,729,O52 13,639,592

these financial statements
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Khalid S, Subhani
Chief Executive Director I

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ENGRO FERTILIZERS LIMITED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2010

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Cash flows from operating activities

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Cash generated from operations Retirement and other service benefits paid Finance cost paid

Taxes paid'

Long term loans and advances to executives and other employees - net Net cash generated from operating activities

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Cash flows from investing activities

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Purchases of property, plant and equipment (PPC:) Proceeds from sale of PPE

Income on deposits I other financial assets

Net cash used in investing activities

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Cash flows from financing activities

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Proceeds from borrowinqs Repayments of borrowings

Net cash generated from financing activities Net increase in cash and cash equivalents

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Cash and cash equivalents at beginning of the year (after transfer of Fertilizer Undertaking)

Cash and cash equivalents at end of the year

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~nnexed notes from 1 to 49 form an integral part of these financial statements.

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Khal;~~----

Chief Executive

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Note

2010 Rupees

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6,143,994 (159,058) (636,861 ) (964,013)

(24,514)

4,359,548

(15,156,877) 371,902 130,897

(14,654,078)

13,713,510 (810,100)

12,903,410

2.608,880

40 40

709,230

3,318,110

Director

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NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2010


1. LEGAL STATUS AND OPERATIONS

1.'1

Engro Fertilizers Limited ('the Company') is a public unlisted company incorporated on June 29, 2009 in Pakistan under the Companies Ordinance, 1984 as a wholly owned subsidiary of Engro Corporation Limited (the Holding Company, torrnerly Engro Chemical Pakistan Limited) for the-purpose explained in note 1.3. The Company's registered office is situated at 7th & 8th floors, The Harbour Front Building, Plot Number HC-3, Block 4, Scheme Number 5, Clifton, Karachi. The Company has issued Term Finance Certificates which are listed at tile Karachi Stock Exchange.

'1.2

The Company's previous audited financial statements pertains to the period June 29, 2009, the date of incorporation, to December 31, 2009. There were no significant transactions, pending transfer of Fertilizer Undertaking as of January 1, 2010 as stated in note 1.3 and 14,' and the accumulated loss of Rs. 544 reflected in the balance sheet and statement of changes in equity as comparatives, represents pre-operating expenses. Accordingly, no comparatives have been presented in the profit and loss account, statement of comprehensive income and statement of cash flows. In addition balances as at January 1, 2010 upon transfer of Fertilizer Undertaking (note 1.3) have been summarised below in note 1.4 and also disclosed in each respective explanatory note, where deemed appropriate.

1,3

The Holding Company through a Scheme of Arrangement (the Scheme), under Section 284 to 288 of the Companies Ordinance, 1984, separated its fertilizer undertaking for continuation thereof by tile newly incorporated subsidiary company (the Company), from the rest of the undertaking which has been retained in the Holding Company. Under the Scheme, effective January 1, 2010:

a) tile Fertilizer Undertaldng has been transferred and vested in the Company against the issuance of ordinary shares of the Company; and

b) the retention of the Retained Undertaking in the Holding Company and the change of the name of the Holding Company from Engro Chemical Pakistan Limited to Engro Corporation Limited. Consequently, Engro Corporation Limited will now function as a Holding Company overseeing the business of the new fertilizer subsidiary as well as the business of its other existing SUbsidiaries/associates.

As per the Scheme, the fertilizer business (manufacturing, purchasing and marketing of fertilizers) including all assets, liabilities, agreements, arrangernents and other matters were transferred to the Company against the issuance of 9,999,993, in addition to existing 7, fully paid ordinary shares of Rs. 10 each plus share premium. Such share premium has been based on the net assets so transferred over Rs. 100,000, being the paid LIP face value of the Company.

1.4

Transfer of Fertilizer Undertaking

In order to determine the net assets for the aforementioned transfer referred to in note 1.3, the assets and liabilities of the Holding Company as at January 1, 2010 were bifurcated, as per the Scheme, between the Fertilizer Undertaking and Retained Undertaking. Based on such bifurcated balance sheet duly audited by the external auditors, the assets and liabilities transferred to the Company have been summarized below including the issuance of shares and share premium resulted therefrom:

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I Assets

Note

Rupees

Property, plant and equipment Intangible assets

Stores, spares and loose tools Stock-in-trade

Trade debts

Loans, advances, deposit and prepayments - long term

- current

4 5 7 8 9

69,462,873 122,704 961,117 422,607

2,514,425

6 1 '1

87,001 1,465,467

Other receivables

Taxes recoverable

Short term investments Cash and bank balances

1,552,468 141,611 536,167 450,857 454,126

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13 '(4

Liabilities

Borrowings including current portion

Derivative financial instruments (net) including current portion Deferred liabilities

Employee housing subsidy

Retirement and other service benefits obligations

including current portion Trade and other payables Accrued interest I mark-LIp Short term borrowinqs

. 76,618,955

18 20 2'1 22

59,375,454 1,276,676 987,270 211,785

23 24 25 26

67,245 3,009,325 1,366,022 195,753

66,489,530

Net assets transferred - Fertilizer Undertaking

Less: Ordinary shares issued to the Holding Company Share premium before adjustment of hedging reserve Add: Hedging reserve (negative) - refer note below Share premium after adjustment of hedging reserve

15.2

10,129,425 100,000

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10,029,425 609,719 10,639,144

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Hedging Reserve

As per the Scheme of Arrangement, tile Iledging reserve and revaluation surplus/reserves as at January 1, 2010 were to be transferred to the Company, whereas only revaluation surpluslreserves (hedging reserve omitted) was to be deducted by the Company from the net assets so transferred to determine the share premium amount over and above ttle Rs. 100,000 share capital. SUCll omission of hedging reserve created a difference of an equivalent amount in the balance sheet Therefore, this being an inadverterit omission in the Scheme of Arrangement, the management also included the hedging reserve. (negative) in the determination of share premium to eliminate the aforementioned difference. Further, in the opinion of the Company's management, supported by the legal advisor, the need for an amendment to the Scheme of Arrangement in respect of such inCluSjon of hedging reserve does' not arise as it does not in any way adversely affect the interests of the shareholders or creditors.

SUMMARY OF SIGNrr=ICANT ACCOUNTING POLICIES

The significant accounting policies applied in the preparation of these financial statements are set out below. These policies are same as those applied in the preparation of the audited financial statements of the Ho!ding Company for the year ended December 31, 2009, when Fertilizer Undertaking was part thereof

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2.1 Basis of preparation

2.1.1 These financial statements have been prepared under the historical cost convention, except for re-measurement of certain financial assets and liabilities at fair value through profit or loss and derivativs hedging instrument as fair value.

2.1.2 These financial statements have been prepared in accordance with the requirements of the Companies Ordinance, 1984 (the Ordinance), directives issued by the Securities and Exchange Commission ci Pakistan (SECP) and the approved financial repor-ting standards as applicable in Pakistan. Approved financial reporting standards comprise of such International Financial Reporting Standards (IFRSs) issued by the International Accounting Standar-ds Board as are notified under the provisions of the Or-dinance. Wherever, the requirements of the Ordinance or directives issued by the SECP differ with the requir~ments of these standards, the requirements of the Ordinance or the requirements of the said directives have been followed.

Ti,e preparation of financial statements in conformity with the above requirements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company's accounting policies. The areas involving a hiqher degr'ee of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 3.

Initial application .of standards, amendments or an interpretation to existing standards

a) Standards, amendments to published standards and interpretation that are effective ill 2010 and arc: relevant to the Company

- IFI~IC 9, 'Reassessment of embedded derivatives and lAS 39, Financial instruments Recognition and measurement' effective 1 July 2009. This amendment to IFRIC 9 requires an entity to assess whether an embedded derivative should be separated from a host contract when the entity reclassifies a hybrid financial asset out of the 'fair value through profit or loss' category. This assessment is to be made based on the circumstances that existed on the later of the date the entity first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. If the entity is unable to make this assessment, that hybrid instrument must remain classified as at fair value through profit or loss in its entirety. Reassessment, as required by Ii-RIC g, resulted in I no impact on Company's financial statements.

- lAS "17 (Amendment) 'Classification of leases of land and buildings' (effective from January 1, 2010).

The amendment deletes the specific guidance regarding classification of leases of land, so as to eliminate inconsistency with the general guidance on lease classification. As a result, leases of land should be classified as either finance or operating, using the general principles of I/\S 17. Tile Company's current accounting policy is in line with the requirements of lAS 17 and the Ordinance, and therefore, there is no effect of this amendment on the Company's financial statements.

- lAS 39 (amendment); 'Cash flow hedge accounting'. This amendment provides clarrfication when to recognize gains or losses on hedging instruments as a reclassification adjustments in d cash flow hedge of a forecast transaction that results subsequently in the recognition of a financial instrument. The amendment clarifies that gains or losses should be reclassified from equity to profit or loss in the period in which the hedged forecast cash flow affects profit or loss The Company's current accounting policy is in compliance with this amendment and therefore there is no effect on the Company's financial statements.

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b) Standards, amendments to published standards and interpretations effective in 2010 but not relevant

The other new standards, amendments and interpretations that are mandatory for accounting period: beginning on or after January 1, 20'10, are considered not to be relevant or to have any significant effec on the Company's financial reporting and operations.

c) Standards, amendments to published standards and interpretations that are not yet effective and have not been early adopted by the Company

- IFRS 9 'Financial instruments' (effective for periods beginning on or after January 1, 2013). This standard is the first step in the process to replace lAS 39, 'Financial instruments recognition aile measurement'. IFRS 9 Introduces new requirements for classifying and measuring financial assets and is likely to affect the Company's accounting for its financial assets. The Company is yet to assess , the full impact of IFRS 9, however, initial indications are that it may. not affect the Company's financia: assets significantly, as currently the Company does not have any assets classified as 'available for sale'.

IFRIC 14 (Amendment) 'Prepayments of a minimum funding requirement' (effective for periods beginning on or after January 1, 2011). The amendments correct an unintended consequence ot [FRIC '14, 'lAS 1 9 - Tile limit on a defined benefit asset, minimum funding requirements and their interaction'. Without the amendments, entities are not permitted to recognize as an asset some voluntary prepayments for minimum funding contributions. This was not intended when [FRIC 14 was issued, and tile amendment corrects this. The Company's retirement benefit funds are 110t subject to any minimum funding requirement, hence, these amendments will have no impact on the Company's financial statements.

- IFRIC 19 'Extinguishing financial liabnitie s with equity instruments' (effective for periods beginning on or after January 1, 2011) The interpretation clarifies the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability (debt for equity swap). It requires a gain or loss to be recognized in profit or loss, which is measured as the difference between the carrying amount of the financial liability and the fair value of the equity instruments issued. If the fair 'value of tile equity instruments issued cannot be reliably measured, the equity instruments should be measured to reflect the fair value of the financial liability extinguished. The Company has not renegotiated the terms of a financial liability and offered any of its shares to its creditors, therefore, this interpretation is not expected to have any material impact on the Company's financial statements.

- Amendments to following standards as a result of improvements to International Financial Reporting Standards 201 O,issued by IASB in May 2010:

IFRS 7 (Amendment), 'Financial instruments: Disclosures' (effective for periods beginning on or after January 1, 2011). The amendment emphasizes the interaction between quantitative and qualitative disclosures about the nature and extent of risks associated with financial instrument. The amendment will only affect the disclosures in the Company's financial statements .

• lAS 1 (Amendment) 'Presentation of financial statements' (effective for periods beginning on or after January 1, 2011). The amendment clarifies that an entity wi[lpresent an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes to the financial statements. The amendment will only affect the disclosures in the Company's financial statements.

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,I lAS 34 (Amendment) 'Interim financial reporting' (effective for periods beginning on or after January 1, 2011). This amendment provides guidance to illustrate hoy'.' to apply disclosure principles in L'\S 34 and add disclosure requirements around the circumstances likely to affect fair vatueso] financial instruments and their classification, transfers of financial instruments between different levels of the fair value hierarchy, changes in classification of financial assets, changes in contingent liabilities and assets.

There are a number of. other minor amendments arid interpretations to other published standards that are not yet effective, and are also not relevant to Hie Company and therefore have not been presented here.


Owned assets

These are stated at historical cost less accumulated depreciation and impairment losses, if any, except freehold land and capital work in progress which are stated at cost. Historical cost includes expenditure that is directly attributable to the acquisition of the items including borrowing costs (note 2.23). The cost of self constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the

. items and restoring the site on which they ale located. Purchased software that is integral to the functionality of tile related equipment is capitalised as part of that equipment.

Where major components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

Subsequent costs al'e included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the profit and loss account during the financial period in which they are incurred

Disposal of asset is recognised when significant risk and rewards incidental to ownership have been transferred to buyers. Gains and losses on disposals are detennined by comparing the proceeds with the carrying amount and are recognised within 'Other operating expenses / income' ill the profit and loss account

Depreciation is charged to the profit and loss account using the straight line method whereby the cost of an operating asset less its estimated residual value is written off over its estimated useful life, Depreciation On addition is charged from the month following the month in which the asset is available 'for use and on disposals up to the preceding month of disposal.

Depreciation method, useful lives and residual values are reviewed annually.

Leased assets

Leases in terms of which the Company assumes substantially all tile risks and rewards of ownership, are classified as. finance lease. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and present value of minimum lease payments: Subsequent to initial recognition, the asset is accounted for in accordance 'Nith the accounting policy applicable to that asset. Outstandinq obligations under the lease less finance cost allocated to future periods are shown as a liability.

Finance cost under lease agreements are allocated to the periods during the lease term so as to produce a constant periodic rate of finance cost on the remaining balance of principal liability for each period.

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Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term.


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,I Intangible assets

a) Computer Software and Licenses

Costs associated with maintaining computer software programmes are recognised as an expense when incurred. However, costs that are directly attributable to identifiable software and have probable economic benefits exceeding the cost beyond one year, are recognised as an intangible asset. Direct costs include the purchase cost of software (license fee) and related overhead cost.

Expenditure which enhances or extends the performance of computer software beyond its original specification and useful life is recognised as a capital improvement and added to the original cost of the software.

Computer software and license cost treated as intangible assets are amortised from the date the software is put to use ona straight-line basis over a period of 3to 5 years.

b) Rights for future gas utilization

Rights for future gas utilization represents premium paid to the Government of Pakistan for allocation of 100 MMCFD natural gas for a period of 20 years from Qadirpur gas field at a predetermined price for a period of ten years commencing from the date of commercial production. The rights will be amortised from the date of commercial production on a straight-line basis over the rerTlaining allocation period.

Impairment of non-financial assets

Assets that are subject to depreciation / amortisation are reviewed at each balance sheet date to identify Circumstances indicating occurrence of impairment loss or reversal of previous impairment losses. An impairment loss is recognised for the amount by which the asset's carryinq amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less cost to sale and value in use. Reversal of impairment loss is restricted to the original cost of the asset.

Non current assets (or disposal groups) held-far-sale

Non-current assets (or disposal groups) are classified as assets held for sale when their carrying amount is to be recovered principaljy throuqh a sale transaction and a sale is considered highly probable They are stated at the lower of carrying amount and fair value less costs to sell if their' carrying amount is to be recovered principally through a sale transaction rather than through continuing use. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognised in the profit and loss account.

Financial assets

Classification

The Company classifies its financial assets in the following categories: at fair value through profit or loss, held to maturity, loans and receivables, and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

a) Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held for trading, A financial asset is classified in this category if acquired principally for thepLJrpose of selling in the short-term. Derivatives are also categorised as held for trading unless tiley are designated as hedges. Assets in this category

~I classified as current assets.

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I b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets.

c) Held to maturity financial assets

Held to maturity financial assets are non derivative financial assets with fixed or determinable payments and fixed maturity with a positive intention and ability to hold to maturity. There were no held to maturity financial assets at the balance sheet date.

d) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures m management intends to dispose off it within 12 months of the end of the reporting date. There were no available for sale financial assets at the balance sheet date.

Recognition and measurement

Regular purchases and sales of financial assets are recognised on the trade date - the date on which the Company commits to purchase or sell the asset. Investments are initlally recognised at fair value plus transaction costs for all financial assets (lot carried at fair value throuqh profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the profit and loss account Financial assets are derecognised when the riqhts to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables am subsequently carried at amortised cost using the effective interest method.

Gains or losses arising from changes in the fair value of the 'financial assets at fair value through profit or loss' category are presented in the profit and loss account within 'other operating income / expenses' in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the profit and loss account as part of other income when the Company's right to receive payments is established.

Changes in fair value of monetary and non-monetary securities classified as available-for-sale are recognised in other comprehensive income. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in other comprehensive income are included in the profit and loss account as 'gains and losses from investment securities'.

Interest on available-for-sale securities calculated using the effective interest method is recognised in the profit and loss account as part of other income. Dividends on available for sale equity instruments are recognised in the profit and loss account as part of other income when the Company's right to receive payments is established.

The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss is removed from equity and recognised in the profit and loss account. Impairment losses recognised in the profit and loss account on equity instruments are not reversed through the profit and loss account. Impairment testing of trade debts and other receivables is described in note 2.11.

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2.7

2.8

2.9

2.10

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is c legally enforceable right to offset the recognised amounts and there is an intention to settle either on a ne basis, or realise the asset and settle the liability simultaneously"

Derivative financial instruments and hedging activities

Derivatives are recognised initially at fair value; attributable transaction cost are recognised in profit and loss account when incurred. Subsequent to initial recognition, derivatives are measured at fair values, ane changes therein are accounted for as described below:

a) Cash flow hedges

Changes in fair value of derivative hedging instrurnents designated as a cash flow hedge are recognised in statement of comprehensive income to the extent that the hedge is effective. To the extent the hedge is ineffective, changes in fair value are reccqnisenin profit and loss account.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, the hedge accounting is discontinued prospectively. The cumulative gaill or loss previously deferred in equity remains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount previously deferred in equity is transferred to carrying amount of the asset when it is recognised. In other cases the amount deferred in equity is transferred to profit and loss account in the same period that the hedge item affects profit and loss account.

b) Other non-trading derivatives

When a derivative financial instrument is not held for trading, and is not designated in a qualifying hedge relationship, all changes in its fair value are recognised immediately in profit and loss account.

The Company holds derivative financial instruments to hedge its foreign currency and interest rate risk exposure. Further, the Company also has issued a conversion option with the IFC loan on the shares of the Holding Company. The fair values of various derivative instruments used for hedging and the conversion option are disclosed in note 20.

Stores, spares and loose tools

These are valued at weighted average cost except for items in transit which are stated at invoice value plus other charges paid thereon till the. balance sheet date. For items which are slow moving and ( or identified as surplus to the Company's requirements, adequate provision is made for any excess book value over estimated realizable value. The Company reviews the carrying amount of stores and spares on a regular basis ano. provision is made for obsolescence.

Stock-i n-trado

These are valued at the lower of cost and net realizable value. Cost is determined using weighted average method except for raw material in transit which are stated at cost (invoice value) plus other charges incurred thereon till the balance sheet date. Cost in relation to finished goods includes applicable purchase cost and manufacturing expenses. The cost of work in process includes material and proportionate conversion costs.

Net realisable value signifies the estimated selling price in the ordinary course of business less all estimated costs of completion and costs necessarily to be incurred in order to make the sales.

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2.11

Trade debts and other receivables

. These are recognised initially at fair value plus directly attributable transaction costs, if any and subsequently measured at amortised cost using effective interest rate method less provision for impairment, if any. A provision for impairment is established if there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables. The amount of provision is charged to profit and loss account. Trade debts and other receivables considered irrecoverable are writtenoff.

Cast1 and cash equivalents

Cash and cash equivalents in the staternont of cash flows includes cash in hand, balance with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts / short term borrowings Bank overdrafts are shown within short term borrowings in current liabilities on the balance sheet.

Share capital

Ordinary shares .are classified as equity and recogriised at their face value. Incremental costs clrectty attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Employees' share option scheme

The grant date fair value of equity settled share based payments to employees is initially recognised in tl10 balance sheet as deferred employee compensation expense with a consequent credit to equity as employee share option compensation reserve.

The fair value determined at the grant date of the equity settled share based payments is recogniseci as an employee compensation expense on a straight line basis over the vesting period.

When an unvested option lapses by virtue of an employee not conforming to the vesting conditions after recognition of an employee compensation expense in profit or loss, employee compensation expense in profit or loss will be reversed equal to the amortised portion with a corresponding effect to employee share option compensation reserve in the balance sheet.

When a vested option lapses on expiry of the exercise period, employee compensation expense already recognised in the profit or loss is reversed with a corresponding reduction to employee share option compensation reserve in the balance sheet.

When the options are exercised, employee share option compensation reserve relating to these options is transferred to share capital and share premium account. An amount equivalent to the face value of related shares is transferred to share capital. Any amount over and above the share capital is transferred to share premiumaccount.

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference betvveen the proceeds (net of transaction costs) and tile redemption value is recognised in the profit and loss account over the period of the borrowings using the effective interest method.

Borrowinqs are classified as current liabilities .unless Hie Company has an unconditional right to cefu settlement of the liability for at least 12 months after the balance sheet date.

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2.16

2.'17

2.1 S

2.19

2.19.1

Trade and other payables

Trade and other payables are recognised initially at fair value and subsequently measured at amortised cos

using the effective interest method. .

These are classified as current liabilities if payment is due within one year or less (or in the normal operatin. cycle of the business if longer). If not, they are presented as non-current liabilities.

Current and deferred income tax

The tax expense for the period comprises current and deferred tax. Tax is recognised in the profit and loss account, except to the extent that it relates to items recognised in the statement of comprehensive income or directly in equity. I n this case the tax is also recognised in the statement of comprehensive income or

directly in equity, respectively. .

Current

The current income tax charge is based on the taxable income for the year calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred

Deferred tax is recoqnised using the balance sheet method, providing for all temporary differences between the carrying amounts of assets and liabilities fOI' financial reporting purposes and the amounts usee fOI" taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacteci or substantively enacted by the reporting date.

A deferred tax asset is recognised to the extent that is probable that future taxable profits will be available against which temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit wrll be realisecl.

Employees' housinq subsidy scheme

Employee compensation expense under Housing Subsidy Scheme is recognised as an expense on 3 straight line basis over the vesting period with a corresponding credit to employee housing subsidy shown as long term liability in the balance sheet.

On expiry of the vesting period, amounts disbursed under the scheme will be set-off against the employee housing SUbsidy.

Employee benefits

Defined contribution plans

A defined contribution plan is a post-employment benefit plan under wntch an entity pays fixed contribution into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised as an employee benefit expense in profit or loss when they are due. Prepaid contributions are recognised as an asset to the extent thata cash refund or a reduction in futurepayments is available.

The Company contributes to:

- defined contribution provident fund for its permanent employees. Monthly contributions are made both by the Company and employees to the fund at the rate of -i 0% of basic salary.

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I 2.19.2 Defined benefit plans

A defined benefit plan is a post-employment benefit plan other than the defined contribution plan. The Company's net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in return for tlleir service in current arid prior periods; that benefit is discounted to determine its present value. The calculation is performed annually by a qualified actuary using the projected unit credit method, related details of which are given in note 38 to the financial statements. Actuarial gains/losses in excess of corridor limit (10% of the higher of fair value of assets and present value of obligation) are recognised over the average remaining service life of the employees.

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- defined contribution pension fund for the b·?r,dit of management employees. Monthly contributions are made by the Company to the fund at rates ranging from 12.5% to 1375% of basic salary.

Contributions require assumptions to be made of future outcomes which mainly includes increase in remuneration, expected long-term return on plan assets and the discount rate used to convert future cash flows to current values. Calculations aresensitive to changes in the under'lying assumptions.

The Company also contributes to:

- defined benefit funded pension scheme for its management employees

- defined benefit funded gratuity schemes for its management and non-management employees.

The pension scheme provides life time pension to retired employees or to their spouses Contributions are made annually to these funds on tile basis of actuarial recommendations. The pension scheme has been curtailed and effective from July 1, 2005, no new members are inducted in this scheme.

Actuarlai gains on curtailment of defined benefit pension scheme (curtailed) is recognised immediately once the certainty of recovery is established.

2.19.3 Service Incentive Pia n

Company recognises provision and an expense under a service incentive plan for certain cateqory of experienced employees to continue in the Company's employment.

2.19.4 Employees' compensated absences

The Company accounts for compensated absences on the basis of unavailed leave balance of each employee at the end of the year.

2.20 Provisions

Provisions are recognised when the Company has a legal or constructive obligation as a result of past events and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect current best estimate.

2.21 Foreiqn currency transactions and translation

These financial statements are presented in Pakistan Rupees, which is the Company's functional and presentation currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains anc losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account.

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Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably. Revenue is measured at the fair value of the consideration received or receivable and is reduced for marketing allowances. Revenue is recognised on the followinq basis:

- Sales revenue is recognised when product is dispatched to customers.

- Income on deposits and other financial assets is recognised on accrual basis .

. - Commission income is recognised 011 an accrual basis in accordance with the substance of tile relevant agreement.

Borrowing costs

Borrowing costs are recognised as an expense in the period in which they are incurred except where such costs are directly attributable to the acquisition, construction or production of a qualifying asset in which case such costs are capitalised as part of the cost of that asset. Borrowing costs includes exchange differences arising on foreign currency borrowings to the extent these are regarded as an adjustment to borrowing costs.

Research and development costs

Research and development costs are Charged to profit and loss account as and when inCLIITed.

Government grant

Government grant that compensates the Company for expenses incurred is recognised in the profit and loss account on a systematic basis in the same period in which the expenses are recogniseci. Government grants are deducted from related expense.

Earnings per share

Tile company presents basic and diluted earnings per share (EF'S) (lata for its ordinary shares. Basic !::PS is calculated by dividing the profit or loss attributable to ordinary sharehotders of the Company by the weighted average number of ordinary shares outstanding during the period Diluted EPS is determined by adjusting the profit or loss attributable to ordinary share holders and the weighted averaqe number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.

Transactions with related parties

Sales, purchases and oilier transactions with related parties are carried out on commercial terms and conditions.

Dividend and appropriation to reserves

Dividend and appropriation to reserves are recognised in the financial statements in the period in which these are approved.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under thecircurnstance s.

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3.5

3,6

3.7

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3.1


2010

The Company reviews appropriateness of the rate of depreciation, useful life, residual value used in the calculation of depreciation. Further where applicable, an estimate of recoverable amount of assets is made for possible impairment On an annual basis,

3,2

Investments stated at fair value through profit and loss

Management has determined fair value of certain investments by using quotations from active market a'r,j conditions and information about the financial instruments, These estimates are subjective in nature and involve some uncertainties and matters of judgment.

3.3

Derivatives,

The Company reviews changes in fair values of the derivative hedging financial instruments at each reporting date based on the valuations received from the contracting banks, These valuations represent estimated fluctuations .n the relevant c rrencies/interest rates over the reporting period and other relevant variables signifying currency and interest rate risks. The Company has calculated the fair value of conversion option on IFe loan using the option pr!cing model.

Stock-in-trade and stores & spares

The Company reviews the net reatizabts value of stock-in-trade and stores & spares to aSSeSs any diminution in the respective carrying values, Net realizable vaiue is determined with reference to estimated selling price less estimated expenditures to make the sales.

!ncome taxes

In making the estimates for income taxes payable by the Company, the management looks at the applicable law and the decisions of appellate authorities on certain issues ln the past

Fair value of employee share option

The manZlgement has determined the valLie of options issued under the Employee Share Option Scheme at the grant date using the Black Scholes pricing model. The fair value of these options and the underiying assumptions are disclosed in note 10,

Provision for retirement and other service benefits oblig2~ions

The present value of these obligations depend on a number of factors that are ceterminedon actuarial basis using a number of assumptions. Any changes in these assumptions will impact the carrying amount of these obligations The present value of these obligations and the unde:lying assumptions are disclosed in note 38.1.3 and 381.6 respectively,

PROPERTY, PLANT AND EQUIPMENT

Transfer of Fertilizer Undertaking j n ote 1-4) Rupees

Operating assets at net book value (note 4.1) Capital work in progress

- Expansion and other projects (note 4.4)

- Capital spares, including, related to

Enven Plant (note 7,1)

6, 1 09,?~~L',

63,226,323

127,326

63,353,649

69,462873

2009 (note 1.2)

------------------R up ees -----------------

16,340,534

L.. __ 6_7_' 7_1_1_'5_7_7-, I-~ 318,1'10 ~

68,029,687

84,3/0,22'1

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4.1

Operating assets,

As at January 1. 2010, alter transfer of Fertilizer Undertakillfj (note 4)

Cost

Accumulated deprectauco

Nal book valve

Yoar e noed Dc cernbor 31,2010

Net bOOK valve - January 1, 2010

Additions including transfers (note 4.4)

Disposals (trans(ers (note 4.3)

Cost

Accumulated depreceuon

Depreciation chmge (oote 4.2)

Net book varve

As OIt Decembo r 31, 2010

Cost

Accumolated oonro couon

Nut book value

!\noUiI: rare of depreciation ("to)

14

Land

Huitdin

Pl3.fll,lnd G3S

machinery Pipeline

Catalyst

Furniture, fixture and e quipme nt s

fr<!eilOld Leas c bctc

Fueholtl Leasehold

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130,668

152.280

476,873

1,041.929

339,4.47

10,:r77.213

429,715

(4S,483)

(325,128)

(65.996)

(6,013,223)

(300.4'2)

Vehlcle s

TO(31

3(l0,951

13,329,076

(167,519)

(7.219,052)

130,668

17G.431

G.l09,224

106.797

716.801

273.<51

4.363.990

127.554

130.666 106.797
13,456 84.600
(49.560)
9.994
('39,566)
(3,683)
144,124 He,H8 716,80'

4,353,£.,0

127.&54

176,01

186,215

1;240

1,261,654

56,123

40,932

(2,751) (79) 2,751 52

(62.0'9)

(8,507)

(530.980)

(28.818)

(31.7'0)

(&0.521)

16,:HO,5J~

841,027

206,184

152,0'37

1%,815

13,160,786

213,432

6,109,22ol

102,132

11.080)08

(27)

(20.037)

(59,630)

(63,150)

(HHI.4/je)

14/.,1201 187,320 1,226.204 J-!O,687 llJ,70",!lt59 i.267,B504 4B5,838 514,975 426,7G4 ~4,JO{;,YG5
(39,172) (387.177) (74.503) (6,S44.203) (26.818) (3JJ,aOl) (JS(),lGO) (194,367) (7,960,221)
~ 41\,124 146,,/j8 e41,02:7 266,184 13.160,706 1,239,0;6 152.0)7 i~G,B\5 ~32)77 1G,:HD,S3';
'2 \0 5 2,510'0 2,5 51010 5.0 201033,33 ,0 (0 '25 12 to 2S Depreciation charge for the year has been allocated as follows:

Cost of sales (note 29)

Selling and distribution expenses (note 30) Administrative expenses (note 31)

Capital work in progress (note 4.4.2)

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2010 Rupees

612,576 19,879 31,037 125,956

789,448

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4.3

The details of operating assets disposed/written off ('uring th

Description and method of disposal

Leasehold land Land at Port Qasim

Sold to

Coca-Cola Beverages Company Limited

Furniture, fixtures & equipment

Items having net book value upto Rs. 50 each Vehicles

Insurance claims

By Company policy

to existing/separating executives

Sale through bid

Adil Aziz Khan Ahmad Muneeb Ahsan Afzaal Ahmad Amir Mahmud

Arif Jalil

Muhammad Asad Waheed Asghar Naveed

Awais Mushtaq Piracha 8akhtiar A. Uqaili

Dr. Muzaffar A. Khan Dr.Shahid Rashid Eqan Ali Khan

Faisal Iftikhar

Farooq A. Qazi Favad Soomro Haider Ali Isani Hammad Masood Khalid Mehmood Khusrau Nadir Gilani M.Ali

M. Khurram Farooq Mohammad Arshad

Muddassir Shafique Chaudhry Muhammad Siddique

Najam Saeed

Noordin Burero

Rehman Hanif

Syed Reza .Jawad

Syed Shahzad Nabi

Ummat Rasool

Vijay Kumar

Waqas Habib

Yousuf Mohiuddin

Zaid Bin Zeeshan

Zamir Hussain

Zeesllan Bukhari

Adnan Rafi AnisAhmed Khan Arsalan Nabi Siddiqui Farooq Raza Mohammad Qasim Mohsin Ahmed Khan Muhammad Ali Qureshi Muhammad Shahid

. Saeed Ahmed

Sultan Jan Nabi Syed Imran Aii Syed Riaz Ahmed

2010

e year are as follows:
Cost Accumulated Net book Sale
depreciation value, Proceeds
--------------------------- --- --- R u pee S ------------ -- --- -------------- _______
49,560 9,994 39,566 339,250
2,830 2,803 27 269
7,315 3,053 4,262 ·6,699
1,354 776 578 ·1,439
900 647 253 225
879 659 220 220
896 644 252 225
899 646 253 225
886 651 235 219
899 660 239 225
1,438 315 1,123 1,013
900 661 239 225
885 664 221 222
895 629 266 225
900 436 464 464
900 464 436 900
886 651 235 222
886 664 222 222
879 I 659 220 249
1,329 I 249 1,080 1,329
879 632 247 225
900 422 470 498
900 .-j08 'Fi2 486
900 675 225 225
896 658 238 225
900 380 520 495
879 659 220 220
886 651 235 222
879 632 247 220
896 630 266 225
1,359 42 1,317 1,359
886 623 263 231
1,809 141 1,668 1,584
1,060 315 745 728
896 672 224 225
900 . 406 494 54·1
900 675 225 225
900 GG1 239 225
900 '-i~j2 .1 408 900
--
35,135 19,849 15,287 16,908
6,600 6,600 - 2,450
555 500 55 380
849 764 85 780
599 599 - 571
1,052 946 106 528
555 500 55 418
705 695 10 623
555 555 - 397
433 433 - 599
643 643 - 1,029
436 436 163
886 7G9 177 838
13,868 13,380 488 8,776
108,709 49,079 59,630 371,902
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4.4

Capital work in progress - Expansion and Oth[~( Project

Plant and Machinery

Furniture, fixture and equipment

Other

Building & civil works

Advances to suppliers

ancillary

Total

costs

(note 4.4.2)

.- - --- - -- - -- -- -------------------~------------ R u pee s - ---. - - - - -- --- _ - -- . _

Balance as at January 1, 2010 after transfer of fertilize r undertaking (note 4)

Additions during the year

47,363,621 7,486,749

5,081,850 2,273,402

107,442 155,356

292,822 ~,975,689

30,028 7,916,472

63,226,323 15,457,108

Transferred to:

- operating assets (note 4.1)

- intangible assets (note 5)

Balance as at December 31, 2010

(7,925,505) (1,230,084)

(40,932) (45,645)

(102,132) (1,627,556)

(10,926,209) (45,645)

44,519,966 8,530,067

176,221

220,718 14,264,605

67,711,577

4.4,1 Capital work in progress includes Rs. 44,256,976 (January 1, 2010: Rs. 47,081,203) and Rs. 8,365,879 (January 1, 2010: Rs. 7,459,458) with respect to Urea expansion project (Enven Plant) adjacent to existing Daharki Plant for plant & machinery and building & civil works respectively. The capacity of the Enven Plant will be 1.3 million tons of Urea per annum and will cost approximately US$ 1.1 billion. The Company commenced trial production on December 29, 2010 but could not continue for a reasonable period, as required for cornrnlssioninq of commercial production, due to curtailment of gas by Sui Northern Gas Pipeline Limited (SNGPL) for forty five days from January 7, 2011. Tile Company, therefore, now expects to commence production by end of February 2011 and will declare commercial production once fully tested. However, certain components related to the Enven Plant, amounting to Rs. 10,599,'106 have been transferred to operating assets being complete in all respects for its intended use.

4.4,2 Other ancillary costs include borrowing costs capitalized amounting to Rs 1'1,318,874 (January 1, 2010:

Rs.5,580,976) at borrowing rates ranging from 11.52% to 1722% . It also includes depreciation and amortisation (note 4.2 & 5.1), salaries, wages & benefits, legal & professional charges, etc.

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5

INTANGIBLE ASSETS

As at January 1,2010, after transfer of fertilizer undertaking (note 1.4)

Cost

Accumu [a ted amortization Net book value

Year ended December 31,2010

Net book value-January 1, 2010

Transferred from capital work in progress (note 4.4) Amortization charge (note 5.1)

Closing net book value

As at December 31,2010

Cost

Accumulated amortization Net book value

218,885 (96,181)

Software and Rights for

licenses future gas Total utilisation

------------ - -- ----- -- ------ R u pee s -----------------------------

116,573 (96,181)

20,392

20,392 45,645 (19,111)

46,926

162,218 (115,292)

46,926

5.1

Amortization charge for the year [las been allocated as follows:

Cost of sales (note 29)

Selling and distribution expenses (note 30) Administrative expenses (note 31)

Capital work in progress (note 4.4.2)

5.2

The Company does not have any internally generated intangible assets.

6

LONG TERM LOANS AND ADVANCES - Considered good

Long term loans to:

Executives (notes 6.1 and 6.2) Other employees (note 6.3)

Less: Current portion shown under 'current assets (note 11)

Transfer of Fertilizer Undertaking (note 1.4) Rupees

280,408 218,439

498,847

4'11,846

87,001

102,312

102,312

102,312

102,312

102,312

102,312

122,704

122,704 45,645 (19,111)

149,238

264,530 ( 115,292)

"149,238

20'10 Rupees

3,695 48 13,278 2,090

19,111

2009 (note 1.2)

------------------ R up e es ----------------.

2010

289,81,1 235,570

525,384

4'13,869

111,515

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6.1

6.2

6.3

Reconciliation of the carrying amount of loans and advances to executives

Balance as at January 1, after

transfer of Fertilizer Undertaking (note 6) Disbu rsements

Repayments / amortisation

Balance as at December 31

2010 Rupees

280,408 63,475 (54,069)

289,814

Includes interest free services incentive loans to executives of Rs. 66,723 (January 1, 2010: Rs. 57,627) repayablein equal monthly instalments over a three years period or in one lump SL;m at the end of such period and disbursements to executives under housing subsidy scheme amounting to Rs.182,910 (January 1,2010: Rs. 183,920). It also includes advance of Rs. 34,112 (January 1, 20'10: Rs.33,717) and Rs. 6,069 (January 1, 2010: Rs. 5,144) to employees for car earn out assistance and house rent advance respectively.

Includes interest free loans given to workers of Rs.49,446 (January 1, 2010: Rs. 6,988) pursuant to Collective Labour Agreement and disbursement to workers under housing subsidy scheme amounting to Rs. 186,124 (January 1, 2010: Rs. 211,451).

The maximum amount outstanding at the end of any month from .the executives aggregated to Rs. 311,099.

-r STORES, SPARES M-JD LOOSE TOOLS


Consumable stores Spares (note 7.1) Loose tools

Less: Provision for surplus and slow moving items

133,728 867,660 3,247 43,518

961,11.7

2009 (note 1.2)

- -- -- .. -- -- -------- R up e es -----------------

2010

255,128 3,1 92,630 3,606 59,284

3,392,080

7.1

The Company has purchased stores and spares for its new Enven Plant aggregating Rs. 2,446,407, of which Rs. 148,712 (note 4) are of capital nature based on initial assessment.


8

'STOCK-IN-TRADE

Raw materials (note 8.1) Packing materials

290,848 19,259

Finished goods

310,107 112,500

422,607

8.1

Includes in-transit amounting to Rs. 219,726 (January 1,2010: Rs. 48,857)

oNe-

2009 (note 1.2) ----··-------------R up ees ----------------.

2010

576,641 46,438

623,079 272,378'

895,457

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9 TRADE DEBTS


Considered good

- Secured (note 9.1)

- Unsecured

2,508,564 5,861

2010

2009

2,514,425

Considered doubtful

8,873

(note 1.2)

-----------------_.R u pee s ----------------.

342,600 II
10,344
352,944
8,073
361,017
(8,073)
352,944 2,523,298

Provision for impairment (note 9.2 & 9.4)

'(8,873).

---~.~--'--

2,514,425

9.2

9.1 These debts are secured by way of bank guarantee and inland letter of credit.

9.3

The movement in provision during the year is as follows:

Balance as at January 1, after transfer of fertilizer undertaking (note 1.4) Pcovisions written back during the year


2010 Rupees

8,873

. __ ----, (800) 8,073

As at December 31, 2010 trade debts aggregating to f~s. 3'1,938 (January 1, 2010 Rs. 132,741) were past due but not impaired. These relate to various customers for which there is no recent history of default. The ageing analysis of these trade debts is as follows:


Upto 3 months 3 to 6 months

118,959 13,782

132,741

2010 2009

(note 1.L)

----- ---- ---7----- R LI pees ----------------.

31 ;938

31,938

As at December 31, 2010 trade debts aggregating to Rs. 8,073 (January 1, 2010: Rs. 8,873) were impaired and provided for, which .are past due for more than six months.

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10

'10,1

10.2

10.3

EMPLOYEE SHARE OPTION SCHErllE

Consequent to the demerger, as referred to in note 1.3, the employees transferred to the Company and holding share options of the Holding Company have been, on surrender thereof, granted share options under a new Employee Share Option Scheme (the Scheme) of the Company. Under the Scheme, employees have been granted options to purchase 4,937,100 ordinary shares of the Company at an exercise price of Rs. 98 per ordinary share. As per the Scheme, the entitlements and exercise price are subject to adjustments because of issue of right shares and bonus shares. The number of options granted to an employee are the same as the number of options of the Holding Company surrendered by them. No amounts are paid or payable by the recipient on receipt of the option. The options carry neither right to dividends nor voting rights. Vesting period for employees who were initially granted options on or before June 30, 2008 in the Holding Company, has started from .January 1, 2010 and has ended on December 31, 2010, whereafter these options can be exercised within a period of two year~ ending December 31, 2012.

For options which were initially granted by tile Holding Company after June 30, 2008, the vesting period will end such number of days after December 31, 2010 as is equal to the number of days between the date the initial option letters were issued and the date of grant of the later options by the Holding Company. However, the later options can also only be exercised upto December 31,2012.

The above Scheme was conceptually approved by the Securities and Exchange Commission of Pakistan (SECP) before ·the transfer of Fertilizer Undertaking to the Company, referred to in note 1.3, whereas the formal approval was granted subsequently on June 10, 2010. As the vesting period has started from January 1, 2010 and the Scheme being considered a continuation of the old Scheme announced by tile Holding Company, a charge based on fair value of share options i.e. Rs .. \ 1.94 per share, calculated as on January 1, 2010, has been recognised in these financial statements.

Deferred employee compensation expense

Options issued during the year

Options lapsed clue to employee resignation Amortisation for the year

Balance at end of the year

Current portion shown under current assets

Long term portion of deferred employee compensation expense

Employee share option compensation reserve

Options issued during the year

Option.s lapsed due to employee resignation Balance at end of the year

Movement in share options outstanding at end of the year is as follows:

Options issued during the year Options lapsed during the ye ar Balance at end of the year

1ft.

2010

2009 (note 1,2)

------------------R u pee s-----------------

58,949 (276) (54,971 )

3,702 (3,702)

58,949 (276)

58,673

---~------------- N U III b 3 rs-----------------

4,937,100 (23,100) 4,914,000

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'10.3.1 The above mentioned share options do not !ncl~Jde the effect of bonus shares, issued during fourth quarter of the year, which make the total number of share options outstanding at the end of the year 17,690,400.Further consequent to issue of bonus shares, the exercise price was also adjusted to Rs. 27.22 per share, however, such adjustment has no effect on the fair value of share options recognised in the financial statements, The approval from SEep in this regard has been requested vide letter dated December 29, 2010.

10.4 The Company used Black Scholes pricing model to calculate the fair value of share options at the grant date, The fair value of the share options as per the model and underlying assumptions are as follows:

Fair value of the share options at grant date Share price at grant date

EXercise price

Annual volatility

Risk free rate used

Dividend yield

10,5

Rs,11,94 Rs, 87.61 Rs.98.00

41,64% 12,21% 5.71%

Employee-wise detail of options granted to senior management personnel/other personnel upto or in excess of five percent of total options granted is as follows:

Name of employee

Khalid Siraj Subhani Asif Sultan Tajik Inamullah Naveed Khan Khalid Mir

Abdul Samad Khan

No. of share options

560,000 280,000 280,000 280,000 280,000

The above mentioned shares do not include the impact of bonus shares, issued during tile fourth quarter.

1 i

LOANS, ADVANCES, DEPOSITS AND.

PREPAYMENTS

Transfer of Fertilizer

Undertaking (note 1.4) Rupees

2009 (note 1.2)

-----~- ----------- R up ee s -----------------

2010

Current portion of long term loans and advances to executives and other employees - considered good (note 6)

Sub-ordinated loan to Engro Eximp (Private) Limited, an associated company (note 11.1)

Loan to Descon Engineering Limited,

considered good, unsecured (note 11,2)

Advance and deposits

Prepayments

- Gas charges (note 11.3)

- Insurance

- Others

411,846 413,869 -
770,000 770,000 -
-
- 650,000
80,594 95,832
95,843 573,843
85,823 70,887
27,177 36,408 - Provision for impairment (note 11.4)

1,471,283 (5,816)

1,465,467

2,610,839 (1,512)

2609,327

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11.'1

11.2

11.3

11.4

12

22

The loan carries mark-up at rates not b2ing :'~'\\'e( than the mark-up payable by the Company for ordinary commercial finance of like maturities, presently at '15% per annum (January 1, 2010: 15.13% per annum). The loan is subordinated to the facilities provided to Engro Eximp (Private) Limited (Eximp) by its banking creditors and is repayable on demand, taking into account the financing requirements of Eximp. Due to the nature of the transaction, the sale and repurchase of under-lying assets has not been recorded in financial

statements. "

Represents interest fr e loan to Descon Engineering Limited, a contractor to the Enven Plant. The loan. ~epayable on demand, is given against a Corporate Bond/Guarantee and Promisory Note.

Represents payments made to Sui Northern Gas Pipeline Limited under Take or Pay arrangement in respect of the Enven Plant as per the agreement. The Company is confident that such prepayment wiH be adjusted, prior to tile Expiry period against the expected gas consumption in the coming months upon commisioning of Enven Plant.

As at December 31, ')010, loans and advances aggregating to Rs. '1,512 (January 1, 2010: Rs, 5,816) were impaired and provided for, which are past due for more than six months. The movement III provision durii1g the year is as follows:

2010 Rupees

Balance as at January 1, after transfer of fertilizer undertaking (note 11) Add: Provision wriiten back during the year

Balance CiS at Deceniber 31

OTHER RECEIVABLES

Receivable from Government of Pakistan for: - sales tax (note 12.1)

- others

Accrued income on deposits linvestments Receivab'e from pension fund (note 381.1)

Due from associated companies: - Engro Foods Limited

- Engro Polymer & Chemicals Limited

- Engro Powergen Qadirpur Limited

(formerly Engro Energy Limited) - Avanceon Limited

- Engro PowerGen (Private) Limited

- Sindh Engro Coal Mining Company Limited

- Engro Foods Supply Chain (Private) Limited

Claims on foreign suppliers

Less: Provision for impairment (note 12A)

Others

Less: Provision for impairment (note 12.4)

5,.'3'16 ___ _:._(4_,_,30~

=-_1,~12


2009 (note 1.2)

--- ----- ---------- Ru pee s -- --------- ------

2010

57,135 19,277

57,135 193

57,328 17,173 4,073

76,412 5.300 31,887

1,912
3,324
780
2,573
6
6
2
II
[ 18'~~~1! 10,028
18.533 10,028
I 9'~!~11 10,442 II
9,479 10,442
141,611 107,647
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12:1

12.2

12.3

Other. receivables transferred from Fertilizer Undertaking include Rs. 57,135 in respect of sales tax receivable from the Government of Pakistan, levied in 2008 on certain imports of Mono Ammonium Phosphate (MAP) 1050:0 based on the actual import value rather than the deemed value as prescribed by SRO 609(1)/2004. The Holding Company had paid the demand made under protest and filed an appeal before the Collector, Saies Tax and Federal Excise. Further, the Ministry of Food, Agriculture. and Livestock had also recommended through its letter dated June 27, 2008 that tile said grade of MAP should be assessed at deemed value of import with retrospective effect. An appeal has been filed before the Collector, Sales Tax and Federal Excise and the rnariaqernent is confident that it will be decided in the Company's favour and the aforementioned amount paid Linde! protest would be fully recovered.

The maximum amount due from Holding Company / as sociated companies at the end of any month dming the year aggregated as follows:

Holding Company

- Engro Corporation Limited

Associated Companies

- Engro Eximp (Private) Limited

- Engro Foods Limited

.. Engro Polymer & Chemicals Limited

- Engro Powergen Qadil-pur Limited (formerly Engro Energy Limited)

- Avanceon Limited

- Engro PowerGen Limited

- Sindh Engro Coal Mining Company Limited

- Engro Foods Supply Chain (Private) Limited

- Engro Management Services Limited

- Pakistan Chemical and Energy Sector Skill Development Company

- Ellgro Vopak Terminal Limited

2010

2009 (note 1.2)

------------------R Ll P ee s-----------------

26,752

44,540

4,666

3,324

9,892

2,573

813

352

1,563

413

419

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As at December 31, 2010, receivables aggregating to Rs. 22,796 (January 1, 2010: Rs. 54,798) were past due but not impaired. The aging analysis of these receivables is as follows:


upto 3 months 3 to 6 months

More than 6 months

5,926

48,872

54,798

2009 (note 1.2)

------------------ R up e es---~--------,-----

2010

6,988 6,162 9,646

22,796

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14.2
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Balance as at January 1, after transfer of fertilizer undertaking (note 12)

Provision written back during the year .


SHORT 'TERM INVESTMENTS


Financial assets at fair value through profit or loss

Fixed income placements (note '13.1) Money market funds (note 13.2)

75,795 375,062

45CJ,857

2010 Rupees

439 (439_L

2010

2009

(note 1.2)

-- .... -------------- R up e es -----------------

61,303 2,390,982

2 ,-:_g,L85 _ =====

These represents foreign and local currency deposits with various banks, at interest rates upto '1.5% per

annum.

These represents investments in various money market funds which are valued at their' respective net asset values at balance sheet date.

449,~76 I 1 ':~;:~~~ r--- -. -----,

'----~ '------:---=-=-~ L__-_J

449,276 1,828,701

CASH AND BANf-<: BALANCES


Cash at banks on:

- deposit accounts (noto 14.1)

- current accounts (note 14.2)

Cash in hand

4,850

454,126

Deposit accounts carried return at rates ranging upto 1255% per annum.

2010

2009 (note 1.2)

------------------Ru pees -----------------

7,250

1,835,951

This include Rs. 10,602 (January 1, 2010: Rs. 10,662) heid in foreion currency banx accounts.

0'+11.>

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15

15.1

'15.2

SHARE CAPITAL

Authorised Capital

1,300,000,000 (December 31,2009: 10,000,0(0) Ordinary shares of Rs.'1 C each (riGtc ~ G_ I)

Issued, subscribed and paid-up capital

1,072,800,000 (December 31.2009: 7) Ordinary shares of Rs. 10 each. (note 152)

2010

2009

(note 1.2)

-------- -- --------R up C 8S -----------------

13,OUO,000

100,000

10,728,000

Movement in issued, subscribed and paid-up capital:

During the year, HIe authorizecJ capital was increased by 1 ,290,000.000 oro-nary shares of Rs.10 each.

2010

2009

2010

2009 (note 1.2) -----------------N u m bers-----------------

7

7 At beginning of the year

-------- .. --------- R 1I pees -- .. -- .. - .... -- .-.--.

'100,000

'10,628,000

9,999,993

Ordinary shares of Rs. '10 each iSSUGd as at January 1, 2010

on transfer of Fertilizer Undertaking (notes 1.3 and 1 A)

10,728,000

1,062,800,000

Ordinary shares of Rs. 10 each issued during the year

as fully paid bonus

shares (note 15.3)

'15.3 During the year, the Company issued bonus shares out of the share premium (i) in the ratio of 2,880 shares for every 100 shares held and (ii) in the ratio of 260 shares for every 100 shares held, in the second and fourth quarter respectively.

15.4

1,072,800,000

7

The Holding Company held 100% (2009: 100%) ordinary shares in the Company.

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Transfer of Fertilizer Undertaking (note 14) Utilized for issuance of bonus shares (note '15.3) Balance as at end of the year

HEDGING RESERVE

Fair values of:

- Foreign exchange forward contracts (note 20.1)

- Foreign exchange option contracts (note 20.2)

- Interest rate swaps (note 20.3)

Deferred tax

26


(134,692) 49,104 (852,441 )

(938,029)

328,310

(609,719)_

2010

2009

(note 1.2)

------------------R up e es -----------------

10,639,144 (10,628,000) 11,144

2010

2009 (note 1.2)

- .. ----------- .... ---R u pc 8S---- .. -- .. - ........ - ......

(231,417) (12,464)

(,1,121,158) (~.::;65,039)

4Tf,762

(88l,277) ..

Hedging reserve primarily represents the effective portion of changes in fair values of designated cash flow hedges.

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18

BORROWINGS

Secured (Non-participatory)

Transfer of

Note

Mark -up r a tc p.u.

Fertilizer Undertaking (nato 1.4) Rupees

2010

Instalments

Number

Co rnmcric i n q Iro m

··---------------------Rupocs------···--···-····-

Long term finance utilised
under mark-up
arrangements:
National Bank of Pakistan 3 months KISOR + 1.3% e quarterly October 31, 2009 I 525,000 225,000
MC B Bank limited 3 months KISOR + 1.3°/1) 8 quarterly March 11. 2010 ~OO,OOO 200,000
Habib Bank limited 6 months KISOR -t 1.1% 8 half yearly September 30,2010 1.000.000 925,ClOO
Allied Bank limited 6 months KISOR + 1.1 % 8 half yearly December 25, 2Cl0 2.000,000 1,G50,OOO
Askari Bank Limited 6 monlhs KIBOR + 1.1 % 8 hatf yearly December 29,2010 250,000 201,25D
Citibank NA 6 monu.s KISOR + 1.1% 8 half yearly. December 29, 2010 100,000 92,500
HSBC Middle Easl Limited 6 months KISOR T 1.1 % B half yearly December 29, 2010 250,000 231,250
Siandard Chartered Bank
(Pakistan) Limited 6 months KISOR -.-1.1"/ .. 8 b atf ye arly December 29, :2010 500,000 462,500
National" Banx of Paklstan G months KISOR + 1.1% 8 half yearly September 4, 20,1 1,500,000 1,500,000
Syndicaied finance 1B,1 6 monlhs KI80R T 1,13°(0 11 half I'early February 27. 2012 12,012,ODQ 18,165,889 .
Islamic otlshore finance 18,2 6 rnonths L!60R + 2.57% 8 half yearly March 23. 2011 12,509,21 'I 12,755,717
OFt Consortium finance 18.3 6 months llBOR + 2.6% 11 half yearly April 15, 2011 7.170,907 7,284,352
In!ernalional Finance Corporetion 18.4 6 months UBOR + 60/0 3 half yearly September 15, 2015 3,794,812 3,089,941
Bank Islarni Pakistan l.irntlec 18.5 G months K[SOR + 2.Q% 14 hal~ yearly May 25,2010 500,000 499,800
Pak I<uwaillnveslmenl Company 494,3571
(Private) limited 18.S 6 months K[SOR :;. 2,35% 10 half yearly April 3D, 2012 '195,323
Faysal Bank limited 18.5 6 months KIBOR 1- :7..35% 3 ~1~lf yearly November 26,2012 1,497,683 1,497,929
Duoal Islamic Bank Limiled 18.S 6 Months Ki!:>or + 2.1 1 % ~ 0 half ye arty De cember 31,2012 ·'90.~00
Sill< Bank Limited 1 ~,5 6 Months Ki~or + 2.35% 10 half yearly January 21.2013 299,405
Standard Chartered 8~nl< 18,5 6 Months Kibcr + 2.'::: 0'% 10 hLilf yearly September 17, 2012 989,09·1 \
Sn.nba Bank Limited ~ 8.5 6 Months Kibor + :2.40% 1 0 ~.:3!f ye ariy September 30, 20' ~ ·~£5,93/1
National BLink of Pakistan 18.6 6 Months Kibor .... 2.40% 6 b alf yearly March 28. 2013 990,9~9 I
Habib Bank Limited 18.11 6 Months Kibor ... 1.5% Bllllet October 28, 2011 1,000,000
{'.!lied Bank Limited 10,11 6 Months Kibor + 1 % Gullel November 29,2011 1 ~9,9~2
Habib Melropofitan Bank Lirnited 1 B.G 6 Months KibDr + 2.40% 10 half ye arty June 21. 2013 199,965
St<1nda(d Cnarter eo Dank Limited 18.12 6 Months Kibor·f. 1.5% 3 installments ,\prjJ 18,2011 1,~JO,OOO
Curtlnc a tc s
Term Finance Certificates ~ 2nd Issue 18,7 G months K[ElOR + 1.55% 3,968,819 ,,,oo~
Term Finonce Certificates ~ 3rd Issue 18.0 6 months K180R + :2.4"'0 1,974,360 1,972:993
Suxuk Certificates 18.9 6 months KISOR 'f- 1.5%, 2.9G4,'159 2.:;(jG.S90
Privately Placec Sobordir-ate d
Term Finance Certificates 10.10 L.. 5,3'13.759 5,959.269
~9.375.'15·[ 71,:J~ 1.606
Less: Current portion shown under
current liabiflt.e s 810,100 fJ.G51,5t1G
::e,565, :~~}'1 62,560,'10.10
._. 2009 (note 1.2)

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18,1 This represents a syndicated finance agreement with Allied Bank Limited, Bank A,ra!ah Limited, Habib Bank Limited, MCB' Bank Limited, National Bank of Pakistan, Standard Chartered and United Bank Limited which was fully disbursed as at December 31,'2010 (January 1, 2010: Rs. 12,175,000). Sorne of the banks have sold down their share to other banks,

'18.2 This represents an offshore Islamic Finance Facility Agreement of US$ 150,000 with Citi Bank, Dubai Islamic Bank, Habib Bank Limited,' National Bank of Pakistan, SAMBA Financial Gmup and Standard Chartered Bank.

18.3 This represents an agreement amounting to US$ 85,000 with 3 consortium of Development Finance Institutions compriSing of DEG, FMO and OFID.

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18.4 The Holding Company entered into a C Loan !\~W:>ciT;ent (Original Agreement) dated September 29,2009 with International Finance Corporation (IFC) for USS 50,000, divided into Tranche A (US$ 15,000) and Tranche B (US$ 35,000). Both Tranche A and B were fully disbursed as at December 31, 2009 and transferred to the Company under the scheme of demerger ,effective January 1, 2010 as referred to in note 1.3. However, the option given to convert the Tranche A loan amount of US$ '15,000 shall remain upon the Holding Company's ordinary shares at Rs. 205 per ordinary share (Rs.186 as at December 31, 2010) calculated at the dollar rupee exchange rate prevailing on the business day prior to the date of the notices issued by IFC to exercise the conversion option. Such option IS to be exercised within a period of no more than five years from the date of disbursement of the loan (December 28, ')009). Tranche B however, is not convertible. The Holding Company, upon shareholders' approval in Hie Annual General Meeting of February 27, 2010, has entered during the year into an agreement with the Company that in the event IFC exercises the aforementioned conversion option (Tranche A), the loan amount then outstanding against the Company would stand reduced by tre conversion option amount and the Company would pay' the rupee equivalent of the corresponding conversion amount to the Holding Company which would simultaneously be given to the Company as a subordinated loan, carrying mark-up payable by the Holding Company for rupee finances of like maturities plus a margin of 1 %. The effect of IFCconversion in substance would result in a loan from the Holding Company having the same repayment terms / dates as that of Tranche A

The fair value of the conversion option, included in note 20, on the date of disbursement amounted to Rs. 338,647. The residual amount, representing the loan liability component is shown as long term borrowings. The Company, considering the substance of the aforementioned agreement with the Holding Company has classified the fair value of conversion option as long term and accordingly reclassified the corresponding figure fr orn current liabilities for better presentation. The fair value of option as at December 31, 2010 amounted to Rs. 367,442.

On December 22, 2010, the Company and I FC have entered into an amended agreement for further disbursement of US$ 30,000 over and above the aforementioned disbursed amount of US$ 50,000. Such amendment is pending for approval of the State Bank of Pakistan and the Securities and Exchange Commission of Pakistan, hence the amount has not been disbursed as at December 3'1, 2010. The salient features or the Original Loan remain essentially the same. The additional loan of US$ 30,000 is divided into (i) 30% convertible loan on the shares of the Company at Rs. 41.67 per share and (ii) 70% non-convertible loan. The additional loan is repayable by September 15, 2017 in three equal installrnents and carries interest at six months LlBOR plus a spread of 60/; or 10% deperidinq on the listing status of the Company at various intervals. However, the management is confident that it will comply with tile requirements of listing and avail the spread of 6% for the entire loan tenor. '

The entire loan is subordinated to other parallel senier debt of the Company and guaranteed by tile Holding Company to IFC through a Corporate Guarantee.

18.5 This represents finance facilities arranged for the Urea expansion project.

18.6 The Company has arranged this facility for a project related to the existing Urea facility

18.7 This represents secured and listed Term Finance Certificates (TFCs) of Rs. 4,000,000. The TFCs are structured to redeem 0.28% of principal in the first 84 months and remaining 99.72% principal in two equal semi-annual instalments. The Company has appointed First Dawood islamic Bank as trustees in respect of these TFCs.

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18.8 This represents secured and listed Term Finance Certificates (TFCs) of Rs. 2,000,000 which comprises of Private Placement of Rs 1,500,000 and Initial Public Offer of Rs. 500,000. The TFCs are structured to redeem

as follows: .

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Year

Redemption %age

1 & 2 3&4

0.04% 7.96%

5 & 6 12%

7 60%

IGI Investment Bank Limited has been appointed as trustee in respect of these TFCs.

This represents privately placed Sukuk Certificates based on diminishing Musharika amounting to Rs. 3,000,000. The principal amount is payable after seven years in two semi-annual equal installments.

This represents Subordinated Privately Placed TFCs amounting to Rs. 4,000,000 (PPTFC Issue I) and Rs. 2,000,000 (PPTFC Issue II) respectively. The PPTFCs are perpetual in nature with a five year call and a ten year put option. Tile PPTFC I issue 118S mark-up of six months KISOR plus 1.7% whereas tile PPTFC II issue has mark-up of six months KIBOR .. plus 1.25%. IGI Investment Banl<: Limited has been appointed as trustees in respect of these TFCs.

These loans are secured against a ranking charge over the assets of the Company.

18.12 This loan is secured against a ranking charge over the assets of the Company and Corporate Guarantee by tile Holding Company.

18.13 The above finances, excluding those covered in notes 184,18.10,18.11 and 18.12, are secured by an equitable mortgage upon the immovable property of the Company and hypothecation charge over current and future fixed assets of tile Company. Perpetual subordinated TFCs and IFC loan al'e secured by a subordinated floating charge over all present and future fixed assets excludinq land and buildings.

18.14 In view of the substance of the transactions, tile sale and repurchase of assets under long term finance have not been recorded in these financial statements.

19

SUBORDINATED LOAN FROM HOLDING COrv1PANY - Unsecured

During the year, the Company has obtained a subordinated loan from the Holding Company. The loan has a maturity of five years, with bullet repayment at the end of the term. The loan carries mark-up at rates not being lower than tile mark-up payable by the Holding Company for finance of like maturities plus 1%.

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20,'\

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DERIVATIVE FINANCIAL INSTRUMENTS

Conversion option on IFe loan Cash flow hedges

- Foreign exchange forward contracts, net (note 20.1) - Foreign exchange option contracts, net (note 20.2)

- Interest rate swaps (note 20.3)

Less: Current portion shown under current assets / liabilities

Cash flow hedges:

- Foreign exchange forward contracts

- Foreign exchange option contracts

- I nterest rate swaps

Foreign exchange forward contracts'

30

Transfer of Fertilizer Undertaking (notef.c) Assets J (Liabilities) Rupees

2010

2009 (note 1 2) Assets I (Liabilities)

Assets Liabilities

.------------------------.---- R u pees ----------------------------

(338,647) - 367,442 -
(134,692) 2,638 234,055 -
49,104 - 12,464 -
(852,441 ) - 1,121,158 - (1,276,676)

2,638

1,735,119

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(134,692) 2,638 234,055 - I
49,104 - 12,464 -
(239,599) - 426,868 - i The Company entered into various forward exchange contracts to hedge its foreign currency exposure, As at December 31, 2010, the Company had forward exchange contracts to purchase Euros 2,698 (January 1, 2010: Euros 9,543) at various maturity dates rnatchinq tile anticipated payment dates for commitments with respeci to the urea expansion project. The fair value of these contracts, as at December 31, 2010 is positive and amounted to Rs. 2,638 (January 1, 2010: Rs. 22,637 positive).

Tile Company entered in various US$: PKR forward contracts to hedge its foreign currency exposure. As at December 31, 2010, the Company had forward contracts to purchase US$ 85,000 (January 1, 2010:

US$ '85,000) at various maturity dates to hedge its foreign currency loan obligations. The fair value of these contracts as at December 31, 2010 is negative and amounted to Rs. 234,055 (January 1,2010: Rs. 157,329 negative).

Foreign exchange option contracts

The Company entered Into various foreign exchange option contracts to hedge its currency exposure against US dollar relating to the expansion project. As at the balance sheet date, the Company had foreign exchange options amounting to Euros 6,371 (January 1, 2010: Euros 12,628). The net fair value of these contracts as at December 31,2010 is negative and amounted to Rs. 12,464 (January 1, 2010: Rs. 49,104 positive).

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20.3 Interest rate swaps

20.3.1 The Company entered into an interest rate swap agreement to hedge its interest rate exposure on floating rate committed borrowing under an Offshore Islamic Finance Facility agreement, for a notional amount of US$ 150,000 (January 1, 2010: US$ 150,000)., amortising up to September 2014. Under the swap agreement, the Company would receive USD-L1BOR from Citibank N.A Pakistan on notional amount and pay fixed 3.47% which will be settled semi-annually. The fair value of the interest rate swap as at December 31,2010 is negative and amounted to Rs~ 654,163 (January 1, 2010: Rs. 542,385 negative).

2'1.1 Deferred taxation

21.2 Deferred income

20.3.2
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The Company entered into another interest rate swap agreement to hedge its interest rate exposure on floating rate committed borrowing from a consortium of Development Finance Institutions for a notional amount of US$ 85,000 (January 1, 2010: US$ 85,000) amortising upto Apr'il 2016. Under the swap agreement, the Company would receive USD-LiBOR from S:andard Chartered Bank on notional amount and pay fixed 3.73% which will be settled semi-annually. The fair value of the interest rate swap as at December 31,2010 is negative and amounted to Rs. 466,995 (January 1,2010: Rs. 310,056 negative).

DEFERRED LIABILITIES

Transfer of Fertilizer Undertak.ing (note 1.4) Rupees

2009 (note 1.2)

------------------R u pee S -----.------0-----

2010

Deferred taxation (note 21.1) Deferred income (note 212)

2,488,204 92,440

890,965 96,305

987,270

2.580,644

Credit / (Debit) balances arising on account of: - Accelerated depreciation allowance

- Carried forward tax losses substantially

pertaining to unabsorbed tax depreciation - Fair values of hedging instruments

- Exchange loss

- Fai~ value of IFC conversion opton

- Provision for:

- retirement benefits

- slow moving stores and spares and

doubtful receivables - others

1.267,494

3,376:158

(328,3'\ 0)

(324,811) (477,762) (20,631) (10,078)

(23,535)

(26,410)

(20,526) (24,104)

(4,158) (4,158) _

===8=9=0=, 9=6=5= ----=2-,4:-;;8'-;::8"-::,2:-::0~4"- ======

This represents an amount of Rs. 96,627 received from Engro Powergen Oadirpur Limited (formerly Engro Energy Limited), an associated company, for the right to use the Company's infrastructure tacilities at Daharki Plant by the employees of Engro Powergen Qadirpur Limited (formerly Engro Energy Limited) for a period of (went'>, five years. The amount is being amortised over such period.

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(Amounts in th ous an d]

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23

24

24.1

24.2

EMPLOYEE HOUSING SUBSIDY

25

The unamortised balance pertaining to the Employee Housing Subsidy Scheme transferred to the Company as ·at January 1, 2010 by the Holding Company amounted to Rs. 211,785 (note 1.4). Under the Scheme, which expired on December 31, 2009, employees who were not entitled for Employee Share Option were provided housing subsidy to be vested/amortised over a period of 2.5 years of employee service. The amortised amount charged in the profit and loss account amounted to Rs. 105,661.

RETIREMENT AND OTHER SERVICE BENEFITS OBLIGATIONS

The expected future charge will be Rs. 20,845 and RS.303 for 2011 and 2012 respectively.


Other service benefit plan

Less: Current portion shown under current liabilities

67,245

-19,664

47,581

TRADE AND OTHER PAYABLES

Creditors

Accrued liabilities (note 24.'1) Advances from customers Payable to:

- Engro Corporation Limited

- Engro Eximp (Private) Limited (note 24.2)

- Engro Vopak Terminal Limited

Deposits from dealers refundable on

termination of dealership Contractors' deposits and retentions

Workers' profits participation fund (note 24.3) vvorkers' welfare fund

Others

647,674 1,021,498 1,099,390

11,073 60,022

169,668

3,009,325

Accrued liabilities

Salaries, wages and other employee benefits Vacation accruals

Others

226,849 88,276 706,373

1,021,498

2010

2009 (note 1.2)

----------- -------R II pees -----------------

75,459

20,636

54,823

1,006,034 961,190 1,338,022

296 151,626 68

11,800 94,201 9,742 106,245 232,125

3,911,349

512,201 88,753 360,236

961,190

544

25

25

Includes payable in respect of funds collected on behalf of Engro Eximp (Private) Limited amounting to Rs. 140,807 under an agreement as a selling agent of imported fertilizers.

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24.3 Workers' profits participation fund

2010 Rupees

I

Payable as at January 1

Allocation for the year (note 33) Amount paid to the trustees of the fund Payable as at December 31

279,591 269,849

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9,742

25

ACCRUED INTEREST I MARK-UP


2010

2009 (note 1.2)

------------------R u pees ----------------.

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Accrued interest I mark-up on: - long term borrowings

- short term borrowings

1,355,503 10.519

1,971,297 10,323

1,366,022

1,981,620

26

SHORT TERM BORROWINGS Secured (note 26.1)

Unsecured (note 26.2)

195,753

970,126

970,126

195,753

26.1

Secured

The funded facilities for short term finances available from various banks amounts to Rs. 3,900,000 (January 1, 2010 Rs. 6,550,000) along with non-funded facilities of Rs. 1,450,000 (January 1, 2010:

Rs. 200,000) for Bank Guarantees. The rates of mark-up on funded financing facilities ranges from 12.88% to 14.84% and all the facilities are secured by floating charge upon all present and future stocks including raw and packaging materials, finished goods, stores and spares and other merchandise and on all present and future book debts of the Company.

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26.2 Unsecured

The Company Issued a Commercial Paper in September, 2010 having a face value of RS.1,OOO,OOO, at discount, for a period of 6 months carrying mark-up of 1414 % per annum. These were listed on Karachi Stock Exchange Over-The-Counter market subsequent to the year end.

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27 CONTINGENCIES AND COMMITMENTS

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Contingencies

27.1 Bank guarantees of Rs. 1,214,295 (January 1, 2010 Rs. 1,148,676) have been issued in favour of third parties.

27.2 Claims. including pending lawsuits, against the Company not acknowledged as debts amounted to Rs. 36,018 (January 1, 2010: Rs. 47,658)

27.3 The Company is contesting the penalty of Rs 99,936 paid and expensed in 1997, imposed by the State Bank of Pakistan (SBP) for alleged late payment of foreign exchange risk cover fee on long term loans and has filed a suit in the High Court of Sindh. A partial refund of Rs. 62,618 was, however, recovered in 1999 from SBP and the recovery of the balance amount is dependent on the Court's decision.

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27.4 The Company and the Holding Company, by virtue of the scheme of demerger have extended project completion support to the lenders of the Engro Powergen Oadirpur Limited, an associated undertaking, for USD 15,400 (2009: USD 15,400) These projects supports are contingent upon occurrence or nonoccurrence of specified future events. The project is complete and lender NOCs are awaited.

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27.5

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27.6

27.7

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The Company had commenced two separate arbitration proceedings against the Government of Pakistan for non-payment of marketing incidentals relating to the years 1983-84 and 1985-86 respectively. The sole arbitrator in the second case has awarded the Company Rs. 47,800 whereas the award for the earlier years is awaited. The award for the second arbitration has not been recognised due to inherent uncertainties arising from its challenge in the High Court of Sindh.

Commitments

2009 (note 1.2)

------------ ------ R u pee s----------------·

2010

Plant and machinery

1,630,879

Commitments on transfer of Fertilizer Undertaking as at January 1, 2010 in respect of plant and machinery amounted to Rs 3,999,846:

NET SALES

2010 Rupees

Own manufactured product (note 28.2) Less Sales tax

19.020,007 2,499

19,017,508

23.1

Sales are net of marketing allowances of Rs.42,920

28.2 This includes sale of Liquid Ammonia amounting to RS.18, 118

29

COST OF SALES

Raw materials consumed

Salaries, wages and staff welfare (note 29.1) Fuel and power

Repairs and maintenance Depreciation (note 42) Amortisation (note 5.1) Consumable stores

Staff recruitment, training, safety

and other expenses Purchased services Travel

Communication, stationery and

other office expenses Insurance

Rent, rates and taxes Other expenses

Cost of goods manufactured

5,379,537 1,017,381 2,423,973

276,119 612,576 3,695 182,632

48,129 142,112 24,662

22,604 113,378 17,962 2,938

10,267,698

Add: Opening stock of finished goods manufactured Less: Closing stock of finished goods manufactured

112,500 272,378

(159.878)

Cost of sales

10,107,820

29.1

Salaries. wages and staff welfare includes Rs. 55.154 in respect of staff retirement benefits.

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30:1

35

(Amounts in tho us and)

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SELLING AND DISTRIBUTION EXPENSES

2010 Rupees

Salaries, wages and staff welfare (note 30.'1)

Staff recruitment, training, safety and other expenses Product transportation and handling

Royalty Expense

Repairs and maintenance Advertising and sales promotion

Rent, rates and taxes

Communication, stationery and other office expenses Travel

Depreciation (note 4.2) Amortisation (note 5.1) Purchased services Insurance

Other expenses

305,593 39,507 925,797 257,584

2,266 42,361 58,880 26,010 '28,426

19,879 48 1,683 3,655 15,787

1,727,476

Salaries, wages and staff welfare includes Rs. 28,182 in respect of staff retirement benefits.

3'1 ADMINISTRATIVE EXPENSES

31.1

32

Salaries, wages and staff welfare (note 31.1) Staff recruitment, training, safety

'and other expenses Repairs and maintenance Rent, rates and taxes

Communication, stationery and other office expenses Travel

Depreciation (note 4.2) Amortisation (note 5.1) Purchased services Donations

I nsu ranee

Other expenses

241,067

26,592 18,078 81,488 17,002 11,750 31,037 13,278 62,741 51,986

262 8,749

564,030

Salaries, wages and staffwelfare includes Rs. 20,716 in respect of staff retirement benefits.

OTHER OPERATING INCOME

On financial assets

lncorrie on deposits I other financial assets

120,120

On nori-ftn anc ial a s s e t s . Comrnlssion income (note 32.1)

Gain on disposal of property, plant and equipment (note 4.3) Others

14,699 312,272 7,950

.334,921

455,041

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32.1

33

33.1

34

35

35.1

35.2

This pertains to commission earned as selling agent of impor-ted fertilizer on behalf of Engro Eximp (Private)

Limited, under an agreement effective January 1, 2010_ .

OTHER OPERATING EXPENSE

2010 Rupees

vvorkers' profits participation fund (note . .24.3) Workers' welfare fund

Research and development (including salaries and wages) Net foreign exchange loss

Auditors' remuneration (note 33.1)

Protessional tax

Legal and professional charqes

Loss on fair value adjustements of embedded der-ivative Others

279,591 106,245

21,725 58,947 2,334

213 65,692 28,795 11,529

575,071

Auditors' remuneration

Fee for the

- audit of annual financial statements

- review of half yearly financial statements

Certifications, audit of retirement funds and other advisory services

Reimbursement of expenses

1,375 150

388 42-1

2,334

FINANCE COST

I nterest/Mark-u p on

- long 'term borrowinqs

-short term borrowings

1,070,545 221,616

'1,292,161

TAXATION

Current

- for the year (note 35_1)

- for prior- year-s (note 35.2)

193,488 (463,784)

Deferred - for the year

(270,296) 1,746,691

'1,476,395

Includes minimum turnover tax amounting to Rs. 190,706.

As/a result of dernerqer, all. pending tax issues of the Fertilizer Undertaking have been transferred to the Company. Majorissues pending before the tax authorities are described below:

The Holding Company in its tax return for financial years 2006 to 2008 (tax years 2007 to 2009) claimed the benefit of Group Relief under section 59B of the Income Tax Ordinance, 200'1 (the Ordinance) on losses acquired for an equivalent cash consideration from its wholly owned subsidiary, Engro Foods Limited (EFL), :xounting to Rs. 428,744, Rs. 622,103 and Rs. 450,000 respectively.

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34,495 (123,741)

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The tax department raised a demand of Rs. 476,479 (rectified to Rs. 406,644), Rs. 910,845 and Rs·. 1,670,814 for financial years 2006, 2007 and 2008 respectively, mainly on account of disallowance of Group Relief (in all three years), inter corporate dividend (in 2007 and 2008) and write down of inventories to net realisable value (in 2008) besides certain other issues. Uptill last year, the Holding Company had paid Rs. 170,000 and Rs. 400,000 for 2006 and 2007 respectively. Stay by the High Court of Sindh for payment of balance amount for financial year 2006 was granted to the Holding Company pending decision of the appeal filed by the Holding Company before the Income Tax Appellate Tribunal (ITAT). However, for financial year 2007 the issue of Group R81ief was decided by the Commissioner Inland Revenue (Appeals I) in Company's favour against which the tax department filed an appeal with ITAT. During the current year, the Company paid Rs. 600,000 for financial year 2008, while stay for payment for the balance amount was granted by the tax department till December 31, 2010. Appeals has also been filed by the Company with the Commissioner Inland Revenue (Appeals I). The tax department upon expiry of the stay period has raised a payment demand of Rs. 509,218 on January 27,2011, against which the management intends to apply its refunds pending with the tax department.

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The main contention for disallowance of Group Relief, among others, being the non-designation of the Holding Company and the subsidiary company as 'companies' entitled to Group Relief by the Securities & Exchange Commission of Pakistan (SECP), a requirement of section 59B of the Ordinance. The Holding Company had applied for such a designation but remained pending with SECP for want of related regulations not framed then. These regulations were framed by SECP subsequently in December 2008 and on resubmission of application the Holding Company alongwith other subsidiaries have been registered as a Group. Designation has also been granted for Group Relief and Group Taxation during the year.

During the year, orders were received for cases pending at ITAT relating to financial years 2006 and 200l. The major issues of Group Taxation and Group Relief have been decided in tile Company's favour in both the years. Further, all the assessments of the Holding Company, for income years 1995 to 2002 which were in appeal at the ITAT level have been decided during the year. The major one being apportionment of gross profit and expenses between normal income and Final Tax Regime (FTR) income has been remanded back to the tax department by ITAT with specific directions for apportionment of gross profit 011 the basis of turnover as claimed by the Holding Company. The Company, therefore has written back provision amounting to Rs. 463,784, in respect of the aforementioned years. The tax department however, may file reference application against the ITAT decisions before the Sindh Higtl Court.

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35.3

Relationship between tax expense and accounting profit

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The tax on the Company's profit before tax differs from the theoretical amount that would arise using the Company's applicable tax rate as follows:

2010 Rupees

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Profit before tax

5,205,991

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Tax calculated at the rate of 35% Minimum turnover tax

Depreciation on exempt assets not deductible for tax purposes

Effect of exemption from tax on certain income Effect of applicability of lower tax rate and other tax credits / debits

Prior year tax effects

Tax charge for the year

~

1,822,097 190,706

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16,622 (463,784) 1,476,395

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37.1

37.2

38

38.1

EARNINGS PER SHARE

There is no dilutive effect on the basic earnings per share of the Company which is based on:

2010 Rupees

Profit for the year

3,729,596

Weighted average number of Ordinary shares (in thousand)

1,072,800

REMUNERATION OF CHIEF EXECUTIVE, DIRECTORS AND EXECUTIVES

The aggregate amounts charged in these financial statements for remuneration, including all benefits, to chief executive, directors and executives of the Company are given below

2010

Directors

Executives

Chief Others

Executive

-------------------"---- R u p ees.-----------------------

Managerial remuneration Retirement benefits funds Other benefits

Fees

Total

24,641 815,027
2,983 '118.126
7,75'1 95 174,019
'1,800 ----
35,375 '1,895 '1,107,172 Number of persons includinq those who worked part of tile year

9

393

The Company also makes contributions based on actuarial calculations to pension and gratuity funds and provides certain household items for use of some employees. Cars are also provided for use of some employees and directors.

Premium charged in the financial statements in respect of directors' indemnity insurance policy, purchased by the Company during the year, amounted to Rs, 79.

RETIREMENT BENEFITS

Defined benefit plans

As per the Schellie and upon transfer of Fertilizer Undertaking, as referred to in note 1.3 and 1.4, except for MPT Employees Gratuity Fund, which is sti!l maintained by Holding Company on behalf of the-Company, all other funds (the funds maintained under defined benefit pension plan and defined benefit gratuity plan) have been transferred under the control of the Company. Accordinqiy the balances receivable from/payable to the aforementioned funds, to the extent of employees of Fertilizers Undertaking, have also been transferred from the Holding Company to the Company. The latest actuarial valuation of the defined benefit plans was carried out as at December 3 '1, 2010, using the Projected Unit Credit Method. Details of the defined benefit plans are as follows:

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(Amounts in thous arid)

38.1.1

38.1.2

38,1,3

Balance sheet reconciliation

Present value of funded obligation Fair value of plan assets

Surplus

Payable to associated companies Unrecognised actuarial gain Unrecognised past service cost

Net (asset) / liability at end of the year

Movement in net (asset)/liabifity recognised

Net (asset)/Iiability at beginning of the yea,

after transfer of Fertilizer Undertaking (Reversai)/expense recog n ised

Amounts received from/(paid to) the Fund Net (asset)/Iiability at end of the year

1\!1ovement in defined benefit obligation

P.s at beginning of the year after transfer of

Fertilizer Undertaking Current service cost

I nterest cost

Benefits paid during the year Actuarial (gain)/Ioss on obligation

Liability transferred in respect of inter-company transfer

As at end of the year

39

Defined Benefit Gratuity Plans Funded

2010

Defined Benefit Pension Plan Funded (Curtailed)

2010

------------------R u pe es-----------------.

269,523 (289,580)

(20,057) 2,875 12,161 5,021

15,470 (15,470)

31,230 (34,855;

(3,625;

(448)

(4,073)

(31,887) (4,0/3) 31,887 (4,073)

241,276 28,703
17,735
29,510 3,264
(6,785) (3,197)
(8,235) 2,460
(3,978)
269,523 31,230
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(Amounts ill thousand)

38.1.4

38.1.5

38.1.6

38.1.7

Movement in fair value of plan. assets

As at beginning of the year Expected return on plan assets

(Repayment to) / Contribution by the Company Benefits paid during the year

Actuarial gain! (loss) on plan assets

Liability transferred in respect of inter-company transfer

As at end of the year

Charge for the year

Current service cost Interest cost

Expected return on plan assets

Amortisation of unrecognized past service cost Amortisation of actuarial (gain) / loss

Principal actuarial assumptions used in the actuarial valuation

Discount rate

Expected per annum rate of return on plan assets

Expected per annum rate of increase in pension

Expected per 'annum rate of increase in future salaries

Actual return on plan assets _I, !

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. Defined Benefit Gratuity Plans Funded

20'10

Defined Benefit Pension Plan Funded (Curtailed) 2010

--------- --------- R up e es -----------------.

263,645 30,947 15,4 70 (3,785)

(12,594)

62,645 7,337 (31,887: (3,197; (43;

(1,103)

--------~~~ ------------

289,580

3fj,855

'17,735
29,510 31264
(30,947) (7,337)
(372)
(456)
15,470 (41073) ----- •• _--- _ ----------- % ---- ---------

14.5%

14.5%

13.5%

'14.5%

14.5%

6.5%

14.5%

18,353

------------------ R up e e s------------------

7,294

38.1.11 Expected future cost for the year ending December 31,2011 is as follows:

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Defined Benefit Gratuity Plans Funded

Defined Benefit Pension Plan Fundeci (Curtailed)

38.1,8 Plan assets comprise of the following 2010 2010
Rupees (%) Rupees (%)
Fixed income instruments 206,428 71% 31,695 91%
Cash 32, ~~g 11% 1,526 4%
Others 51,003 18% 1,634 5%
289,580 34,855 38.1.9 The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date.

38.1.10 During the year, the Company recognised a gain of Rs. 4,073 on curtailed defined benefit plan. In 2005, the Holding Company had setup a Defined Contribution Pension Fund known as Engro Chemical Pakistan Limited (renamed as Engro Corporation Limited) MPT Employees Pension Fund (the Fund) for the benefit of management employees, including those transfered to the Company after demerger. Employees join:ng the.Holding Company from July 1,2005 onwards to become members of the new Fund. Members of then existinq pension fund (a defined benefit plan) were given a one-time option exerciseable upto June -; 5, 2005 to join the new Fund effective July 1,2005.

- MPT Pension FL!i-;c

(526)

- MPT Gratuity Fund

12,752

- Non-MPT Gratuity Fund

5,971

38.2

Defined contribution p lans

An amount of Rs. 135,646 has been charged during tile year in respect of.defined contribution plans maintained by the Holding Company.

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39

CASH GENERATED FROM OPERATIONS

Profit before taxation

Adjustment for non-cash charges and other items:

Depreciation Amortisation

Profit on disposal of property, plant and equipment Amortisation of transaction cost on loans

Provision for retirement and other service benefits Income on deposits / other financial assets Financial charges

Employee share compensation expense Employee Housing Subsidy expense

Provision for surplus and slow moving stores and spares Provision for impairment

Change in the fair value of I FC conversion option Exchange loss on foreign currency loans

Working capital changes (note 39,1)

I 39.1 Working capital changes

(Increase) / decrease in current assets

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- Stores, spares and loose tools

- Stock-in-trade

- Trade debts

- Loans, advances, deposits and prepayments

- Other receivables (net)

Increase in current liabilities

- Trade and other payable s including other service benefits - net

40

CASH AND CASH EQUIVALENTS

Cash and bank balances (note 14) Short term investments (note ,13) Short term borrowings (note 26)


454,126 450,857 (195,753)

709,230

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2010 Rupees

5,205,991

663,492 17,021 (312,272) I 13,266 '124,203 (,142,770) 1,292,161 39,272

105,661 15,766 (4,304) 28,795 58,947

(961,235)

.--~

6,143,994

(2,446,729) (472,850) 2,161,48'1 (1,139,556) _____ 46,410 (1,851,244)

890,009

(961,235)

2009 (note 1.2)

------------------R up ees -----------------

2010

1,835,951 2,452,285 (970,126)

3,318,110

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41

FINANCIAL INSTRUMENTS BY CATEGORY

Financial assets as per balance sheet

- Loans and receivables

Loans, advances and deposits Trade debts

OHler receivables

Cash and bank balances

- Fair value through profit and loss Short term investments

- Derivatives used for hedging Derivatives

Financial liabilities as per balance sheet

- Financial liabilities measured at amortised cost Borrowings

Trade and other payable Accrued interest! mark-up

- Fair valuethrouqh profit and loss Conversion option on IFC loan

- Derivatives used for hedging Derivatives

42 FINANCIAL RISK MANAGEMENT

42.1" Financial risk factors

Transfer.of Fertilizer Undertaking (note 1.4) Rupees

1,126,739 2,514,425 :-'3,312 454,126

4,128,602

450,857

76,209

59,571,207 1,640,354 1,366,022

62,577,583

338,647

1,014,238

2010

2009

1,632,002 352,944 46,149 1,835,951

3,867,046

2,452,285

.2,638

73,781,812 2,225,215 '1,98'1,620

77,988,647

367,442

1,367,677

.(note 1.2)

----------------R up ee s----------------

544

544

The Company's activities expose it to a variety of financial risks: market risk (including currency "risk, interest rate risk and other price risk), credit risk and liquidity risk. The Company's overall' risk management programme focuses on having cost efficient funding as well as to manage financial risk to minimize earnings volatility arid provide maximum return to shareholders.

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44

Risk management is carried out by the Company's Finance and Planning department under policies approved by the Management Committee.

a) Market risk

i) Currency risk

Currency risk is the risk that the fair value of future cash flows of a financial instrument will tluctuaf because of changes in foreign exchange rates.

This exists due to the Company's exposure resulting from outstanding import payments, foreign currency loan liabilities and related interest payments. A foreign exchange risk management poiicy has been developed and approved by the management. The policy allows the Company to take c: .. rrrency exposure for limited periods within predefined limits while open exposures are rigorously rnonitored. The Company ensures to the extent possible that it has options available to manage exposure, either through forward contracts, options or prepayments, etc. subject to the prevailing foreign exchange regulations.

The Company is exposed to currency risk on commitments to purchase plant and machinery in connection with urea expansion project (note 4.4.1) denominated primarily ill Euros. However, as at December 31, 2010 this exposure is minimal since major procurements have been completed.

The Company has entered into Euro-OoJlar forward exchange contracts / options to hedge its currency risk, most of which have 3 maturity of less than one year from the reportinq date (note 20) -~'he Company's ability to mitigate foreign exchange risk has however been curtailed by the State B311k of Pakistan Which has disallowed issuance of new forward covers against letters of credit.

On foreign currency borrowing of US$ 285,000 as on december 31, 2010, the Company has Rupee/US$ hedge of US$ 85,000.

At December 31, 2010, if the currency had weakened! strengthened by 1 % against the US'dollar' With all other variables held constant, post-tax profit for the year would have been Rs. 2tl,741 lower/higher, mainly as a result of foreign exchange loss/gain on translation of US dollar denominated IFC loan.

The impact of other devaluation/revaluation on post tax profit for tl:e year is negligible since all foreign currency borrowings/funds relates to the project, hence gain/loss arising is capitalized.

ii) interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company's interest rate risk arises from short and long-term borrowings. These are bench marked to variable rates which expose the Company to cash flow interest rate risk.

The Company analyses its interest rate exposure on a regular basis by monitoring interest rate trends to determine whether they should enter into hedging alternatives.

Interest rate risk arising on foreign currency loans are hedged through interest rate swaps (note 20). Rates on short term loans vary as per market movement.

,A,s at December 31,2010, if interest rates on Company's borrowings had been 1 % higher/lower with all other variables held constant, post tax profit for the year would have been lower/higller by Rs. 43,331, mainly as a result of interest exposure on variable rate borrowings.

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iii) Other price risk

Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from currency risk or interest rate risk), whether those changes are caused by factors specific to the individual financial instrument-or its issuer, or factors effecting all similar financial instruments traded in the market. The Company's investments in money market mutual funds are exposed to price risk.

b) Credit risk

Credit risk represents the risk of financial loss being caused if counter party fails to discharge an obligation

Credit risk arises from deposits with banks and financial institutions, trade debts, loans, advances, deposits, bank guarantees and other 'receivables. The credit risk on liquid funds is limited because the counter parties are banks with a reasonably Iligh credit rating or mutual funds Which in turn <:.Ire deposited in banks and government securities. The Company maintains an internal policy to place funds with commercial banks and mutual funds of asset management companies having a minimum short term credit rating of A 1 + and A ;]3 respectively.

The Company is exposed to a concentration of credit risk on its trade debts by virtue of all itscustorners being agri-based businesses in Pakist;3n. However, this risk is mitigated by applying individual credit limits and by securing the majority of trade debts against bank gUcHantees and inland letter of credit.

The credit risk arising on account of acceptance of these bank guarantees is managed by ensuring that the bank guarantees are issued by banks of reasonably high credit ratings as approved by tile management.

The Company monitors the credit quality of its financial assets with reference to historical performance of such assets and available external credit ratings. The carrying values of financial assels which are nertner past due nor impaired are as under:


2010

2009

- --- ------------ R u pe e s ----------------

Loans, advances, and deposits Trade debts

Other receivables

Short term investments

Cash and Bank balances

1,126,739 2,381,684 10,401 450,857 454,126

'1,632,002 321,006 33,306 2,452,285 1,835,951

4,423,807

6,274,550

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The credit quality of receivables can be assessed with reference to their historical performance with no or negligible defaults in recent history, however, no losses incurred. The credit quality of Company's' bank balances car) be assessed with reference to external credit ratings 3S follows:

Bank Rating Rating
agency
" Short term Long term
Askari Bank Limited PACRA A1+ AA
.AJlied Bank Limited PACRA A1+ .t1_A.
Bank.AJ Habib Limited PACR.A, A1+ A6,+
Bank.AJ Faiah Limited PACRA A1+ AA
Bank of Khyber PACRA .A2 A-
Barclay's Bank pic S&P A1+ AA-
Bank Islami Pakistan PACRA A1 A
Citibank NA S&P A1 A+
Deutsche Bank p..,G S&P A1 A+
Dubai Islamic Bank JCR-VlS A1 A
Faysal Bank Limited PACRA A1+ AA
Habib Bank Limited JCR-VlS A1+ M+
Habib Metropolitan Bank PACRA A1+ AA+
HSBC Bank Middle East Ltd Moody's P1 AA2
JS Bank PACRA A1 A
KASB Bank PACRA .A2 A-
MCB Bank Limited PACRfI. A1+ AA+
Meezan Bank Limited JCR-VlS A1 AA-
NIB Bank PACRA A1+ AA-
National Clank ot f-'akistan JCK-VI~ Al+ AAA.
Standard Chartered Bank (Pakistan) Limited PACRA A1+ AM
SAMBA Bank Limited JCR-VlS A1 A
Soneri Bank Lim ited PACRA A)+ AA-
Summit Bank JCR-VlS .A2 A
United Bank Lim ited JCR-VlS A1+ AA+ c) Liquidity risk

Liquidity risk represents the risk that the Company will encounter difficulties in meeting obligations associated with financlal tiablllties.

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, tile availability of funding through an adequate amount of committed credit facilities. Due to dynamic nature of the business, the Company maintains flexibility in funding by maintaining committed credit lines available.

The Company's liquiriity management involves projecting cash flows and considennq the level of liqurd assets necessary to meet these, monitoring balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans.

The table below analyses the Company's financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet'date to contractual maturity dates. TI)e amounts disclosed in the table are the contractual undiscounted cash flows.


2010

Maturity upto

Maturity. after

Total

one year one year

-------------------------- R up ees ------.------------------~-

Financial liabilities Derivatives

Trade and other payables Accrued interest / mark-up Borrowings

1,276,676 1,640,354 1,366,022

59,571,207 63,854,259

&.1./

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673,387 1,061,732 1,735,1.19
2,225,215 2,225,215
1,981,620 1,981,620
9,621,672 64,160,140 73,781,812
14,501,894 65,221,872 79,723,766 I

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42.2 Capital risk management

The Company's objective when managing capital are to safeguard the Company's ability to continue as a going concern in order to provide returns for share holders and benefit for other stake holders and to maintain an optimal capital structure to reduce the cost of capital.

The Company manages its capital structure and makes adjustments to it in the light of changes in economic conditions. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders or issue new shares.

The management seeks to maintain a balance between higher returns that might be possible with iligh8r levels of borrowings and the advantages and security afforded by a sound capital position.

The total long term borrowings to equity ratio as at December 31,2010 based on total long term borrowinqs of Rs. 72,811,686 and total ~quity of Rs. 13,639,592 was Rs. 84%.

The Company finances its operations through equity, borrowings and management of working capital with a view to maintaining an appropriate mix between various sources of finance to minimise risk.

42.3 Fair value estimation

The table below analyzes financial instruments carried at fair value by valuation method. Tile different levels have been defined as follows:

Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1)

Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (ie. as prices) or indirectly (i.e. derived from prices) (level 2)

inputs for the asset or liability that are not based on observable market data (level 3)

Level 1

Level 2

Level 3

Total

.----- ------------------------------ ------- R up e e s ---------------- .--- .--------------------------

Assets

Financial assets at fair value tnrouqh profit and loss - Short term investments

2,390,982

2,390,982

Derivatives used for hedging - Derivatives

2,638

2,638

2,390,982

2,638

2,393,620

Liabilities

Derivatives

- Derivatives used for hedging

- Conversion option on IFC loans

1,367,677 367,442

1,367,677 367,442

1,735,119

1,735,119

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42.4 Fair value of financial assets and liabilities

The carrying value of 811 financlal assets and liabilities renectec in the financial statements approximate their fair values.

43 TRANSACTIONS WITH RELATED PARTIES

Related parties comprises of Holding Company, associated companies and other companies with common director, retirement benefits funds, directors and key management personnel.

Details of transactions with related parties during the period, other than those which have been disclosed elsewhere in these financial statements, are as follows:

2010 Rupees

Holding Company

Purchases and services Royalty paid

Use of assets

73,604 257,584 3,860

Associated companies

Purchases and services Exchange of land Mark-up from associate

Contributions to retirement benefit schemes I funds Service charges recoverable

Funds collected against sales made on behalf of an associate Payment of interest on TFCs and repayment

of principal amount Investments in mutual funds Redemption of mutual funds Use of assets

1,875,457

3,200 110,695 151,440 '126,132

'17,018,833

120,454 300,000 192,304

13,282

Others

RemuneratiO"n of key management personnel

72,376

44

DONATIONS

Donations include the following in which a director or his spouse is interested:

Interest in Donee

Name and address of Donee

2010 Rupees

Asad Umar

Khalid Siraj Subhani .

(:->1t~

President and Trustee Trustee

Engro Foundation

46,516

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45 PRODUCTION CAPACITY

Designed annual capacity Metric Tons

Actual production 2010 Metric Tons

Urea plant (note 451) NPK plant (note 45.2)

975,000 160,000

971,913 100,270

45.1 Urea plant also produced 611 metric tons of Liquid Ammonia for out side sale.

45.2 Actual production was below the designed annual capacity due to planned shutdowns as per market demand for NPK products.

46

SEASONALITY

The Company's fertilizer business is subject to seasonal fluctuations as a result of two different farming seasons viz, Rabi (from October to Mal-ch) and Kharif (from April to September). On an average fertilizer sales are more til ed towards Rabi season. The Company manages seasonality in the business through appropriate inventory management

47

LOSS OF CERTA[N ACCOUNTING RECORDS

During 2007, a fire broke out at PNSC Building, Karachi where the Holding Company's registered office was located. [mmediately following this event the Holding Company launched its Disaster Recovery Plan due to which operational disruption and financial impact resulting from this incident remained minimal.

The fire destroyed a substantial portion of ItS hard copy records, including that of Fertilizer Undertaking (note 1.3), related to the financial years 2005, 2006 and the period January 1, 2007 to August 19, 2007 although, electronic data remained intact due to the aforementioned Disaster Recovery Plan. The Holding Company launched an initiative to recreate significant lost records and was successful in gathering the same in respect of the financial year 2007. Hard copy records related to the financial years 2005 and 2006 have not been recreated.

48

CORRESPOND[NG FIGURES

Co responding figures and balances as at January 1,2010, after transfer of Fertilizer Ur.dertaking (note 1.4), have been rearranged and reclassified, wherever necessary, for the purpose of comparison, the effects of which are not material

49

DATE OF AUTHOR[SATION FOR ISSUE

These financial statements were authorised for issue on February 9, 2011 by the Board of Directors of the

kany

3-~~

Khalid S. Subhani

Chief Executive

Director

Engro Fertilizers Limited Accounts 2011

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