Report from the Independent Auditors to the Board of Directors and Shareholders of Vinte Viviendas Integrales, S.A.B. de C.V. and Subsidiaries (formerly Vinte Viviendas Integrales, S.A.P.I. de C.V. and Subsidiaries
We have audited the consolidated fiancial statements of Vinte Viviendas Integrales, S.A.B. of C.V. and Subsidiaries (formerly Vinte Viviendas Integrales, S.A.P.I. de C.V. and Subsidiaries) (the “Company” or “Vinte”), which correspond to the consolidated statements of fiancial position as of December 31, 2017, 2016 and 2015, and the consolidated statements of profi and other comprehensive income, the consolidated statements of changes in stockholders’ equity and the consolidated statements of cash flws, corresponding to the years that ended on those dates, as well as the notes to the consolidated fiancial statements, which include a summary of the main accounting policies.
In our opinion, the accompanying consolidated fiancial statements fairly present, in all material respects, the consolidated fiancial position of the Company as of December 31, 2017, 2016 and 2015, as well as its consolidated fiancial performance and consolidated cash flws for the years that ended on those dates, in accordance with the International Financial Reporting Standards (“IFRS”), issued by the International Accounting Standards Board.
Basis of opinion
We have carried out our audits in accordance with International Auditing Standards (“ISA”). Our responsibilities under those standards are described further below in the section “Responsibilities of the independent auditors in relation to the audit of the consolidated fiancial statements” of our report. We are independent of the Company in accordance with the Code of Ethics for Accounting Professionals of the International Ethics Standards Board for Accountants (IESBA Code of Ethics) and with that issued by the Instituto Mexicano de Contadores Públicos (Code of Ethics of the Mexican Institute of Public Accountants, or “IMCP”), and we have complied with other ethics responsibilities in accordance with the IESBA Code of Ethics and with the Code of Ethics of the IMCP.
We believe that the audit evidence we have obtained provides a suffiient and adequate basis for our opinion.
Key auditing matters
The key auditing matters are those issues that, in our professional judgment, have been of the outmost importance in our audit of the consolidated fiancial statements for the current period. These issues have been addressed in the context of our audit of the consolidated fiancial statements as a whole and in the formation of our opinion on them, and we do not express a separate opinion on those matters. We have determined that the issues described below are the key auditing matters that should be disclosed in our report.
Book value of real estate inventories
For the determination of the book value of the real estate inventories and the construction in process, Vinte’s management makes judgments and assumptions in order to measure those inventories at their lowest net realizable value or acquisition and development cost, in accordance with the International Accounting Standard (“IAS”) 2, “Inventories”. This requires Vinte’s management to consider, among other aspects, its internal control, to estimate the sales prices, demand, provision of subsidies, costs and expected profi margins on its projects, in order to, when applicable, determine possible reductions in the value of the real estate inventories.
The estimated future costs of projects under construction are subject to a number of variables including the accuracy of home design, the market conditions, the obligations with the municipalities or localities where the projects are being carried out, the building materials and costs of subcontractors.
There is also a risk that the costs of real estate inventories and construction in process have been capitalized inappropriately or that they have inadequately assigned to a project, resulting in an erroneous profi margin per project or development.
Our audit procedures with respect to this key matter included the following:
- We perform procedures to validate the adequacy of the current and budgeted profi margin, used both in the current phase of project life and in its entirety.
- We reviewed a sample of land bank acquisitions, and we have tested the design and implementation of key controls.
- We made a sample of certain costs incurred in the construction in process, and we validated that said costs were assigned to the project and phase of the corresponding real estate inventory, as well as the compliance with the defiition of capitalizable costs to the real estate inventory, additionally we reviewed the proportion of the expenses and costs recognized as cost of sales of the year with respect to the residential properties sold.
- We reviewed a sample of the budgets of the projects in progress and we put to test the main judgments used by the Company’s management on sales and future costs.
- We compared the margin recognized during the year of the houses or residences sold against the projected margin of the life of the project or business analysis.
- We tested the key judgments used in the model employed by the Company’s management, with respect to the sale prices and estimated costs to be executed, which underlies the book value of the real estate inventories. We have compared this information against sales price budgets, costs and historical sales information.
Recognition of revenue in the correct period of real estate sales
We identifid that there is a risk of revenue recognition in the correct period of real estate sales. Revenue from sales of real estate properties are recognized when the Company transfers to its customers the signifiant risks and benefis inherent to the ownership of the real estate inventories, this revenue can be reliably valued and there is a probability that the Company will receive the economic benefis associated with the transaction, which normally occurs at the time of the deed or physical delivery of the home.
Our procedures included the following:
- We tested the design, implementation and operational effiiency of the Company’s controls in relation to the recognition of revenue from sales of real estate
- Seleccionamos una muestra de las ventas inmobiliarias durante el ejercicio y realizamos lo siguiente:
- We verifid the existence of the supporting documentation of said sales and, when applicable, we visited the development or project and we validated that the property was built and / or delivered to the client,
- In the case of sales conducted near year-end, we obtained a sample, in which we verifid that these sales had the supporting documentation, and these had been deeded or delivered in the correct period and we also reviewed a sample of the sales closed in the fist days of the next year, obtaining the evidence of its correct recognition in the period.
- We visited certain developments and observed the existence of fiished homes that were physically available and corroborated, through the listings of available homes of the sellers of these projects, that were on sale.
As mentioned in notes 1 and 18, on September 29, 2016, the Company carried out a public offering of 45,940,588 shares, including the over-allotment option; issuing 26,691,013 shares among the investing public, equivalent to 24.3% of the outstanding shares, at a price per share of $26.32 pesos, obtaining net resources of expenses related to the offering for $610,924 thousand pesos.
Information other than the consolidated financial statements and the report of the independent auditors
The Company’s management is responsible for other information. The other information will include the information that will be incorporated in the Annual Report that the Company is required to prepare in compliance with Article 33, Fraction I, subsection b) of Title Four, Chapter One of the Disposiciones de Carácter General Aplicables a las Emisoras y a otros Participantes del Mercado de Valores (General Provisions Applicable to Issuers and Other Stock Market Participants) and the Instructions accompanying those provisions (the Provisions). The Annual Report is expected to be available to the public after the date of this audit report.
Our opinion on the consolidated fiancial statements will not cover other information and we will not express any form of assurance on it.
In relation to our audit of the consolidated fiancial statements, our responsibility will be to review the Annual Report, when it is available, and when we do, assess whether the other information contained therein is materially inconsistent with the consolidated fiancial statements or our knowledge obtained during the audit, or that seems to contain a material error. When we review the Annual Report we will issue the note regarding such, as required by Article 33 Fraction I, subsection b) numeral 1.2 of the Provisions.
Responsibility of the management and of the people responsible for the Company’s corporate governance in relation to the consolidated financial statements
The Company’s management is responsible for the preparation and fair presentation of the accompanying consolidated fiancial statements in accordance with IFRS, and for the internal control the management deems necessary to allow the preparation of the consolidated fiancial statements free of material misstatements, due to fraud or error.
In the preparation of the consolidated fiancial statements, the management is responsible for evaluating the Company’s ability to continue as a going concern, disclosing, as appropriate, the issues related to the Company in operation and using the accounting principle of the operating company, except if the management intends to liquidate the Company or shut down its operations or there is no realistic alternative.
Those responsible for Company’s corporate governance are responsible for the supervision of the Company’s fiancial reporting process.
Responsibility of the independent auditors in relation to the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance that the consolidated fiancial statements as a whole are free of material misstatements, due to fraud or error, and to issue an audit report that contains our opinion. Reasonable assurance is a high level of security but does not guarantee that an audit conducted in compliance with the ISA always detects a material error when it exists. The errors may be due to fraud or error and are considered material if, individually or in aggregate form, it can reasonably be expected to inflence the economic decisions made by the investing public and other stakeholders based on the consolidated fiancial statements.
As part of an audit conducted in compliance with ISA, we exercise our professional judgment and maintain an attitude of professional skepticism throughout the audit. We also:
Identify and assess the material misstatement risks of the consolidated fiancial statements, due to fraud or error. Additionally, we design and apply audit procedures to respond to such risks and obtain suffiient and appropriate audit evidence to provide the basis for our opinion. The risk of not detecting a material misstatement due to fraud is higher than in the case of material misstatement due to an error, since the fraud may involve collusion, falsifiation, deliberate omissions, intentionally erroneous statements, or the annulment of internal control.
- We obtain knowledge of the internal control relevant to the audit in order to design audit procedures that are appropriate in accordance with the circumstances and not in order to express an opinion on the effectiveness of the Company’s internal control.
- We assess the adequacy of the accounting policies applied and the reasonableness of the accounting estimates and the corresponding information disclosed by the management
- We conclude on the adequacy of the use, by the management, of the accounting standard of the operating company and, based on the audit evidence obtained, we conclude on whether or not there is a material uncertainty related to the facts or conditions that can generate signifiant doubts on the Company’s capacity to continue as a going concern. If we conclude that there is material uncertainty, we are required to emphasize in our audit report about the corresponding information disclosed in the consolidated fiancial statements or, if such disclosures are not adequate, that we express an amended opinion. Our conclusions are based on the audit evidence obtained to date from our audit report. However, future events or conditions may cause the Company to cease as an operating Company.
- We evaluate the presentation as a whole of the structure and content of the consolidated fiancial statements, including the disclosed information and whether the consolidated fiancial statements represent the relevant transactions and events in a way that achieves reasonable presentation.
- We obtained suffiient audit evidence regarding the fiancial information of the Subsidiaries or their business activities in the Company’s context to express an opinion on the consolidated fiancial statements.
We disclose to those responsible for the Company’s corporate governance regarding, among other matters, the planning, scope and timing of the audit and the signifiant fidings of the audit, as well as any signifiant defiiencies in internal control that we identify during the audit.
We also provide those responsible for the Company’s corporate governance with a statement that we have complied with the applicable ethical requirements regarding independence and have communicated to them about all the relationships and other matters that can reasonably be expected to affect our independence, and where appropriate, the corresponding safeguards. Among the issues that have been the subject of communications with the people responsible for the Company’s corporate governance, we determined that they have been of the greatest relevance in the audit of the consolidated fiancial statements of the current year and that, consequently, are the key auditing matters.
We describe those matters in this audit report, unless legal or regulatory provisions prohibit public disclosure of the matter or, in extremely rare circumstances, we determine that a matter should not be disclosed in our report because we can reasonably expect that the adverse consequences of doing so would exceed the benefis of public interest thereof.