6-K 1 a52179100.htm GRANA Y MONTERO S.A.A. 6-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 6-K
 
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15b-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the month of March 2020

 Commission File Number 001-35991

GRAÑA Y MONTERO S.A.A.
(Exact name of registrant as specified in its charter)
 
N/A
(Translation of registrant’s name into English)
 
Republic of Peru
(Jurisdiction of incorporation or organization)
 
Avenida Paseo de la República 4667, Lima 34,
Surquillo, Lima
Peru
(Address of principal executive offices)
 


Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
 
Form 20-F ___X____ Form 40-F _______
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ]
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ]
 
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
 
Yes _______ No ___X____
 
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): Not applicable.
March 5, 2020


Sincerely yours,


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

GRAÑA Y MONTERO S.A.A.

By: /s/ LUIS FRANCISCO DIAZ OLIVERO
Name: Luis Francisco Diaz Olivero
Title: Chief Executive Officer
Date: March 5, 2020






GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES



CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2019







(All amounts expressed in thousands of S/ unless otherwise stated)

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES


CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2019


CONTENTS
Page
 
 
 
 
Report of Independent Registered Public Accounting Firm
1 - 2
 
 
Consolidated Statement of Financial Position
 3
 
 
Consolidated Statement of Income
 4
 
 
Consolidated Statement of Comprehensive Income
 5
 
 
Consolidated Statement of Changes in Equity
 6
 
 
Consolidated Statement of Cash Flows
 7
 
 
Notes to the Consolidated Financial Statements
8 – 107






S/        =    Peruvian Sol
US$    =    United States dollar


(All amounts expressed in thousands of S/ unless otherwise stated)
 





OPINION OF THE INDEPENDENT AUDITORS

To the Shareholders and members of the Board of Directors
Graña y Montero S.A.A.

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES
 
 
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(All amounts are expressed in thousands of S/ unless otherwise stated)


 
ASSETS
                  
         
As at
    
As at
  
         
December 31,
    
December 31,
  
   
Note
    
2018
    
2019
  
                   
Current assets
                  
Cash and cash equivalents
    
9
      
801,140
      
948,978
  
Trade accounts receivables, net
    
10
      
1,007,828
      
821,737
  
Work in progress, net
    
11
      
28,538
      
49,457
  
Accounts receivable from related parties
    
12
      
34,903
      
36,658
  
Other accounts receivable
    
13
      
588,451
      
444,500
  
Inventories, net
    
14
      
514,047
      
552,573
  
Prepaid expenses
            
10,549
      
11,348
  
             
2,985,456
      
2,865,251
  
                         
Non-current assets as held for sale
            
247,798
      
205,418
  
                         
Total current assets
            
3,233,254
      
3,070,669
  
                         
Non-current assets
                        
Long-term trade accounts receivable, net
    
10
      
1,020,067
      
753,202
  
Long-term work in progress, net
    
11
      
32,212
      
23,117
  
Long-term accounts receivable from related parties
    
12
      
778,226
      
546,941
  
Prepaid expenses
            
33,697
      
27,934
  
Other long-term accounts receivable
    
13
      
302,957
      
300,323
  
Investments in associates and joint ventures
    
15
      
257,765
      
37,035
  
Investment property
            
29,133
      
28,326
  
Property, plant and equipment, net
    
16
      
470,554
      
443,870
  
Intangible assets, net
    
17
      
847,095
      
853,315
  
Right-of-use assets, net
    
16
      
-
      
78,813
  
Deferred income tax asset
    
24
      
425,436
      
240,919
  
Total non-current assets
            
4,197,142
      
3,333,795
  
                         
                         
                         
                         
                         
                         
                         
                         
Total assets
            
7,430,396
      
6,404,464
  
                         
 
LIABILITIES AND EQUITY
                  
         
As at
    
As at
  
         
December 31,
    
December 31,
  
   
Note
    
2018
    
2019
  
                   
Current liabilities
                  
Borrowings
    
18
      
826,474
      
454,260
  
Bonds
    
19
      
39,167
      
44,737
  
Trade accounts payable
    
20
      
1,079,531
      
1,136,121
  
Accounts payable to related parties
    
12
      
55,941
      
38,916
  
Current income tax
            
25,807
      
47,999
  
Other accounts payable
    
21
      
632,669
      
635,305
  
Provisions
    
22
      
6,197
      
113,483
  
Total current liabilities
            
2,665,786
      
2,470,821
  
                         
Non-current liabilities as held for sale
            
225,828
      
210,025
  
                         
Total current liabilities
            
2,891,614
      
2,680,846
  
                         
Non-current liabilities
                        
Borrowings
    
18
      
376,198
      
344,806
  
Long-term bonds
    
19
      
897,875
      
879,305
  
Other long-term accounts payable
    
21
      
574,110
      
273,101
  
Long-term accounts payable to related parties
    
12
      
21,849
      
22,583
  
Provisions
    
22
      
103,411
      
214,952
  
Derivative financial instruments
            
61
      
52
  
Deferred income tax liability
    
24
      
75,347
      
112,734
  
Total non-current liabilities
            
2,048,851
      
1,847,533
  
Total liabilities
            
4,940,465
      
4,528,379
  
                         
Equity
                        
Capital
    
23
      
729,434
      
871,918
  
Legal reserve
            
132,011
      
132,011
  
Voluntary reserve
            
29,974
      
29,974
  
Share Premium
            
992,144
      
1,132,179
  
Other reserves
            
(170,620
)
    
(177,506
)
Retained earnings
            
375,417
      
(510,766
)
Equity attributable to controlling interest in the Company
      
2,088,360
      
1,477,810
  
Non-controlling interest
            
401,571
      
398,275
  
Total equity
            
2,489,931
      
1,876,085
  
Total liabilities and equity
            
7,430,396
      
6,404,464
  
















































The accompanying notes on pages 8 to 107 are an integral part of the consolidated financial statements.
- 3 -
CONSOLIDATED STATEMENT OF INCOME
                  
(All amounts are expressed in thousands of S/ unless otherwise stated)
        
                   
         
For the period
  
         
ended December 31,
  
   
Note
    
2018
    
2019
  
                   
                   
Revenues from construction activities
          
1,961,100
      
2,411,880
  
Revenues from services provided
          
1,003,623
      
1,089,465
  
Revenue from real estate and sale of goods
          
934,739
      
583,659
  
           
3,899,462
      
4,085,263
  
                       
Cost of construction activities
          
(1,921,112
)
    
(2,351,563
)
Cost of services provided
          
(741,172
)
    
(866,326
)
Cost of real estate and  sale of goods
          
(562,689
)
    
(425,352
)
     
26
      
(3,224,973
)
    
(3,643,241
)
Gross profit
            
674,489
      
441,763
  
                         
Administrative expenses
    
26
      
(278,433
)
    
(213,908
)
Other income and expenses
    
28
      
(61,335
)
    
(326,754
)
Loss from the sale of investments
            
(7
)
    
-
  
Operating profit (loss)
            
334,714
      
(98,899
)
                         
Financial expenses
    
27
      
(247,982
)
    
(231,709
)
Financial income
    
27
      
50,925
      
74,656
  
                         
Share of the profit or loss in associates and joint ventures
      
(3,709
)
    
(218,774
)
Profit (loss) before income tax
            
133,948
      
(474,726
)
Income tax
    
29
      
(113,318
)
    
(319,957
)
Profit (loss) from continuing operations
            
20,630
      
(794,683
)
                         
Profit (loss) from discontinued operations
    
36
      
36,785
      
(43,959
)
Profit (loss) for the period
            
57,415
      
(838,642
)
                         
Profit (loss) attributable to:
                        
Owners of the Company
            
(83,188
)
    
(884,721
)
Non-controlling interest
            
140,603
      
46,079
  
             
57,415
      
(838,642
)
                         
                         
Loss per share attributable to owners of the
                        
Company during the year
    
34
      
(0.125
)
    
(1.076
)
Loss per share from continuing operations
                        
attributable to owners of the Company during the year
            
(0.099
)
    
(1.023
)

The accompanying notes on pages 8 to 107 are an integral part of the consolidated financial statements.
- 4 -

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES
                  
                   
                   
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                  
(All amounts are expressed in thousands of S/ unless otherwise stated)
        
                   
         
For the year
  
         
ended December 31,
  
   
Note
    
2018
    
2019
  
                   
                   
Profit (loss) for the year
          
57,415
      
(838,642
)
Other comprehensive income:
                      
Items that will not be reclassified to profit or loss
                      
Remeasurement of actuarial gains and losses, net of tax
          
16,589
      
-
  
                       
Items that may be subsequently  reclassified to profit or loss
                      
Cash flow hedge, net of tax
    
30
      
119
      
6
  
Foreign currency translation adjustment, net of tax
    
30
      
5,733
      
(8,170
)
Exchange difference from net investment in a foreign operation, net of tax
    
30
      
(8,147
)
    
(456
)
             
(2,295
)
    
(8,620
)
Other comprehensive income for the year, net of tax
            
14,294
      
(8,620
)
Total comprehensive income for the year
            
71,709
      
(847,262
)
                         
Comprehensive income attributable to:
                        
Owners of  the Company
            
(67,548
)
    
(891,607
)
Non-controlling interest
            
139,257
      
44,345
  
             
71,709
      
(847,262
)
                         
Comprehensive income attributable to owners of the Company:
                        
Continuing operations
            
(131,284
)
    
(848,994
)
Discontinued operations
            
63,736
      
(42,613
)
             
(67,548
)
    
(891,607
)

The accompanying notes on pages 8 to 107 are an integral part of the consolidated financial statements.
- 5 -
GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES   
   
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY   
FOR THE YEAR ENDED DECEMBER 31, 2018 AND 2019   
(All amounts are expressed in thousands of S/ unless otherwise stated)   



   
Attributable to the controlling interests of the Company
              
   
Number
                                                        
   
of shares
          
Legal
    
Voluntary
    
Share
    
Other
    
Retained
          
Non-controlling
  
   
In thousands
    
Capital
    
reserve
    
reserve
    
premium
    
reserves
    
earnings
    
Total
    
interest
    
Total
  
                                                             
                                                             
Balances as of January 1, 2018
    
660,054
      
660,054
      
132,011
      
29,974
      
881,795
      
(169,671
)
    
589,167
      
2,123,330
      
465,748
      
2,589,078
  
- IFRS adoption
    
-
      
-
      
-
      
-
      
-
      
-
      
(52,564
)
    
(52,564
)
    
(979
)
    
(53,543
)
Initial balances restated
    
660,054
      
660,054
      
132,011
      
29,974
      
881,795
      
(169,671
)
    
536,603
      
2,070,766
      
464,769
      
2,535,535
  
(Loss) profit for the year
    
-
      
-
      
-
      
-
      
-
      
-
      
(83,188
)
    
(83,188
)
    
140,603
      
57,415
  
Cash flow hedge
    
-
      
-
      
-
      
-
      
-
      
113
      
-
      
113
      
6
      
119
  
Adjustment for actuarial gains and losses
    
-
      
-
      
-
      
-
      
-
      
-
      
16,589
      
16,589
      
-
      
16,589
  
Foreign currency translation adjustment
    
-
      
-
      
-
      
-
      
-
      
6,930
      
-
      
6,930
      
(1,197
)
    
5,733
  
Exchange difference from net investment in a foreign operation
    
-
      
-
      
-
      
-
      
-
      
(7,992
)
    
-
      
(7,992
)
    
(155
)
    
(8,147
)
Comprehensive income of the year
    
-
      
-
      
-
      
-
      
-
      
(949
)
    
(66,599
)
    
(67,548
)
    
139,257
      
71,709
  
Transactions with shareholders:
                                                                                
- Dividend distribution
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(102,772
)
    
(102,772
)
- Contributions (devolution) of non-controlling shareholders, net
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(84,442
)
    
(84,442
)
- Additional acquisition of non-controlling
    
-
      
-
      
-
      
-
      
(9,583
)
    
-
      
-
      
(9,583
)
    
(4,050
)
    
(13,633
)
- Capital Increase
    
69,380
      
69,380
      
-
      
-
      
68,223
      
-
      
-
      
137,603
      
-
      
137,603
  
- Deconsolidation CAM Group
    
-
      
-
      
-
      
-
      
-
      
-
      
(42,878
)
    
(42,878
)
    
18,221
      
(24,657
)
- Deconsolidation Stracon GyM
    
-
      
-
      
-
      
-
      
51,709
      
-
      
(51,709
)
    
-
      
(29,412
)
    
(29,412
)
Total transactions with shareholders
    
69,380
      
69,380
      
-
      
-
      
110,349
      
-
      
(94,587
)
    
85,142
      
(202,455
)
    
(117,313
)
Balances as of December 31, 2018
    
729,434
      
729,434
      
132,011
      
29,974
      
992,144
      
(170,620
)
    
375,417
      
2,088,360
      
401,571
      
2,489,931
  
                                                                                 
Balances as of January 1, 2019
    
729,434
      
729,434
      
132,011
      
29,974
      
992,144
      
(170,620
)
    
375,417
      
2,088,360
      
401,571
      
2,489,931
  
                                                                                 
- IFRS adoption
    
-
      
-
      
-
      
-
      
-
      
-
      
(1,462
)
    
(1,462
)
    
-
      
(1,462
)
Initial balances restated
    
729,434
      
729,434
      
132,011
      
29,974
      
992,144
      
(170,620
)
    
373,955
      
2,086,898
      
401,571
      
2,488,469
  
(Loss) profit for the year
    
-
      
-
      
-
      
-
      
-
      
-
      
(884,721
)
    
(884,721
)
    
46,079
      
(838,642
)
Cash flow hedge
    
-
      
-
      
-
      
-
      
-
      
6
      
-
      
6
      
-
      
6
  
Foreign currency translation adjustment
    
-
      
-
      
-
      
-
      
-
      
(6,440
)
    
-
      
(6,440
)
    
(1,730
)
    
(8,170
)
Exchange difference from net investment in a foreign operation
    
-
      
-
      
-
      
-
      
-
      
(452
)
    
-
      
(452
)
    
(4
)
    
(456
)
Comprehensive income of the year
    
-
      
-
      
-
      
-
      
-
      
(6,886
)
    
(884,721
)
    
(891,607
)
    
44,345
      
(847,262
)
Transactions with shareholders:
                                                                                
- Dividend distribution
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(12,762
)
    
(12,762
)
- Contributions (devolution) of non-controlling shareholders, net
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(32,996
)
    
(32,996
)
- Additional acquisition of non-controlling
     -
       -
       -
       -
       1,883
       -
       -
       1,883
       (1,883
 )
     -  
- Capital increase
    
142,484
      
142,484
      
-
      
-
      
138,152
      
-
      
-
      
280,636
      
-
      
280,636
  
Total transactions with shareholders
    
142,484
      
142,484
      
-
      
-
      
140,035
      
-
      
-
      
282,519
      
(47,641
)
    
234,878
  
Balances as of December 31, 2019
    
871,918
      
871,918
      
132,011
      
29,974
      
1,132,179
      
(177,506
)
    
(510,766
)
    
1,477,810
      
398,275
      
1,876,085
  

The accompanying notes on pages 8 to 107 are an integral part of the consolidated financial statements.
- 6 -
GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES
        
                   
                   
CONSOLIDATED STATEMENT OF CASH FLOWS
                  
(All amounts are expressed in thousands of S/ unless otherwise stated)
        
                   
         
For the year
        
         
ended December 31,
  
   
Note
    
2018
    
2019
  
                   
OPERATING ACTIVITIES
                  
Profit (loss) before income tax
          
170,202
      
(535,271
)
Adjustments to  profit not affecting cash flows from
                      
operating activities:
                      
Depreciation
    
26
      
125,419
      
97,352
  
Amortization
    
26
      
112,072
      
105,278
  
Impairment of inventories
    
26
      
-
      
4,503
  
Impairment of accounts receivable and other accounts receivable
    
26
      
65,076
      
290,491
  
Reversal of impairment of inventories
            
(26,993
)
    
(4,752
)
Debt condonation
            
-
      
(18,186
)
Impairment of property, plant and equipment
    
26
      
5,664
      
20,018
  
Impairment of intangible assets
    
28
      
-
      
45,821
  
Reversal of impairment of accounts receivable
            
-
      
(19,448
)
Reversal of impairment of intangible assets
            
-
      
(20,676
)
Indemnification
            
686
      
-
  
Change in the fair value of the liability for put option
    
28
      
(6,122
)
    
4,697
  
Other provisions
    
22
      
75,369
      
186,894
  
Financial expense,net
            
177,649
      
152,970
  
Impairment of investments
            
-
       384
  
Share of the profit and loss in associates and joint ventures under the equity method of accounting
    
15 a) b
)
    
3,709
      
218,774
  
Reversal of provisions
    
22
      
(6,218
)
    
(7,471
)
Disposal of assets
            
16,327
      
833
  
Loss (profit) on sale of property, plant and equipment
    
16
      
7,105
      
(11,892
)
Loss on sale from available-for-sale financial assets
    

     
1,529
      
-
  
Profit on sale of investments in subsidiaries
            
(73,642
)
    
-
  
Loss on remeasurement of accounts receivable
            
25,110
      
45,363
  
Net variations in assets and liabilities:
                        
Trade accounts receivable and unbilled working in progress
      
(236,011
)
    
457,709
  
Other accounts receivable
            
190,354
      
148,833
  
Other accounts receivable from related parties
            
24,609
      
(11,178
 )
Inventories
            
200,575
      
(34,575
)
Pre-paid expenses and other assets
            
18,309
      
4,964
  
Trade accounts payable
            
10,917
      
58,973
  
Other accounts payable
            
(311,848
)
    
(283,526
)
Other accounts payable to related parties
            
92,613
      
(24,461
)
Other provisions
            
(6,615
)
    
(2,178
)
Interest payment
            
(188,704
)
    
(157,475
)
Payments for purchases of intangibles - Concessions
            
(10,305
)
    
(25,917
)
Payment of income tax
            
(177,563
)
    
(94,669
)
Net cash provided by operating activities
            
279,273
      
592,182
  
                         
INVESTING ACTIVITIES
                        
Sale of investment
            
222,971
      
-
  
Sale of property, plant and equipment
            
31,852
      
18,607
  
Sale of non-current assets held for sale, net
            
16,244
      
-
  
Interest received
            
36,508
      
6,552
  
Dividends received
    
15 a) b
)
    
1,823
      
1,517
  
Payment for purchase of investments properties
            
(209
)
    
(88
)
Payments for intangible purchase
            
(86,799
)
    
(80,709
)
Payments for purchase and contributions on investment in associate and joint ventures
      
(3,770
)
    
-
  
Payments for property, plant and equipment purchase
            
(80,765
)
    
(76,707
)
Net cash provided by (applied to) investing activities
            
137,855
      
(130,828
)
                         
FINANCING ACTIVITIES
                        
Loans received
            
1,018,744
      
581,637
  
Amortization of loans received
            
(1,265,920
)
    
(1,074,259
)
Amortization of bonds issued
            
(28,914
)
    
(31,335
)
Payment for transaction costs for debt
            
-
      
(4,770
)
Dividends paid to non-controlling interest
    
35 d
)
    
(102,772
)
    
(12,762
)
Cash received (return of contributions) from non-controlling shareholders
      
(59,053
)
    
(32,996
)
Capital increase
    
23
      
137,603
      
281,391
  
Acquisition or sale of interest in a subsidiary of non-controlling shareholders
      
389
      
-
  
Net cash applied to financing activities
            
(299,923
)
    
(293,094
)
Net increase in cash
            
117,205
      
168,260
  
Exchange difference
            
57,756
      
(20,303
)
Cash and cash equivalents at the beginning of the period
      
626,060
      
801,021
  
Cash and cash equivalents at the end of the period
    
9
      
801,021
      
948,978
  
                         
NON-CASH TRANSACTIONS:
                        
Capitalization of interests
            
3,361
      
7,229
  
Acquisition of assets through finance leases
            
2,365
      
3,851
  
Accounts payable to the non-controlling interest for purchase of investments
      
14,022
      
-
  
Contribution in inventories
            
25,389
      
-
  
Acquisition of right-of-use assets
            
-
      
101,745
  
Deconsolidation from non-controlling interest
            
54,069
       -
  
Transaction costs due to capital increase pending payment
             -
       755
  

The accompanying notes on pages 8 to 107 are an integral part of the consolidated financial statements.
- 7 -

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2019


1
GENERAL INFORMATION

 
a)
Incorporation and operations

Graña y Montero S.A.A. (hereinafter the “Company”) was incorporated in Perú on August 12, 1996, as a result of the equity spin-off of Inversiones GyM S.A. (formerly Graña y Montero S.A.). The Company’s legal address is Av. Paseo de la República 4675, Surquillo Lima, Perú and is listed on the Lima Stock Exchange and the New York Stock Exchange (NYSE).

The Company is the parent of the Graña y Montero Group that includes the Company and its subsidiaries (hereinafter, the “Group”) and is mainly engaged in holding investments in different Group companies. Additionally, the Company provides services of general management, financial management, commercial management, legal advisory, human resources management and leases office space to the Group companies.

The Group is a conglomerate of companies with operations including different business activities, the most significant are engineering and construction, infrastructure (public concession ownership and operation) and real estate businesses. See details of operating segments in Note 7.

 
b)
Authorization for the issue of the financial statements

The consolidated financial statements for the year ended December 31, 2019, have been prepared and issued with Management and Board of Directors’ authorization on March 5, 2020, and will be submitted for consideration and approval at the General Shareholders’ Meeting to be held within the term established by Peruvian law. Management expects that the consolidated financial statements as of December 31, 2019, will be approved with no changes.

 
c)
Current situation of the Company

As a result of decisions of a previous administration, the Group is involved in a series of corruption cases mainly between 2004 and 2015, which have generated criminal investigations by the Prosecutor's Office and administrative investigations by a regulatory body. Such situations led to organizational changes, external investigations, independent of the Company’s Management, related to the Group's business with Odebrecht and the facts under criminal investigation, as well as other internal measures as explained below:

●
On January 9, 2017, the Board of Directors approved the performance of an independent investigation related to six projects developed in association with companies of the Odebrecht Group.

●
On March 30, 2017, the Board of Directors created a Risk, Compliance and Sustainability Committee, who was in charge of the oversight of the investigation independently of Management. The external investigation was entrusted to the law firm Simpson, Thacher and Bartlett, who reported exclusively to the Risk, Compliance and Sustainability Committee in order to preserve the independence of the investigation.

●
The external investigation concluded on November 2, 2017 and found no evidence that the Group or any of its former or current directors or executives had intentionally or knowngly participated in acts of corruption related to the six projects developed in association with Odebrecht.

- 8 -
●
As new information about the cases emerged, the Company's Board of Directors continued to investigate the facts that were the subject of the criminal investigations described above, including matters that were beyond the scope of the investigation conducted by Simpson, Thacher and Barlett. After an extensive and detailed review process, the Company obtained relevant findings for the criminal investigations in process and, in line with its commitment to transparency and integrity, decided to share them in their entirety with the authorities within the framework of a plea bargain process.

●
As a result of its contribution to the investigations, on December 27, 2019, the Company signed a preliminary agreement whereby the Anti-Corruption Prosecutor and the Ad hoc Prosecutor's Office promise to execute a final plea bargain agreement with the Company that would provide The Company with certain regarding the contingencies it faces as a result of the above-mentioned processes. Additionally, in the aforementioned preliminary agreement, the Anti-Corruption Prosecutor and the Ad Hoc Attorney General's Office authorize the Company to disclose its existence but maintain the legal reserve on its content

●
On the other hand, over the last three years the new administration together with the new board initiated a transformation process based on the principles of Truth, Transparency and Integrity, making profound changes in the organization such as the reconfiguration of a board of directors with an independent majority, new composition shareholding, as well as the creation of new instances of government such as the Corporate Risk Management and autonomous Compliance, with direct report to the Board of Directors, among other actions.

Criminal investigations derived from projects developed in partnership with companies of the Odebrecht group

As for the Lava Jato case, the Company participated directly or through its subsidiaries as minority partner in certain entities that developed six infrastructure projects in Peru with companies belonging to the Odebrecht group (hereinafter Odebrecht).

In 2016, Odebrecht entered into a Plea Agreement with the authorities of the United States Department of Justice and the Office of the District Attorney for the Eastern District of New York by which it admitted corruption acts in connection with some of these projects in which the Company participate as minority partner.

●
IIRSA Sur

In relation to investigations on IIRSA Sur, the former Chairman of the Board of Directors was incorporated as investigated by collusion; a former director and a former executive for money laundering. Subsequently, Graña y Montero S.A.A. and GyM S.A. they have been incorporated as third-party civilians responsible in the process, which means that it will be assessed whether the obligation to indemnify the state for damages resulting from the facts under investigation will be imposed on these entities.

●
Electric Train construction project

The first Preparatory Investigation Court of the Judiciary decided to incorporate GyM S.A. as civil third party responsible in the process related to the construction of the Electric train construction Project, tranches 1 and 2. In this investigation the former Chairman of the Board, a former director and a former manager have been charged.

●
Gasoducto Sur Peruano (GSP)

In 2019, the Company concluded that it has an exposure to the preliminary investigation process conducted in relation to GSP (the South Peruvian Gas Pipeline project), even though as of the date hereof, it has not been indicted or incorporated as liable third party, even though the former Chairman of the Board of Directors and a former director are seeking plea bargain agreements in relation to this process, among others.

In addition to the cases described for which a provision for civil damages has been registered, there are two projects carried out in partnership with Odebrecht that are not currently under investigation. If this is initiated and some evidence is found, the maximum possible civil damage exposure estimated under Law 30737 for both projects would be S/52.7 million (US$16 million approximately).

Criminal investigations in conection to the Construction Club case

On the other hand, GyM S.A. has been incorporated, along with other construction companies, as a legal entity investigated in the criminal investigation that the Public Ministry has been carrying out for the alleged crime of corruption of officials in relation to the so-called Construction Club. Similarly, at the end of February 2020, the Public Ministry has requested the incorporation of Concar S.A., the latter is pending judicial decision.

On the other hand, like officials of other construction companies, a former commercial manager of GyM S.A., the former president of the Board of Directors, a former director and the former Corporate General Manager of the company have been included in the criminal investigation.

Anticorruption Law - effects on the Group

Law 30737 and its regulation issued by Supreme Decree 096-2018-EF have mitigated the Company and subsidiaries exposure to the cases described in subsections 1) and 2) above. These rules set clear guidelines to estimate the potential compensation reducing the uncertainty derived from the legal proceedings, by among other things, preventing the imposition of liens or attachments of assets that would impair its ability to operate.

The benefits of the mentioned rules are subject to the fulfillment of the following obligations:

•
The obligation to set up a trust that will guarantee any eventual payment obligation of an eventual civil compensation in favor of the Peruvian Government;
•
The obligation not to transfer funds abroad without the prior consent of the Ministry of Justice;
•
The implementation of a compliance program; and
•
The obligation to disclose information to the authorities and to collaborate in the investigation.

The Group has designed a compliance program which is currently under implementation, it fully cooperates with the authorities in its investigations and has executed a trust agreement with the Ministry of Justice, under which the Company has established for an approximate amount of S/80 million (equivalent to US$24 million).

On the other hand, based on the standards indicated and their guidelines, Management has estimated that the value of the civil damages for the cases described above is S/280 millions (US$85 millions)  and has registered as of December 31st, 2019 S/153.9 million (equivalent to US$46.6 million) as net present value (Note 22).

Investigations and administrative process initiated by INDECOPI in conection to the Construction Club case

On July 11, 2017, the Peruvian National Institute for the Defense of Free Competition and the Protection of Intellectual Property (“Indecopi”) initiated an investigation against several construction companies, including GyM S.A., about the existence of an alleged cartel called the Construction Club.
Throughout the investigation, GyM S.A. has provided to Indecopi with all the information requested and continues collaborating with the ongoing investigations.

On February 11, 2020, GyM S.A. was notified by the Technical Secretariat of the Commission for the Defense of Free Competition (“Indecopi”) with the resolution that begins a sanctioning administrative procedure involving a total of 35 companies and 28 natural persons, for an alleged anticompetitive conduct in the market of Public Works. The resolution does not include the assignment of responsibilities or the result of the administrative disciplinary procedure, which will be determined at the end of said procedure. The procedure is in a probatory stage, therefore, INDECOPI has not carried out actions in order to quantifying the possible penalties that could result.

- 9 -

2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied in all the years presented, unless otherwise stated.

2.1
Basis of preparation

The consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the IFRS Interpretations Committee (IFRIC) applicable to companies reporting under IFRS.  The financial statements comply with IFRS as issued by the IASB in force as of December 31, 2018, and December 31, 2019, respectively.
- 10 -

The consolidated financial statements have been prepared under the historical cost convention, except for derivative financial instruments, financial assets at fair value through profit or loss, and available-for-sale financial assets measured at fair value.  The financial statements are presented in thousands of Peruvian Sol unless otherwise stated.

The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. Also requires that the Management exercise its critical judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 5.

2.2
Consolidation of financial statements

 
a)
Subsidiaries

Subsidiaries are entities over which the Company has control. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The Group applies the acquisition method to account for business combinations. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.

The Group evaluates the measurement of the non-controlling interest on an acquisition-by-acquisition basis.  At December 31, 2018, and 2019, the measurements of the non-controlling interest in the Group´s acquisitions were made at the non-controlling interest´s proportionate share of the recognized amounts of the acquiree’s identifiable net assets.

Business acquisition-related costs are expensed as incurred.

Any contingent consideration assumed by the Group with the selling party is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration are recognized in accordance with IFRS 9 “Financial Instruments” as profit or loss.

Goodwill is initially measured as the excess of the acquisition cost, the fair value at the acquisition date of any interest previously acquired plus the fair value of the non-controlling interest, over the net identifiable assets acquired and liabilities and contingent liabilities assumed. If the acquisition cost is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss at the time of acquisition.

For consolidating subsidiaries, balances, income, and expenses from transactions between Group companies are eliminated. Profits and losses resulting from inter-company transactions that are recognized as assets are also eliminated. Group companies use common accounting practices, except for those that are specifically required for specific businesses.

 
b)
Changes in ownership interests in subsidiaries without change of control

Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions, in other words as transactions with owners in their capacity as owners. The difference between the fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interest are also recorded in equity at the time of disposal.

 
c)
Disposal of subsidiaries

- 11 -
When the Group ceases to have control over a subsidiary, any retained interest in the entity is re-measured at its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss at such date. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that the amount previously recognized in other comprehensive income is reclassified to profit or loss.

 
d)
Joint arrangements

Contracts in which the Group and one or more of the contracting parties have joint control on the relevant joint activities are called joint arrangements.

Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be both joint ventures as well as joint operations.

Joint ventures are accounted for using the equity method. Under this method, interests in joint ventures are initially recognized at cost and adjusted thereafter to recognize the Group’s share of the post-acquisition profits or losses and movements in the comprehensive income statement.

The Group assesses on an annual basis whether there is any objective evidence that the investment in the joint ventures and associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the impairment loss in share of the profit or loss in associates and joint ventures under the equity method of accounting in the income statement. In addition, the Group stops the use of the equity method if the entity ceases to be an operating entity.

Joint operations are joint arrangements whereby the parties that have joint control of the arrangement, have rights over the assets, and obligations for the liabilities, relating to the arrangement. Each party recognizes its assets, liabilities, revenue and cost and its share of any asset or liability jointly held and, on any revenue, or cost arisen from the joint operation.

In the Group, joint operations mainly relate to consortiums (entities without legal personality) created exclusively for the development of a construction contract. Considering that the only objective of the consortium is to develop a specific project, all revenue and costs are included within revenue from construction activities and cost of construction activities, respectively.

 
e)
Associates

Associates are all entities over which the Group has significant influence but not control, generally accompanying a holding of between 20% and 50% of the voting rights.  Investments in associates are accounted for using the equity method (see section d) above).

Profits and losses resulting from transactions between the Group and its associates are recognized in the Group’s consolidated financial statements only to the extent of unrelated investor’s interests in the associates.  Unrealized losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred.  Accounting policies of associates are changed where necessary to ensure consistency with the policies adopted by the Group.

Impairment losses are measured and recorded in accordance with section d) above.

2.3
Segment reporting

Operating segments are reported in a consistent manner with internal reporting provided to the Management of the Group.
- 12 -
If an entity changes the structure of its internal organization in a manner that causes the composition of its reportable segments to change, the Group restates the information for earlier periods unless the information is not available.

2.4
Foreign currency translation

 
a)
Functional and presentation currency

The consolidated financial statements are presented in Peruvian soles, which is the functional and presentation currency of the Group. All subsidiaries, joint arrangements, and associates use the Peruvian Sol as their functional currency, except for foreign entities, for which the functional currency is the currency of the country in which they operate.

 
b)
Transactions and balances

Foreign currency transactions are translated into the functional currency using prevailing the exchange rates at the date of the transactions or valuation when items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the consolidated income statement, except when deferred in other comprehensive income.  Foreign exchange gains and losses of all monetary items are included in the income statement within financial income or expense.

Exchange differences arising on loans from the Company to its subsidiaries in foreign currencies are recognized in the separate financial statements of the Company and separate financial statements of the subsidiaries. In the consolidated financial statements, such exchange differences are recognized in other comprehensive income and are re-classified in the income statement on the disposal of the subsidiary or debt repayment to the extent such loans qualify as part of the “net investment in a foreign operation”.

 
c)
Group companies

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency of the Group are translated into the presentation currency as follows:

i)
Assets and liabilities for each statement of financial position are translated using the closing exchange rate prevailing at the date of the consolidated statement of financial position;
ii)
income and expenses for each income statement are translated at the average exchange rate (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated using the exchange rate on the date of the transaction);
iii)
capital is translated by using the historical exchange rate for each capital contribution made; and
iv)
all exchange differences are recognized as separate components in other comprehensive income, within foreign currency translations adjustment.

Goodwill and fair value adjustments arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the closing exchange rate.  Exchange differences are recognized in other comprehensive income.

2.5
Concession agreements

- 13 -
Concession agreements signed between the Group and the Peruvian Government entitle the Group, as a Concessionaire, to assume obligations for the construction or improvement of infrastructure and which qualify as public service concessions are accounted as defined by IFRIC 12 “Service Concession Arrangements”.  The consideration to be received from the Government for the services of constructing or improving public infrastructure is recognized as a financial asset, an intangible asset or both, as stated below:

a)
It is recognized as a financial asset to the extent that it has a contractual right to receive cash or other financial assets either because the Government secures the payment of specified or determinable amounts or because the Government will cover any difference arising from the amounts actually received from public service users in relation with the specified or determinable amounts.  These financial assets are recognized initially at fair value and subsequently at amortized cost (financial asset model).
   
b)
It is recognized as an intangible asset to the extent that the service agreement grants the Group a contractual right to charge users of the public service. The resulting intangible asset is measured at cost and is amortized as described in Note 2.15 (intangible asset model).
   
c)
It is recognized as a financial asset and an intangible asset when the Group recovers its investment partially by a financial asset and partially by an intangible asset (bifurcated model).

2.6
Cash and cash equivalents

In the consolidated statements of financial position and cash flows, cash and cash equivalents include cash on hand, on-demand bank deposits, other highly liquid investments with original maturities of three months or less and bank overdrafts.  In the consolidated statement of financial position, bank overdrafts are included in the balance of borrowings as current liabilities.

2.7
Financial assets

2.7.1
 Classification and measurement

The Group classifies its financial assets, according to its subsequent measurement, in the following categories: i) amortized cost; ii) financial assets at fair value through other comprehensive income and iii) financial assets at fair value through profit or loss. The classification depends on the purpose for which the financial assets were acquired on the basis of the Group's business model for managing the financial assets and the characteristics of the contractual cash flows of the financial asset.

Management determines the classification of its financial assets at the date of its initial recognition and re-evaluates this classification at the date of each closing of its consolidated financial statements. As of December 31, 2018, and 2019, the Group only maintains financial assets in the following categories:

a) Amortized cost

This category is the most relevant for the Group. The Group measures financial assets at amortized cost if the following conditions are met:

i) The financial asset is held within a business model with the objective of maintaining the financial assets to obtain the contractual cash flows; and

ii) The contractual terms of the financial asset generate cash flows, on specific dates, that are only payments of the principal and interest on the amount of the outstanding principal.

Financial assets at amortized cost are subsequently measured using the effective interest method and are subject to impairment. Profits and losses are recognized in profits or losses when the asset is written off, modified or impaired.

Trade accounts receivable, accounts receivable from related companies, other accounts receivable, work in progress and cash and cash equivalents are included in current assets except for those over twelve months after the date of the consolidated statement of financial position. The latter are classified as non-current assets.
- 14 -

b) Financial assets at fair value through other comprehensive results

Financial assets at fair value through other comprehensive income of the Group are classified in this category when they meet the following conditions:

i) keep them within a business model whose objective is achieved by obtaining contractual cash flows and selling financial assets; and
ii) the contractual terms of the financial asset give rise, on specific dates, to cash flows that are only payments of the principal and interest on the outstanding principal amount.

The investment account at Inversiones en Autopistas S.A. is included in this category.

c) Financial assets at fair value through profit or loss

Financial assets that do not meet the criteria of amortized costs or fair value through other comprehensive income are measured at fair value through profit or loss. The result in a debt investment that is subsequently measured at fair value through gains and losses is recognized in the consolidated statement of comprehensive income in the period in which it occurs.

Financial assets at fair value through profit or loss are non-derivative financial assets designated by the Group at their fair value upon initial recognition and are held for sale. These are included in current assets.

2.7.2
Derecognition of financial assets

The Group derecognizes a financial asset when the contractual rights over the cash flows of the financial asset expire, or when it transfers the rights to receive the contractual cash flows in a transaction in which all the risks and benefits of ownership of the financial asset are substantially transferred, or does not transfer or retain substantially all the risks and benefits related to the property and does not retain control over the assets transferred.

The Group participates in transactions in which it transfers the assets recognized in its statement of financial position but retains all or substantially all the risks and advantages of the assets transferred, and/or control over them. In these cases, the assets transferred are not derecognized and are measured on a basis that reflects rights and obligations that the Group has retained.

2.8
Impairment of financial assets

IFRS 9 “Financial Instruments”, requires to register expected credit losses of all financial assets, except for those that are carried at fair value with an effect on results, estimating it over 12 months or for the entire life of the financial instrument ("lifetime"). In accordance with the provisions of the standard, the Group applies the simplified approach (which estimates the loss for the entire life of the financial instrument), for the commercial debtors of the rental business line of the real estate sector, and the general approach for the trade accounts receivables, work in progress and other accounts receivable; the same that requires evaluating whether or not a significant increase in risk exists to determine whether the loss should be estimated based on 12 months after the reporting date or during the entire life of the asset.

The Group has established a policy to conduct an evaluation, at the end of each reporting period, to identify whether the asset has suffered a significant increase in credit risk since the initial date. Both the credit losses expected at 12 months and the expected credit losses during the life of the asset are calculated individually or collectively, depending on the nature of the portfolio.
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For financial assets for which the Group has no reasonable expectation of recovering, either the entire outstanding amount or a portion thereof, the gross carrying amount of the financial asset is reduced. This is considered a decrease in (partial) accounts of the financial asset.

2.9
Derivative financial instruments and hedging activities

Derivatives are initially recognized at fair value on the date a derivative contract is signed into and are subsequently re-measured at their fair value at the end of each reporting period.  The method for recognizing the gain or loss resulting from changes in the fair value of the derivatives depends on whether they are designated as an  hedging instrument, and if so, the nature of the item being hedged.

The Group designates certain derivatives as hedges of a particular risk associated with a recognized asset or liability (fair value hedge) or a highly probable forecast transaction (cash flow hedge).  Derivatives are initially recognized at fair value on the date of subscription of the contract and are subsequently recognized at their fair value.

The Group documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedges transactions. The Group also documents its assessment, both at hedge inception as at the date of each subsequent statement of financial position, of whether the derivatives used in hedges transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

The fair value of various derivative instruments used for hedging purposes and changes in the account reserves for hedges in equity are disclosed in Note 8.  The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity period of the hedged item is more than 12 months and as a current asset or liability when the remaining maturity period of the hedged item is less than 12 months.  Trading derivatives are classified as a current asset or liability.

Cash flow hedge

The effective portion of changes in the fair value of derivatives that are designated and qualify as fair value hedges is recognized as other comprehensive income.  The gain or loss relating to the ineffective portion is recognized immediately in the income statement. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss (for example, when the forecasted sale that is hedged takes place).

The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognized in the income statement as “Financial income or Financial expenses”.

However, when the forecasted transaction that is hedged results in the recognition of a non-financial asset (for example, inventory or fixed assets), the gains or losses previously deferred in equity are transferred from equity and are included in the initial measurement of the cost of the non-financial asset.  The deferred amounts are finally recognized in cost of goods sold in the case of inventory or depreciation in the case of fixed assets.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and will be reversed to income  when the forecasted transaction is finally recognized in the statement of comprehensive income .  When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement within “other income and expenses, net”.

2.10
Trade accounts receivables

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Trade receivables are amounts due from customers for goods or services sold by the Group.  If the collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets. In the Infrastructure segment it includes the billing of the first purchase of trains as part of the model of the financial asset of the concessionaire GyM Ferrovías S.A (Note 2.5).

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less any provision for impairment, except for receivables of less than one year that are stated at a nominal amount which is similar to their fair values since they are short term.

It includes Management estimates corresponding to the collection rights for services performed pending invoice and/or approval by client, which have been valued using the completion percentage method. It corresponds mainly to the Engineering and Construction segment (subsidiaries GyM S.A. and GMI S.A.). In the Infrastructure segment, for concessions it corresponds to future collections for public services, mainly represented by unconditional contractual rights to be received from the Grantor under the model of the financial asset (Note 2.5).

2.11
Work in progress

This account includes the balance of work in progress costs incurred that relates to future activities of the construction contracts and the constructions phase in concessions (see Note 2.26 for detail on revenue recognition from construction activities and concessions services).

Changes in estimates of contract revenues and costs can increase or decrease the estimated margin. When a change in the estimate is known, the cumulative impact of the change is recorded in the period in which it is known, based on the progress completed.

2.12
Inventories

The inventories include land, works in progress and finished buildings related to the real estate activity, materials used in the construction activity and marketed supplies for exploration and extraction activities.

 
a)
Real estate activity

Land used for the execution of real estate projects is recognized at acquisition cost. Work in progress and finished real estate includes the costs of design, materials, direct labor, borrowing costs (directly attributable to the acquisition, construction, production of the asset), other indirect costs and general expenses related to the construction.

Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.  The Group reviews annually whether inventories have been impaired identifying three groups of inventories to measure their net realizable value: i) land bought for future real estate projects which are compared to their net appraisal value; if the acquisition value is higher, a provision of impairment is reconized; ii) land under construction, impairment is measured based on cost projections; if these costs are higher than selling prices of each real estate unit, an impairment estimated is recorded; and iii) completed real estate units; these inventory items are compared to the selling prices less selling expenses; if these selling expenses are higher, a provision for impairment is recorded.

For the reductions in the carrying amount of these inventories to their net realizable value, a provision is recognized for impairment of inventories with a charge to profit or loss for the year in which those reductions occur.

 
b)
Exploration and extraction activities

Inventories are valued at production costs or net realizable value (NRV), the one with the lowest result, on the basis of the weighted average method. The NRV represents the value at which it is estimated to make oil, gas and its derivatives LPG and HAS, which is calculated on the basis of international prices at which discounts that are usually granted are deducted. Miscellaneous supplies, materials, and spare parts are valued at cost or replacement value, whichever is less based on the average method. The cost of inventories excludes financing expenses and exchange differences. Inventories to be received are recorded at cost by the specific identification method.
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The Group constitutes a devaluation of materials charged to income for the year in cases in which the book value exceeds its recoverable value.

 
c)
   Other activities

Materials and supplies are recorded at cost by the weighted average method or at their replacement value, the lower. The cost of these items includes freight and non-refundable applicable taxes.

The devaluation of these items is estimated on the basis of specific analysis made by the Management on its rotation. If it is identified that the book value of the stocks of materials and supplies exceeds their replacement value, the difference is charged to income in the year in which this situation is determined.

Management considers that as of the date of the consolidated financial statements it is not necessary to establish additional provisions to those recognized in the financial statements to cover losses due to obsolescence of these inventories.

2.13
Investment property

Investment properties are shown at cost less accumulated depreciation and impairment losses, if any. Subsequent costs attributable to investment properties are capitalized only if it is probable that future economic benefits will flow to the Company and the cost of these assets can be measured reliably; if not, they are recognized as expenses when incurred.

Repair and maintenance expenses are recognized in profit and loss when they are incurred.  If the property’s carrying amount is greater than its estimated recoverable amount, an adjustment to reduce the carrying amount to the recoverable amount is recognized.

Depreciation is determined by the straight-line method at a rate that is considered sufficient to absorb the cost of the assets and the end of the useful life and considered their significant components with useful lives substantially different (each component is treated separately for depreciation purposes). The estimated useful lives of those properties range from 5 to 33 years.

The investment properties held by the Group correspond to: (i) “Agustino Plaza” Shopping Center, located in the El Agustino District, and (ii) the stores situated within the stations of Line 1 of the Lima Metro; the properties owned by the subsidiary Viva GyM S.A. are represented by a fair value amount to US$18.7 million, equivalent to S/62.6 million as of December 31, 2019 (US$19.2 million, equivalent to S/64.3 million, as of December 31 of 2018).

These investment properties have been leased under the modality of an operating lease.

2.14
Property, plant and equipment

Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment losses, if any. Historical cost includes expenditure that is directly attributable to the acquisition of these items.

Subsequent costs are included in the asset’s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Repairs and maintenance expense are charged to the statement of income during the financial period in which they are incurred.

Assets under construction are capitalized as a separate component. At their completion, the cost of such assets is transferred to their definitive category.
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Replacement units are major spare parts in which depreciation starts when the units are installed for use within the related asset.

Depreciation of machinery, equipment and vehicles recognized as “Major equipment” are depreciated based on their hours of use. Under this method, the total number of work hours that machinery and equipment is capable of producing is estimated and a charge per hour is determined.  The depreciation of other assets that do not qualify as “Major equipment” is calculated under the straight-line method to allocate their cost less their residual values over their estimated useful lives, as follows:

 
 Years
 
Buildings and facilities
Between 3 and 33
 
Machinery and equipment
Between 4 and 10
 
Vehicles
Between 2 and 10
 
Furniture and fixtures
Between 2 and 10
 
Other equipment
Between 2 and 10
 

Residual values and useful lives are reviewed and adjusted as appropriate at each reporting date.  Gains and losses on disposals are recognized in “Other income and expenses, net” in the statement of income. Regarding joint operations that carry out construction activities, the difference between the proceeds from disposals of fixed assets and their carrying amount is shown within “revenue from construction activities” and “cost of construction activities”, respectively.

2.15
Intangible assets

 
i)
Goodwill

Goodwill arises on the acquisition of subsidiaries and represents the excess of the purchase consideration, the amount of any non-controlling interest and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the net identifiable assets acquired.  If the payment made, the amount of the non-controlling interest recognized and previously held interest measured at fair value is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statement of income.

Goodwill acquired in a business combination is allocated to each cash-generating units (CGU), or group of CGUs, that is expected to benefit from the synergies of the combination. Goodwill is monitored at the operating segment level.

Goodwill impairment reviews are performed at least annually and when events or changes in circumstances indicate a potential impairment. Any impairment is recognized immediately as an expense in item “Other income and expenses, net” and cannot be reversed later.

 
ii)
Trademarks

Trademarks acquired separately are shown at historical cost. Trademarks acquired in a business combination are recognized at fair value at the acquisition date.  Management has determined that these trademarks have indefinite useful lives.

Trademark impairment reviews are performed at least annually and when events or changes in circumstances indicate a potential impairment. Any impairment is recognized immediately as an expense in item “Other income and expenses, net”. The carrying amount that has been subject to impairment is reviewed at each reporting date to verify possible reversals of the impairment and is recognized in the “other income and expenses, net” item.

 
iii)
Concession rights

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The intangible asset consisting of the right to charge users for the services related to service concessions agreements (Note 2.5 and Note 6.b) is initially recorded at the fair value of construction or improvement services and before amortization is started, an impairment test is performed; it is amortized under the straight-line method, from the date revenue starts using the lower of its estimated expected useful life or effective period of the concession agreement.

 
iv)
Contractual relationships with customers

Contractual relationships with customers are assets resulting from business combinations that were initially recognized at fair value as determined based on the expected cash flows from those relations over a period of time based on the estimated permanent of the Group’s customer (the estimation of useful life is based on the term of contract with customers which fluctuate between 5 and 9 years). The useful life and the impairment of these assets are individually assessed.

 
v)
Cost of development wells

Costs incurred in preparing wells to extract hydrocarbons in Blocks I, III, IV, and V, located in Talara, are capitalized as part of intangible assets.  These costs are amortized over the useful lives of the wells (estimated in remaining periods for Blocks I and V and the unit of production method for Blocks III and IV), until the end period of the agreements signed with Perupetro.

 
vi)
Software and development costs

Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Group are recognized as intangible assets when the following criteria are met:

 
-
technically feasible to complete the software product so that it will be available for use;
 
-
management intends to complete the software product and use or sell it;
 
-
there is the ability to use or sell the software product;
 
-
it can be demonstrated how the software product will probably generate future economic benefits;
 
-
technical, financial and other resources are available to complete the development and to use or sell the software product; and
 
-
expenses incurred during its development can be reliably measured.

Other development costs that do not meet these criteria are reconized in the statement of income as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period.  Computer software development costs recognized as assets are amortized over their estimated useful lives, which fluctuate between 2 to 15 years.

 
vii)
Land use rights

Refers to the rights maintained by the subsidiary Promotora Larcomar S.A. Land use of rights are stated at historical cost less amortization and any accumulated impairment losses. The useful life of this asset is based on the agreement signed (60 years) and may be extended if agreed by parties.  Amortization will begin when it becomes ready for its intended use by Management.

2.16
Impairment of non-financial assets

Assets subject to amortization are subject to impairment tests when events or circumstances occur that indicate that their book value may not be recovered. Impairment losses are measured as the amount by which the book value of the asset exceeds its recoverable value. The recoverable value of the assets corresponds to the higher of its fair value and its value in use. For purposes of the impairment assessment, assets are grouped at the lowest levels in which they generate identifiable cash flows (cash-generating units). The book value of non-financial assets other than goodwill that have been subject to write-offs for impairment is reviewed at each reporting date to verify possible reversals of impairment.
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2.17
Financial liabilities

The financial liabilities of the Group include trade accounts payable, accounts payable to related parties, remuneration and other accounts payable. All financial liabilities are initially recognized at fair value and subsequently valued at amortized cost using the effective interest rate method.

Financial liabilities are classified as current liabilities if the payment must be made within a year or less (or in the normal operating cycle of the business if it is greater), otherwise, they are presented as non-current liabilities.

2.18
Trade accounts payable

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer), if not, they are presented as non-current liabilities.

Accounts payable are initially recognized at their fair value and subsequently are amortized at amortized cost using the effective interest method, except for accounts payable within less than one year that are recorded at their nominal value that is similar to their fair value due to its maturity in the short term.

2.19
Other financial liabilities

Corresponds to the loans and bonds issued by the Group, which are initially recognized at their fair value, net of the costs incurred in the transaction. These financial liabilities are subsequently recorded at amortized cost; any difference between the funds received (net of transaction costs) and the redemption value is recognized in the statement of income during the period of the loan using the effective interest method.

The costs incurred to obtain these financial liabilities are recognized as transaction costs to the extent that it is probable that part or the entire loan will be received. In this case, these charges are deferred until the time the loan is received.

2.20
Borrowing costs

Debt costs are recognized at the statement of income in the period in which they have been incurred, except for intangible assets and inventories in which the borrowing costs are capitalized.

General and specific borrowing costs directly attributable to the acquisition, construction or production of qualified assets, which are assets that necessarily take a substantial period (more than 12 months) to reach their condition of use or sale, are added to the cost of said assets until the period when the assets are substantially ready for use or sale. The Group suspends the capitalization of borrowing costs during the periods in which the development of activities of a qualified asset has been suspended. The income obtained from the temporary investment of specific loans that have not yet been invested in qualified assets is deducted from the borrowing costs eligible for capitalization.

2.21
Current and deferred income tax

Income tax expense comprises current and deferred tax. Tax expense is recognized in the statement of income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, tax is also recognized in the statement of comprehensive income or directly in equity, respectively.

The current income tax is calculated based on the tax laws enacted at the date of the statement of financial position in the countries where the Company and its subsidiaries operate and generate taxable income. Management, where appropriate, establishes provisions based on amounts expected to be paid to the tax authorities.
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Deferred tax is recognized on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax is determined using tax rates (and legislation) that have been enacted as of the date of the statement of financial position and that are expected to be applicable when the deferred income tax is realized or paid.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group, and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax arising from the initial recognition of goodwill is not recognized; likewise, the deferred tax is not recorded if it arises from the initial recognition of an asset or liability in a transaction that is not a business combination that does not affect the accounting or tax profit or loss at the time of the transaction.

2.22
Employee benefits

The Group recognizes a liability when the employee has rendered services in exchange for which is entitled to receive future payments and an expense when the Group has consumed the economic benefit from the service provided by the employee in exchange for the benefits in question.

The Group determines employee benefits in accordance with current labor and legal regulations and classifies them as short-term benefits, post-employment benefits, long-term benefits, and termination benefits.

Short-term benefits are those other than termination indemnities, whose payment is settled in the twelve months following the end of the period in which the employees have rendered the services; they correspond to current remunerations (salaries, wages and contributions to social security), annual paid and sick absences, participation in profits and incentives and other non-monetary benefits.

Long-term benefits are those benefits that must be paid more than twelve months after the end of the period in which the services were rendered. As of December 31, 2018, and 2019, the Group does not grant benefits in this category.

Termination benefits are those benefits payable as a result of (i) the entity’s decision to terminate the employee’s contract before the retirement date, and (ii) the employee’s decision to voluntarily accept the conclusion of the relationship of work.

Short-term benefits:

 
a)
Current salaries and wages

The current remunerations are constituted by salaries, wages, contributions to social security, statutory bonuses and compensation for the time of services. Salaries, wages, and contributions to social security are settled on a monthly basis.

Entities of the Group recognize the expense and the related liability for statutory bonuses based on applicable laws and regulations effective in Peru, Chile, and Colombia. In Peru bonuses correspond to two monthly payments, settled one in July and one in December of each year, and accrue based on the consideration of the service.

The compensation for time of service corresponds to the indemnification rights of the staff, and is accrued based on the consideration of the service calculated according to the legislation in force in each country in which the entities of the Group operate and determine as follows: (i) in Peru it is equivalent to half the remuneration in force at the date of payment and this is effected by deposit in bank accounts designated by the workers in the months of May and November of each year; (ii) In Colombia, it is equivalent to 8.33% of the monthly remuneration, (iii) In Chile this benefit is not available.
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b)
Annual paid absences

Annual holidays are recognized on an accrual basis. The provision for the estimated obligation for the annual vacations of personnel resulting from the services rendered by employees is recognized on the date of the consolidated statement of financial position and corresponds; (i) one month for personnel in Peru, (ii) fifteen days for personnel in Colombia, and (iii) in the case of Chile, they are subject to the worker’s seniority and range from fifteen to thirty days.

 
c)
Workers’ profit sharing and incentives

The workers’ profit sharing is determined on the basis of the legal provisions in force in each country where the entities of the Group operate, as follows: (i) in Peru it is equivalent to 5% of the taxable base determined by each entity of the Group, in accordance with current income tax legislation, (ii) in Chile, workers’ participation is a component of the remuneration (equivalent to 4.75 minimum wages per year) and not a determinable percentage of the profit, (iii) in Colombia these benefits are not provided to employees.

Termination benefits

The Group entities recognize the liability and expense for severance payments when they occur, based on the legal provisions in force in each country. In accordance with the legislation of Peru, the compensation for arbitrary dismissal for personnel with an indefinite contract amounts to 1.5 times the monthly remuneration for each year worked.

In Colombian legislation, for the first year worked, the equivalent of 30 days of salary is granted, and from the second year on, the compensation will be the equivalent of 20 days of salary for each additional year (or the proportion); in the legislation of Chile is granted compensation of thirty days of salary for each year worked with a maximum salary of 330 days.

2.23
Provisions

 
a)
General

Provisions are recognized when i) the Group has a present, legal or constructive obligation as a result of past events; ii) it is probable that an outflow of resources will be required to settle the obligation; and iii) the amount has been reliably estimated.  Provisions are reviewed at year - end.  If the time value of money is significant, provisions are discounted using a pre-tax rate that reflects, when applicable, the specific risks related to the liability. Reversal of the discount due to the passage of time results in the obligation being recognized with a charge to the statement of income as a financial expense.

Contingent obligations when their existence will only be confirmed by future events or their amount cannot be reliably measured. Contingent assets are not recognized, and are disclosed only if it is probable that the Group will generate an income from economic benefits in the future.
     b)    Provision for the closure of production wells

The subsidiary GMP S.A. recognizes a provision for the closure of operating units that correspond to the legal obligation to close oil production wells once the production phase has been completed. At the initial date of recognition, the liability that arises from this obligation measured at its fair value and discounted at its present value, according to the valuation techniques established by IFRS 13, “Fair Value Measurement”, and is simultaneously charged to the intangible account in the consolidated statement of financial position.
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Subsequently, the liability is increased in each period to reflect the financial cost considered in the initial measurement of the discount, and the capitalized cost is depreciated based on the useful life of the related asset. When a liability is settled, the subsidiaries recognize any gain or loss that may arise. The fair value changes estimated for the initial obligation and the interest rates used to discount the flows they are recognized as an increase or decrease in the book value of the obligation and the asset to which they relate to, any decrease in the provision, and any decrease of the asset that may exceed the carrying amount of said asset is immediately recognized in the consolidated statement of income.

If the review of the estimated obligation results in the need to increase the provision and, accordingly, increase the carrying amount of the asset, the subsidiaries should also take into consideration if the said increase corresponds to an indicator that the asset has been impaired and, if so, impairment tests are to be carried out (Note 2.16).

2.24
Put option arrangement

The subsidiary GyM S.A. signed a sale option contract on the equity of its subsidiary Morelco SAS (Note 32 b) that allows the shareholder to reallocate its shares over a period of 10 years. The amount payable under the option is initially recognized at the present value of the reimbursement under “Other accounts payable”, directly charged to equity. The charge to equity is recorded separately as put options subscribed on the non-controlling interest, adjacent to the non-controlling interest in the net assets of the consolidated subsidiaries.

Subsequently, the financial liability is updated by changes in the assumptions on which the estimation of the expected cash flows is based and by the financial component due to the passage of time. The effects of this update are recognized in results. In the event that the option expires without being exercised, the liability is written off with the corresponding adjustment to equity.

2.25
Capital

Common shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in equity, as a deduction, of the proceeds, net of taxes.

2.26
Revenue recognition from contracts with customers

Revenues from contracts with customers are recognized, for each performance obligation, either during a period of time or at a specific time, depending on which method best reflects the transfer of control of the underlying products or services to the obligation of particular performance with the client.

The Group recognizes the income through the application of the five steps defined in the regulation i) identification of the contract with the client; ii) identification of performance obligations in the contract; iii) determination of the price of the transaction; iv) allocation of the transaction price for performance obligations; and v) recognition of income when (or as) a performance obligation is satisfied.

Subsequently, the Group policy of recognition of each type of income according to IFRS 15:

i)  Engineering and construction

These contracts have only one obligation of performance, which is executed by the delivery of the work.

Revenues from engineering and construction contracts are recognized using the percentage-of-completion method which is based on the completion of a physical proportion of the overall work contract considering total costs and revenues estimated at the end of the project. Under this method, revenues are determined based on the proportion of actual physical completion compared to the total contracted physical commitment.
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The contract generates assets when the costs incurred are greater than the cost associated with those revenues. Otherwise liabilities are generated for the accrued costs not invoiced.

When it is probable that the total costs of the contract will exceed the related revenue, the expected loss is immediately recognized.

When the construction contract profit cannot be estimated reliably, the associated revenue is recognized to the extent of costs incurred are recoverable.  Revenue is billed once approval is received by the owners of the work in progress.

Revenues for additional works come from a modification or instruction received from the client to make a change in the scope of work or the price, or both, and which may result in an increase or decrease in contract revenue. A modification is included in the contract revenue when the customer is likely to approve the modification, as well as when the amount of income arising from such modification can be measured reliably.

A claim is an amount that the Group seeks to collect from the customer or third party as reimbursement for costs not included in the contract price.  Claims are included in contract revenue only when it is probable that the cost incurred are recoverable and the amount can be reliably measured.

  ii)
Real-estate – Real estate, urban and industrial lots

Sale of Real estate

Revenue from sales of real estate properties is recognized when control over the property has been transferred to the client with the delivery record. Revenue is measured based on the price agreed under the contract. Until this is met, the incomes received will be counted as customer advances. These sales contracts have two performance obligations: i) the one corresponding to the transfer of the property, which includes the common areas of the building where these real estates are located, and ii) the one corresponding to the transfer of the common area outside the real estate assets but that are part of the real estate projects, which are recognized when the common area has been delivered.

Sale of urban lots

Revenue related to sales of urban lots is recognized when control over the property is transferred to the customer. Until this is met, the incomes received will be recognized as customer advances. Revenue is measured based on the transaction price agreed under the contract. These sales contracts have a single performance obligation for the sale of lots, which is executed upon delivery of the sale of the assets.

Sale of industrial lots

Revenue related to sales of industrial lots is recognized when control over the property has been transferred to the customer. Until this is met, the incomes received will be counted as customer advances. These sales contracts have two performance obligations: i) transfer of the industrial lot and ii) urban authorization of the industrial lot.

iii) Infrastructure

Income for services of oil and gas extraction, fuel dispatch and other services

The revenue from these services is recognized at the time the service is performed calculating the actual service as a portion of the total services. This type of income has a single performance obligation; that is performed when the service is provided at a time moment.

Income from the sale of oil and derivative products
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Revenue from the sale of goods is recognized when the control of the assets is transferred to the customer, which is when the goods are delivered. In this type of income there is only one performance obligation for the sale of oil; which is executed at the delivery of the goods.

Income from concession services

Revenues from concession services correspond to operation and maintenance services, and are recognized according to their nature in the period in which the service is provided. In this revenue there is only one performance obligation, executed when the service is provided.

2.27
Recognition of cost and expenses

Construction contracts

The costs of construction contracts are recognized as an expense in the period in which they are incurred.

Contract costs include all direct costs such as materials, labor, subcontracting costs, manufacturing and supply costs of equipment, start-up costs and indirect costs.  Periodically, the Group evaluates the reasonableness of the estimates used in the determination of the percentage-of-completion.  If, as a result of this evaluation, there are modifications to the revenue or cost previously estimated, or if the total estimated cost of the project exceeds expected revenues, an adjustment is made in order to reflect the effect in results of the period in which the adjustment or loss is incurred.

When the outcome of a construction work cannot be estimated reliably, the revenue of the contract is recognized only up to the amount of the contractual costs incurred and that are likely to be recovered.

Costs for sale of oil and derivative products

The costs of the services rendered and the costs of sales of petroleum and derivative products are recognized when they are incurred, simultaneously with the recognition of related revenues. Other costs and expenses are recognized as they accrue, regardless of when they are paid and are recorded in the accounting periods to which they relate.

Costs for concession operation services

The costs of the operation and maintenance services are recognized when they are incurred, simultaneously with the recognition of related revenues. Other costs and expenses are recognized as they are accrued, regardless of when they are paid and are recorded in the accounting periods with which they are related.

2.28
Leases

Lease contracts are analyzed for the purpose of identifying those containing the characterisctics according to IFRS 16 Leases (hereinafter “IFRS 16”) for recognition, measurement, presentation and disclosure.

The Group evaluates in every lease contract the following:

●
If you have the right to control the use of the identified asses,
●
If the contract term is longer that twelve months,
●
If the underlying asset amount is a material amount, and,
●
That the fees to be paid are not entirely variable.

- 26 -
a) Leases in which the Group is a lessee

The Group recognizes a right-of-use asset and a lease liability as of the beginning of the lease.

The right-of-use asset is initially measured by the initial amount of the lease liability adjusted for any lease payment made on or before the start date, plus the initial direct costs incurred. The right-of-use assets are depreciated in a straight line, from the start date until the end of the lease contract. The term of the lease includes the periods covered by an option to extend the contract if the Group is reasonably sure to exercise that option.

The lease liability is the total unpaid installments, measured at amortized cost using the effective interest method. It is measured again when there is a change in future lease payments that arise from a change in an index or rate, if there is a change in the Group's estimate of the amount expected to be paid under a residual value guarantee, or if the Group changes its assessment of whether it is sure that it will exercise a purchase, extension or term option.

When the lease liability is measured again, the carrying amount of the right-of-use asset is adjusted.

At the engineering and construction segment, interest expenses related to leasing contracts of the core business are reported in gross margin; the rest of the group segments, report them in financial expenses.

Operational cash flows will be greater since cash payments for the main portion of the lease debt are classified within the financing activities. Only the part of the payments that reflects interest can continue to be presented as operating cash flow.

b) Leases in which the Group is a lessor

Liabilities for operating leases and assets are included in the statement of financial position according to the nature of the asset. Revenues from operating leases are recognized in a straight line over the term of the lease agreement and the incentives granted to lessees are reduced from rental income.

Based on the foregoing, the Group as lessor has not changed the recognition of its leases.

      c)    Treatment before the implementation of IFRS 16

Leases in which the Group is a lessee

Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.  Payments made under operating leases, including prepayments (net of any incentives received from lessor) are recognized in the consolidated income statement under the straight-line method over the lease term.  The Group’s major kinds of operating leases are leases of machinery, computer equipment, printing equipment, among others.

Finance leases

Leases in which the Group assumes substantially all the risks and rewards of ownership of an asset are classified as finance leases.    Each lease payment is allocated between the liability and finance charges so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The corresponding rental obligations, net of finance charges, are included in other payables, short- and long-term in the consolidated statement of financial position. The interest element of the finance cost is charged to the consolidated income statement of over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.  The property, plant and equipment acquired under finance leases are depreciated over the useful life of the asset or the lease term.
- 27 -

2.29
Dividend distribution

Dividend distribution to the Group shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved.

2.30
Significant non-operating items

Significant non-operating items are separately shown in the financial statements when they are necessary to provide an adequate understanding of the Group’s financial performance. These material items are income or expenses shown separately due to their nature or significant amount.

2.31
Reclassified discontinued operations as of December 31, 2018

  As a result of the divestment process, the results of discontinued operations are reclassified as follows:

         
Reclassification
        
   
2018
    
discontinued
    
2018
  
   
Audited
    
operations
    
Reclassified
  
                   
                   
Profit for the year
    
57,415
      
-
      
57,415
  
Other comprehensive income:
                        
Items that will not be reclassified to profit or loss
                        
Remeasurement of actuarial gains and losses, net of tax
    
16,589
      
-
      
16,589
  
                         
Items that may be subsequently  reclassified to profit or loss
                        
Cash flow hedge, net of tax
    
119
      
-
      
119
  
Foreign currency translation adjustment, net of tax
    
5,733
      
-
      
5,733
  
Exchange difference from net investment in a foreign operation, net of tax
    
(8,147
)
    
-
      
(8,147
)
     
(2,295
)
    
-
      
(2,295
)
Other comprehensive income for the year, net of tax
    
14,294
      
-
      
14,294
  
Total comprehensive income for the year
    
71,709
      
-
      
71,709
  
                         
Comprehensive income attributable to:
                        
Owners of  the Company
    
(67,548
)
    
-
      
(67,548
)
Non-controlling interest
    
139,257
      
-
      
139,257
  
     
71,709
      
-
      
71,709
  
                         
Comprehensive income attributable to owners of the Company:
                        
Continuing operations
    
(98,942
)
    
(32,342
)
    
(131,284
)
Discontinued operations
    
31,394
      
32,342
      
63,736
  
     
(67,548
)
    
-
      
(67,548
)


































- 28 -

3
STANDARDS, AMENDMENTS, AND INTERPRETATION ADOPTED IN 2019

3.1      Current standards, amendments, and interpretations adopted

The following current standards, amendments to the policies and interpretations were adopted by the Group on January 1, 2019.

 
a)
IFRS 16 “Leases”

This standard replaces the accounting treatment of leases under IAS 17 "Leases" and IFRIC 4 "Determination of whether an agreement contains a lease" and other related interpretations.

IFRS 16 was implemented as of January 1, 2019 and the Group applied the modified retrospective approach, so that comparative information has not been restructured, recognizing on the date of initial application an amount of asset per right of use equal to lease liability; adjusted for the amount of any payment for early or accrued lease, related to leases recognized in the consolidated statement of financial position.

IFRS 16 eliminates the current difference between operating and financial leases and requires the recognition of an asset (the right to use the leased asset) and a financial liability for the payment of income, this for virtually all lease agreements. There is an optional exemption for short-term and low-value leases.

The income statement will also be affected because the total expenditure is normally higher in the first years of the lease and lower in recent years. In addition, operating expenses will be replaced by interest and depreciation expenses, so key metrics such as EBITDA will change.

The accounting by the lessors will not change significantly.

Impact on the financial statements -

In the adoption of IFRS 16, the Group recognized liabilities related to leases that have been previously classified as operating leases under IAS 17. These liabilities have been measured based on the present value of the remaining future payments, discounted using a rate of incremental interest as of January 1, 2019 (7.3% average interest rate).

As a result of the effect of the transition of IFRS 16, right-of-use assets and liabilities for S/97.7 million were recognized as of January 1, 2019 (representing 1.33% and 2.15% of total assets and liabilities, respectively). As part of the initial application of IFRS 16, the Company used the modified retrospective method, therefore, the financial statements for previous years were not modified.
- 29 -

At December 31, 2019, the effect of IFRS 16 in the Group's financial statements is detailed as follows:

       
   
At
  
   
December 31,
  
Impact on assets
  
2019
  
       
Right-of-use
      
Right-of-use buildings
    
59,599
  
Right-of-use vehicles
    
20,211
  
Right-of-use machinery
    
17,896
  
Impact of implementation 2019
    
97,706
  
Adjustments on contract fees
    
4,039
  
Total right-of-use assets
    
101,745
  
         
Cumulative depreciation
    
(22,958
)
Foreign currency translation effect
    
26
  
Impact on assets (Note 16.2)
    
78,813
  

             At the end of 2019, the Group's companies with the most representative balances were GMP S.A. (S/24 million) and Graña y Montero S.A.A. (S/54 million).

   
At
  
   
December 31,
  
Impact on liabilities
  
2019
  
       
Impact of implementation 2019
    
97,706
  
Adjustments on contract fees
    
4,039
  
Addition of liabilities for right-of-use
    
101,745
  
Accrued interest
    
5,617
  
Amortization
    
(20,326
)
Interest paid
    
(5,368
)
Foreign currency translation effect
    
(11
)
Exchange difference
    
(1,441
)
Impact on liabilities
    
80,216
  
         
Short-term liabilities for right-of-use
    
18,246
  
Long-term liabilities for right-of-use
    
61,970
  
Impact on liabilities (Note 18)
    
80,216
  

- 30 -

 
b)
IFRIC 23 “Uncertainty over income tax treatments”

IFRIC 23 Uncertainty regarding income tax treatments (hereinafter “IFRIC 23”), describe the assessment you must comply with when there is a tax treatment for which you are uncertain about whether or not to be accepted by the tax administration, according to the interpretation of tax legislation. If the company identifies uncertain tax treatments, the effect of the uncertainty must be identified through a provision of the current income tax or the deferred income tax, whichever is applicable.

The Group adopted IFRIC 23 from January 1, 2019. This rule regulates how to determine the accounting record of a tax position when there is uncertainty about income tax treatments.

The interpretation requires the Group to determine whether uncertain tax positions are assessed separately or in groups; and assess whether a tax authority is likely to accept uncertain tax treatment to be used by an entity in its income tax returns.

If tax authority accepts, the Group must determine its tax position in a manner consistent with the tax treatment used or intended to be used in its tax returns.

If not, the Group must reflect the effect of uncertainty in determining its tax position using the most probable amount method or the expected value method.

Uncertain tax positions have been evaluated separately in each Group company and have been identified as the best method the most likely amount. Based on the foregoing, the Group has recognized an income tax accrual of S/0.5 million and a decrease in deferred income tax assets of S/1 million, affecting the retained earnings on S/1.5 million. Due to the aforementioned tax uncertainty, there is a possibility that, at the end of the processes of the years open to the audit, the final result may differ from what was originally assessed.

3.2    Standards and amendments issued to be adopted at a later date

  a)
International Financial Reporting Standard 17 (IFRS 17 “Insurance Contracts”), effective as of January 1, 2021. It has no impact on the Group.

  b)
Amendments to the Rules

The following amendments to IFRS have been issued and are applicable to the Group for its annual periods as of January 1, 2020:


 -
           Modification to references to the Conceptual Framework of International Financial Reporting Standards (IFRS), effective as of January 1, 2020.


-
Definition of a Business (amendments to IFRS 3 “Business Combinations”), effective as of January 1, 2020.


-
Definition of Materiality (amendments to IAS 1 “Presentation of Financial Statements” and IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”), effective as of January 1, 2020.


-
Sale or contribution of assets between an investor and its associate or joint arrangement, with no defined effective date, but its application is optionally allowed.

The Group has not adopted the amendments and modifications in advance and is not expected to have an impact on current or future reporting periods and foreseeable future transactions.

4
FINANCIAL RISK MANAGEMENT

Financial risk management is carried out by the Group’s Management. Management oversees the general management of financial risks, such as foreign exchange rate risk, price risk, cash flow, and fair value interest rate risk, credit risk, the use of derivative and non-derivative financial instruments and the investment of excess liquidity, which are supervised and monitoring periodically.

- 31 -
4.1   Financial Risk Factors

The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk, fair value interest rate risk and cash flow interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.  The Group uses derivative financial instruments to hedge certain risk exposures in one of its subsidiaries and considers the use of other derivatives in the event that it identifies risks that may generate an adverse effect for the Group in the short and medium-term.

  a)
Market risks

 
i)
Foreign exchange risk

The Group is exposed to exchange rate risk as a result of the transactions carried out locally in foreign currency and due to its operations abroad.  As of December 31, 2018, and 2019 this exposure is mainly concentrated in fluctuations of U.S. dollar, the Chilean and Colombian Pesos.

At December 31, 2019, the consolidated statement of financial position includes the following:

 
        
2018
          
2019
  
 
    
S/(000
)
  
USD(000)
      
S/(000
)
  
USD(000)
  
 
                            
Assets
    
2,273,132
      
674,753
      
2,859,324
      
862,021
  
Liabilities
    
2,042,176
      
604,383
      
1,751,479
      
528,031
  

The Group’s exchange gains and losses for the Peruvian Sol, the Chilean and Colombian Pesos exposure against the U.S. dollar was:
 
  
2018
    
2019
  
 
            
 
            
Gain
    
382,104
      
389,008
  
Loss
    
(405,380
)
    
(422,578
)

If at December 31, 2019 the Peruvian Sol, the Chilean and Colombian Pesos had strengthened/weakened by 2% against the U.S. dollar, with all other variables held constant, the pre-tax results for the year would have increased/decreased by S/0.7 million (S/0.5 million in 2018).

The consolidated statement of changes in equity comprises a foreign currency translation adjustment originated by its subsidiaries.  The consolidated statement of financial position includes assets and liabilities in functional currency equivalent to (in thousands):
 
 
        
2018
          
2019
  
 
  
Assets
    
Liabilities
    
Assets
    
Liabilities
  
 
                        
Chilean Pesos
    
48,129,848
      
49,728,313
      
19,915,617
      
39,193,917
  
Colombian Pesos
    
163,560,697
      
76,978,655
      
187,119,204
      
76,446,723
  

- 32 -
The Group’s foreign exchange translation adjustment for 2019 was negative by S/8.2 million (in 2018 S/5.7 million positive).

 
ii)
Price risk

Management considers that the exposure of the Group to the price risk of its investments in mutual funds, bonds, and equity securities is low since the invested amounts are not significant. Any fluctuation in their fair value will not have any significant impact on the balances reported in the consolidated financial statements.

 
iii)
Cash flow and fair value interest rate risk

The Group’s interest rate risk mainly arises from its long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group policy is to maintain most of its borrowings at fixed rate instruments; 61.8% of total debt in 2019 (46.9% in 2018) was contracted at fixed rates and 38.2% at variable rates (53.1% in 2018) which consisted of a 37.7% fixed rate plus VAC (adjusted for inflation) and the remaining 0.5% at a variable rate (27.7% fixed rate + VAC and the remaining 25.4% at a variable rate in 2018).

The debt subject to fixed rate plus VAC is related to a bond issued in Peruvian Sol to finance the GyM Ferrovias Project, Metro Line 1 (Note 19). Any increase in the interest rate resulting from higher inflation will have no significant impact on the Group’s profit because these revenues are also adjusted for inflation.

During 2018 and 2019 borrowings at variable rates are denominated in Peruvian Sol, and U.S. dollars and the Group’s policy is to manage their cash flow risk by using interest-rate swaps, which are recognized under hedge accounting. In 2018, the variable rate loans related to GSP (Note 18 a-ii), were not hedged, Management decided to assume the risk since it was expected to pre-pay them before due.

If at December 31, 2019, the libor rate plus three months had increased/decreased by 5%, with all other variables held constant, the pre-tax results for the year would have increased/decreased by S/0.01 million (S/0.75 million in 2018). In 2019 and 2018 there was no significant ineffectiveness in the cash flow hedge.
- 33 -

  b)
Credit risk

Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, as well as customer credit counterparties, including the outstanding balance of accounts receivable and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted.

Concerning to loans to related parties, the Group has measures in place to ensure the recovery of these loans through the controls maintained by the Corporate Finance Management and the performance evaluation conducted by the Board.

Management does not expect the Group to incur any losses from the performance by these counterparties, except for the ones already recorded at the financial statements.

c) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, the availability of funding through an adequate number of sources of committed credit facilities and the capacity to close out positions in the market. Historically, the Group cash flows enabled it to maintain sufficient cash to meet its obligations. However, since 2017, the Group experienced liquidity problems due to the early termination of the GSP concession agreement and the obligations assumed (Note 15 a-i). As a consequence, the Group started a disinvestment plan to be able to meet the obligations resulting from this scenario (Note 36). This plan was met and the GSP debt was terminated.

Group Corporate Finance monitors rolling forecasts of the Group’s liquidity requirements to ensure it exists sufficient cash to meet operational needs so that the Group does not breach borrowing limits or covenants, where applicable, on any of its borrowing facilities.  Less significant financing transactions are controlled by the Finance Management of each subsidiary.

Such forecasting takes into consideration the Group’s debt financing plans, covenant compliance, compliance with internal statement of financial position ratio targets and, if applicable, external regulatory or legal requirements; for example, foreign currency restrictions.

Surplus cash held by the operating entities over the balance required for working capital management is invested in interest-bearing checking accounts or time deposits, selecting instruments with appropriate maturities and sufficient liquidity.

The table below analyzes the Group’s financial liabilities into relevant maturity groupings based on the remaining period from the date of the consolidated statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
- 34 -

   
Less than
      
1-2
      
2-5
    
More than
        
   
1 year
    
years
    
years
    
5 years
    
Total
  
                                   
At December 31, 2018
                                  
Other financial liabilities (except
                                  
  for finance leases)
    
816,122
      
273,079
      
129,233
      
41,577
      
1,260,011
  
Finance leases
    
15,151
      
7,489
      
14,094
      
-
      
36,734
  
Bonds
    
111,080
      
153,287
      
355,667
      
1,174,404
      
1,794,438
  
Trade accounts payables (except
                                        
  non-financial liabilities)
    
980,723
      
-
      
-
      
-
      
980,723
  
Accounts payables to related
                                        
  parties
    
55,941
      
21,849
      
-
      
-
      
77,790
  
Other accounts payables (except
                                        
  non-financial liabilities)
    
116,806
      
17,777
      
338,627
      
-
      
473,210
  
Other non-financial liabilities
    
-
      
61
      
-
      
-
      
61
  
     
2,095,823
      
473,542
      
837,621
      
1,215,981
      
4,622,967
  




















   
Less than
      
1-2
      
2-5
    
More than
        
   
1 year
    
years
    
years
    
5 years
    
Total
  
At December 31, 2019
                                  
Other financial liabilities (except
                                  
  for finance leases and lease
                                  
  liability for right-of-use asset)
    
479,000
      
147,473
      
177,018
      
-
      
803,491
  
Finance leases
    
10,826
      
3,467
      
13,346
      
-
      
27,639
  
Lease liability for right-of-use asset
    
24,966
      
38,788
      
31,167
      
7,603
      
102,524
  
Bonds
    
115,690
      
157,516
      
358,461
      
1,077,960
      
1,709,627
  
Trade accounts payables (except
                                        
  non-financial liabilities)
    
966,620
      
-
      
-
      
-
      
966,620
  
Accounts payables to related
                                        
  parties
    
38,916
      
21,747
      
-
      
836
      
61,499
  
Other accounts payables (except
                                        
  non-financial liabilities)
    
200,098
      
2,505
      
194,908
      
-
      
397,511
  
Other non-financial liabilities
    
-
      
52
      
-
      
-
      
52
  
     
1,836,116
      
371,548
      
774,900
      
1,086,399
      
4,068,963
  






















4.2
Capital management risk

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders, benefits for other stakeholders and to maintain an optimal capital structure to minimize the cost of capital.  In 2017 the situation of the Group had lead Management to monitor deviations that might cause the non-compliance of covenants and may hinder renegotiation of liabilities (Note18-a).

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The Group monitors capital based on the gearing ratio.  This ratio is calculated as net debt divided by total capital.  Net debt is calculated as total borrowings (including current and non-current borrowings), less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the consolidated statement of financial position plus net debt.

As of December 31, 2018, and 2019, the gearing ratio is presented below indicating the Group’s strategy to keep it in a range from 0.10 to 0.70.
- 35 -
   
2018
    
2019
  
Total financial liabilities and bonds
    
2,139,714
      
1,723,108
  
Less: Cash and cash equivalents
    
(801,140
)
    
(948,978
)
Net debt
    
1,338,574
      
774,130
  
Total equity
    
2,489,931
      
1,876,085
  
Total capital
    
3,828,505
      
2,650,215
  
Gearing ratio
    
0.35
      
0.29
  







4.3
Fair value estimation

For the classification of the type of valuation used by the Group for its financial instruments at fair value, the following levels of measurement have been established.

-
Level 1:
Measurement based on quoted prices in active markets for identical assets or liabilities.
-
Level 2:
Measurement based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).
-
Level 3:
Measurement based on inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs, generally based on internal estimates and assumptions of the Group).

The table below shows the Group’s assets and liabilities measured at fair value on December 31, 2018, and 2019:

 
Level 2
At December 31, 2018
 
 
 
Financial liabilities
 
Derivatives used for hedging
                   61
 
 
At December 31, 2019
 
 
 
Financial liabilities
 
Derivatives used for hedging
                   52

5    CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Estimates and judgments used are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

5.1   Critical accounting estimates and assumptions

The Group makes estimates and assumptions concerning the future.  The resulting accounting estimates will, by definition, seldom equal the related actual results.  The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

  a)
Estimated impairment of goodwill and other intangible assets with an indefinite useful life

Impairment reviews are undertaken annually to determine if goodwill arising from business acquisitions and other intangible assets with indefinite useful life are impaired, in accordance with the policy described in Note 2.15-i).  For this purpose, goodwill is allocated to the different Cash Generating Unit (“CGU”) to which it relates while other intangible assets with indefinite useful life are assessed individually. The recoverable amounts of the CGU and of other intangible assets with indefinite useful life have been determined based on the higher of their value-in-use and fair value less costs to sell.  This evaluation requires the exercise of Management’s professional judgment to analyze any potential indicators of impairment as well as the use of estimates in determining the value in use, including preparing future cash flows, macro-economic forecasts as well as defining the interest rate at which said cash flows will be discounted.
- 36 -
If the Group experiences a significant drop in revenues or a drastic increase in costs or changes in other factors, the fair value of their business units might decrease. If management determines that the factors reducing the fair value of the business are permanent, those economic factors will be taken into consideration to determine the recoverable amount of those business units and therefore, goodwill, as well as other intangible assets with indefinite useful life may be deemed to be impaired, which may cause their write-down.

In accordance with the impairment evaluations carried out by Management, losses due to impairment of goodwill and trademarks have been recognized by the decrease in the expected flows as a consequence of a reduction of the contracts’ “backlog”.

At December 31, 2018, and 2019 the Group has performed a sensitivity analysis increasing or decreasing the assumptions of gross margin, discount rate, and revenue and terminal growth rate by a 10%, with all the other variables held constant, as follows:

    Difference between recoverable amount and carrying amounts  
         
2018
          
2019
  
Goodwill
                        
                         
Gross margin
    
(10
%)
    
+10
%
    
(10
%)
    
+10
%
Engineering and construction
    
0.51
%
    
41.12
%
    
(25.54
%)
    
(4.25
%)
Electromechanical
    
(9.73
%)
    
38.89
%
    
35.63
%
    
52.97
%
                                 
Discount rate:
    
(10
%)
    
+10
%
    
(10
%)
    
+10
%
Engineering and construction
    
39.19
%
    
6.65
%
    
(4.30
%)
    
(23.09
%)
Electromechanical
    
29.36
%
    
2.97
%
    
48.89
%
    
39.92
%
                                 
Terminal growth rate:
    
(10
%)
    
+10
%
    
(10
%)
    
+10
%
Engineering and construction
    
18.48
%
    
23.30
%
    
(16.31
%)
    
(13.38
%)
Electromechanical
    
12.90
%
    
16.34
%
    
42.36
%
    
46.32
%
                                 
                                 
Trademarks
                                
                                 
Revenue growth rate:
    
(10
%)
    
+10
%
    
(10
%)
    
+10
%
Morelco
    
75.00
%
    
116.27
%
    
22.14
%
    
60.11
%
Vial y Vives - DSD
    
27.40
%
    
55.71
%
    
110.69
%
    
72.38
%
                                 
Discount rate:
    
(10
%)
    
+10
%
    
(10
%)
    
+10
%
Morelco
    
126.00
%
    
72.33
%
    
63.02
%
    
23.56
%
Vial y Vives - DSD
    
29.54
%
    
55.99
%
    
78.72
%
    
106.64
%
                                 
Terminal growth rate:
    
(10
%)
    
+10
%
    
(10
%)
    
+10
%
Morelco
    
91.70
%
    
99.82
%
    
37.49
%
    
44.02
%
Vial y Vives - DSD
    
38.99
%
    
44.26
%
    
88.07
%
    
95.20
%



































In 2019, if the gross margin, discount rate or terminal growth rate had been 10% below or 10% above Management’s estimates, the Group would not have recognized a provision for impairment of goodwill in the Electromechanical CGU (GMA); however, at the same variation, the Group would have to recognized a provision for impairment of the Engineering and Construction (Morelco).  In 2018, if the discount rate or terminal growth rate had been 10% below or 10% above Management’s estimates, the Group would not have recognized a provision for impairment of goodwill; however, at the same variation in gross margin, the Group would have to recognized a provision for impairment of the Electromechanical GMA.
- 37 -
As a result of these assessments, as of December 31, 2019, an impairment of the goodwill in Morelco was identified and recorded in the Engineering and Construction CGU (Note 17).

In 2018 and 2019, if the revenue growth rate, terminal growth rate or the discount rate had been 10% below or had been 10% above Management’s estimates, the Group would have not recognized a provision for impairment in trademarks.

At December 31, 2019, as a result of these evaluations, a reversal of goodwill impairment was identified and recorded in the Engineering and Construction CGU, trademark impairment in Vial y Vives-DSD (Note 17).

  b)
Income taxes

Determination of the tax obligations and expenses requires interpretations of the applicable tax laws and regulations.  The Group seeks legal and tax counsel before making any decision on tax matters.

Deferred income tax assets and liabilities are calculated on the temporary differences arising between the tax basis of assets and liabilities and the amounts stated in the financial statement of each entity that makes up the Group, using the tax rates in effect in each of the years in which the difference is expected to reverse.  Any change in tax rates will affect the deferred income tax assets and liabilities.  This change will be recognized in the consolidated statement of income in the period in which the change takes effect.

Deferred income tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which deductible temporary differences and tax loss carryforwards can be utilized.  For this purpose, the Group takes into consideration all available evidence, including factors such as historical data, projected income, current operations, and tax planning strategies.  A tax benefit related to a tax position is only recognized if it is more likely than not that the benefit will ultimately be realized.

The Group’s possible maximum exposure to tax contingencies amount to S/71.4 million.

The income tax for the year includes Management's evaluation of the amount of taxes to be paid in uncertain tax positions, where the liabilities have not yet been agreed with the tax administration.

  c)
Percentage of completion revenue recognition

Service revenues based on construction contracts are recognized by the percentage of completion method, which requires estimating the margin will be obtained culminating works. Projections of these margins are determined by management based on their budgets execution and adjusted periodically in order to use updated information to reflect actual performance in the work. In this regard, management believes that the estimates made at the end of the year are reasonable. When changes occur not approved in the scope of work, income is recognized as equivalent to the cost incurred (no profit is recognized) until it has been approved the additional work.

The revenue of the contract is recognized as such in the consolidated statement of comprehensive income in the accounting periods in which the work was executed. Costs related to the construction contract costs are recognized as works in the consolidated comprehensive income in the accounting periods in which the work was executed. However, any expected and likely cost overruns related to the contract over total expected income under the contract is recognized as expense immediately. In addition, any change in the estimates under the contract is recognized as a change in accounting estimates in the period in which the change is made and future periods if applicable. In certain construction contracts, the terms of these agreements allow to retain an amount to customers until it culminates with construction. Under these contracts, the total amount cannot be recognized until the construction is finished.
- 38 -

As of December 31, 2018 and 2019, a sensitivity analysis was performed considering a 10% increase/decrease in the Group’s gross margins, as follows:

 
  
2018
    
2019
  
Revenues
    
1,961,100
      
2,411,880
  
Gross profit
    
32,685
      
60,317
  
%
    
1.67
      
2.50
  
Plus 10%
    
1.84
      
2.75
  
Increase in profit before income tax
    
3,399
      
6,010
  
 
    
36,084
      
66,327
  
 
                
Less 10%
    
1.50
      
2.25
  
Decrease in profit before income tax
    
(3,399
)
    
(6,010
)
 
    
29,286
      
54,307
  

  d)
Provision for well closure costs

At December 31, 2019, the present value of the estimated provision for the closure of 189 wells located in Talara amounted to S/50.1 million (S/20.3 million as of December 31, 2018, for the closure of 158 wells). The well closure liability is adjusted to reflect the changes that resulted from the passage of time and from reviews of either the date of occurrence or the amount of the present value of the originally estimated obligations (Note 17-d).

The Group estimates the present value of its future obligation for well closure costs, or well closure liability, and increases the carrying amount of the asset that will be withdrawn in the future and that is shown under the heading of intangibles in the consolidated statement of financial position.

The pre-tax discount rate used for the present value calculation was 1.58% for Block I and 1.66% for Block V (2.46% for Block I and 2.51% for Block V for the year 2018), and 2.33% for Blocks III and IV, (2.98% for the year 2018) based on 3, 5 and 30-year rate used on U.S. bonds effective at December 31, 2018 and 2019.

If on December 31, 2018, and 2019, the estimated rate had increased or decreased by 10%, with all variables held constant, the impact on pre-tax profit would not have been significant.

  e)
Impairment of investment in associate and account receivable to Gasoducto Sur Peruano S.A. (GSP)

Based on the termination of the concession agreement, on which Gasoducto Sur Peruano S.A. (GSP) acts as concessionaire (Note 15 a-i), as well as the agreements taken at the end of the year, the Group identified potential impairment indicators affecting the recoverability of its investment. Consequently, the Group impaired the full investment amount.

In that process, the Group has applied judgment to weight the various uncertainties surrounding the amount that can be recovered from this investment. Management has determined the recoverable amount assuming the following key factors: (i) the amount that GSP will recover as a result of a possible public auction, (ii) the liquidation of the company via the GSP Creditor´s meeting, and (iii) the validity of its right to subordinate the Odebrecht Group’s debts in GSP.

The calculation of the impairment estimate assumes a process of liquidation of GSP in accordance with Peruvian legislation, whereby the value of the asset to be recovered is first applied to the payments of liabilities in the different categories of creditors and the remainder, if it is the case, to the payment of the shareholders, taking into account the existing subordination agreements.
- 39 -

As of December 31, 2018 in relation to the amount to be recovered by GSP, the Group is assuming a recovery of the minimum amount established in the concession agreement, which is equivalent to 72.25% of the Net Carrying Amount (NCA) of the Concession assets. This amount, in substance, represents a minimum payment to be obtained by GSP based on a public auction (liquidation) to be set up for the adequate transfer of the Concession’s assets to a new Concessionaire, under the relevant contractual terms and conditions. Additionally, given the situation of non-compliance by the Peruvian State and the situation in which the process of forming the creditors' meeting was, and according to the opinion of lawyers for similar cases, the term for five years was estimated the recovery of the account receivable.

As of 31 December, 2019 the recovery of NCA estimated by Management equals 50%, as a result of the signing of the plea bargain agreement considering that the formation of the creditors' meeting is still pending, the deadline for initiating the actions that initiate the collection process has been extended. Therefore, a total term of eight years has been considered, from the date and until the formation of the creditors' meeting, the approval of the settlement plan, the presentation of the arbitration claim, as well as the entire arbitration process in yes.

5.2   Critical judgments in applying the accounting policies

Consolidation of entities in which the Group holds less than 50%

The Group owns some direct and indirect subsidiaries of which the Group has control even though it has less than 50% of the voting rights. These subsidiaries mainly comprise indirect subsidiaries in the real estate business owned through Viva GyM S.A., having the power to affect the relevant activities that impact the subsidiaries’ returns, even though the Group holds interest between 30% and 50%.  Additionally, the Group has control de facto by a contractual agreement with the majority investor over Promotora Larcomar S.A. of which it owns 46.55% of the equity interest.

Consolidation of entities in which the Group does not have joint control but holds rights and obligations over the assets and liabilities

The Group assesses, on an ongoing basis, the nature of the contracts signed with one or more parties. If no control or joint control is determined to be held by the Group, but it has rights over assets and obligations for liabilities under the arrangement, then the Group recognizes its assets, liabilities, revenue and expenses and its share of any jointly controlled assets or liabilities and any revenue or expense arising under the arrangement as a joint operation in accordance with IFRS 11 - Joint arrangements (Note 2.2-d).

6.    INTERESTS IN OTHER ENTITIES

The consolidated financial statements include the accounts of the Group and its subsidiaries. Additionally, the consolidated financial statements of the Group include its interest in joint operations in which the Company or certain subsidiaries have joint control with their partners (Note 2.2-d).

 
a)
Main subsidiaries

The following table shows the principal direct and indirect subsidiaries classified by operating segment (Note 7):

Name
 
Country
 
Economic activity
 
 
 
 
 
Engineering and Construction:
 
 
 
 
 
 
 
 
 
GyM S.A.   Peru, and Colombia   Civil construction, electro-mechanic assembly, buildings management and implementing housing development projects and other related services.
 
 
 
 
 
GyM Chile S.p.A.
 
Chile
 
Investment funds, investment companies and similar financial entities.
 
 
 
 
 
Vial y Vives - DSD S.A.   Chile   Construction engineering projects, civil construction and related technical consultancy, rental of agricultural machinery and equipment, forestry, construction and civil engineering without operator.
 
 
 
 
 
GMI S.A.
 
Peru, Mexico, and Bolivia
 
Advisory and consultancy services in engineering, carrying out studies and projects, managing projects and supervision of works.

- 40 -

Name
  Country
  Economic activity
         
Morelco S.A.S.
 
Colombia and Ecuador
 
Providing construction and assembly services, supply of equipment Ecuador and materials, operation and maintenance and engineering services in the specialties of mechanics, instrumentation and civil works.

     
Infrastructure:
 
 
 
 
 
 
 
 
 
GMP S.A.
 
Peru
 
Oil and oil by-products extraction, operation and exploration services, as well as providing storage and fuel dispatch services. 
         
Oiltanking Andina Services S.A.
 
Peru
 
Operation of the gas processing plant of Pisco - Camisea.
 
 
 
 
 
Transportadora de Gas Natural Comprimido Andino S.A.C.
 
Peru
 
Supply, process and market natural gas and its derivative products.

 
 
 
 
Concar S.A.
 
Peru
 
Highway and roads concessions operation and maintenance.
 
 
 
 
 
GyM Ferrovias S.A.
 
Peru
 
Concession for the operation of the public transportation system of Lima Metro (Metro de Lima Metropolitana).
 
 
 
 
 
Survial S.A.
 
Peru
 
Concession for constructing, operating and maintaining Section 1 of the “Southern Inter-oceanic” highway.
 
 
 
 
 
Norvial S.A.
 
Peru
 
Concession for restoring, operating and maintaining the “Ancon - Huacho - Pativilca” section of the Panamericana Norte road.
 
 
 
 
 
Concesionar Canchaque S.A.C.
 
Peru
 
Concession for operating and maintaining of the Buenos Aires – Canchaque provincial road highway.
 
 
 
 
 
Concesionaria Via Expresa Sur S.A.
 
Peru
 
Concession for designing, constructing, operating and maintaining the Via Expresa - Paseo de la Republica in Lima.
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
 
 
VIVA GyM S.A.
 
Peru
 
Developing and managing real estate projects directly or together with other partners.
 
 
 
 
 
Parent company operation:
 
 
 
 
 
 
 
 
 
Adexus S.A.
 
Chile, Peru,Colombia and Ecuador Ecuador 
 
IT solutions services.
 
 
 
 
 
CAM Holding S.p.A.
 
Chile
 
Investment company.
 
 
 
 
 
Qualys S.A.
 
Peru
 
Human, economic and technological services to the Group´s companies.
 
 
 
 
 
Promotora Larcomar S.A.
 
Peru
 
Building a hotel complex on a plot of land located in thedistrict of Miraflores.
 
 
 
 
 
Promotores Asociados de Inmobiliarias S.A.
 
Peru
 
Operating in the real-estate industry and engaged in the development and sale of office premises in Peru.
 
 
 
 
 
Negocios del Gas S.A.
 
Peru
 
Investment company for construction, operation, and maintenance of the pipeline system to transport natural gas and liquids.
 
 
 
 
 
Inversiones en Autopistas S.A.
 
Peru
 
Holding company of shares, participation or any other credit instrument or investment document.

- 41 -
The following table shows the Group’s subsidiaries and related interest as of December 31, 2019:

   
Percentage
of common
shares
directly held
by Parent
(%)
    
Percentage
of common
shares held
by
Subsidiaries
(%)
    

Percentage
of common
shares held
by the
Group (%)
    
Percentage
of common
shares held
by non-
controlling
interests (%)
  
Engineering and Construction:
                        
GyM S.A.
    
98.87
%
    
-
      
98.87
%
    
1.13
%
- Morelco  S.A.S.
    
-
      
70.00
%
    
70.00
%
    
30.00
%
- GyM Chile S.p.A.
    
-
      
100.00
%
    
100.00
%
    
-
  
- Vial y Vives – DSD S.A.
    
-
      
94.49
%
    
94.49
%
    
5.51
%
GMI S.A.
    
89.41
%
    
-
      
89.41
%
    
10.59
%
- Ecología Tecnología Ambiental S.A.C.
    
-
      
100.00
%
    
100.00
%
    
-
  
- GM Ingenieria y Construcción de CV
    
-
      
99.00
%
    
99.00
%
    
1.00
%
- GM Ingenieria Bolivia S.R.L.
    
-
      
98.57
%
    
98.57
%
    
1.43
%
                                 
Infrastructure:
                                
GMP S.A.
    
95.00
%
    
-
      
95.00
%
    
5.00
%
- Oiltanking Andina Services S.A.
    
-
      
50.00
%
    
50.00
%
    
50.00
%
- Transportadora de Gas Natural
                                
  Comprimido Andino S.A.C.
    
-
      
99.93
%
    
99.93
%
    
0.07
%
Concar S.A.
    
100.00
%
    
-
      
100.00
%
    
-
  
GyM Ferrovias S.A.
    
75.00
%
    
-
      
75.00
%
    
25.00
%
Survial S.A.
    
100.00
%
    
-
      
100.00
%
    
-
  
Norvial S.A.
    
18.20
%
    
48.80
%
    
67.00
%
    
33.00
%
Concesión Canchaque S.A.
    
99.96
%
    
0.04
%
    
100.00
%
    
-
  
Concesionaria Vía Expresa Sur S.A.
    
99.98
%
    
0.02
%
    
100.00
%
    
-
  
                                 
Real Estate:
                                
Viva GyM S.A.
    
56.22
%
    
43.32
%
    
99.54
%
    
0.46
%
                                 
Parent company operations:
                                
Qualys S.A (Previously Generadora Arabesco S.A.)
    
100.00
%
    
-
      
100.00
%
    
-
  
Promotora Larcomar S.A.
    
46.55
%
    
-
      
46.55
%
    
53.45
%
Negocios del Gas S.A.
    
99.99
%
    
0.01
%
    
100.00
%
    
-
  
Agenera S.A.
    
99.00
%
    
1.00
%
    
100.00
%
    
-
  
Inversiones en Autopistas S.A.
    
1.00
%
    
99.00
%
    
100.00
%
    
-
  
Cam Holding S.p.A.
    
100.00
%
    
-
      
100.00
%
    
-
  
Adexus S.A.
    
100.00
%
    
-
      
100.00
%
    
-
  












































- 42 -
The following table shows the Group’s subsidiaries and related interest as of December 31, 2018:

   
Percentage
of common
shares
directly held
by Parent
(%)
    
Percentage
of common
shares held
by
Subsidiaries
(%)
   

Percentage
of common
shares held
by the
Group (%)
   
Percentage
of common
shares held
by non-
controlling
interests (%)
  
Engineering and Construction:
                        
GyM S.A.
    
98.24
%
    
-
      
98.24
%
    
1.76
%
- Morelco  S.A.S.
    
-
      
70.00
%
    
70.00
%
    
30.00
%
- GyM Chile S.p.A.
    
-
      
94.49
%
    
99.99
%
    
0.01
%
- Vial y Vives – DSD S.A.
    
-
      
94.49
%
    
94.49
%
    
5.51
%
GMI S.A.
    
89.41
%
    
-
      
89.41
%
    
10.59
%
- Ecología Tecnología Ambiental S.A.C.
    
-
      
-
      
99.99
%
    
0.01
%
- GM Ingenieria y Construcción de CV
    
-
      
-
      
99.00
%
    
1.00
%
- GM Ingenieria Bolivia S.R.L.
    
-
      
-
      
99.00
%
    
1.00
%
                                 
Infrastructure:
                                
GMP S.A.
    
95.00
%
    
-
      
95.00
%
    
5.00
%
- Oiltanking Andina Services S.A.
    
-
      
50.00
%
    
50.00
%
    
50.00
%
- Transportadora de Gas Natural
                                
  Comprimido Andino S.A.C.
    
-
      
99.93
%
    
99.93
%
    
0.07
%
Concar S.A.
    
99.99
%
    
-
      
99.99
%
    
0.01
%
GyM Ferrovias S.A.
    
75.00
%
    
-
      
75.00
%
    
25.00
%
Survial S.A.
    
99.99
%
    
-
      
99.99
%
    
0.01
%
Norvial S.A.
    
67.00
%
    
-
      
67.00
%
    
33.00
%
Concesión Canchaque S.A.
    
99.96
%
    
-
      
99.96
%
    
0.04
%
Concesionaria Vía Expresa Sur S.A.
    
99.98
%
    
0.02
%
    
100.00
%
    
-
  
                                 
Real Estate:
                                
Viva GyM S.A.
    
63.44
%
    
36.10
%
    
99.54
%
    
0.46
%
                                 
Parent company operations:
                                
Qualys S.A (Previously Generadora Arabesco S.A.)
    
99.00
%
    
-
      
99.00
%
    
1.00
%
Promotora Larcomar S.A.
    
46.55
%
    
-
      
46.55
%
    
53.45
%
Negocios del Gas S.A.
    
99.99
%
    
0.01
%
    
100.00
%
    
-
  
Agenera S.A.
    
99.00
%
    
1.00
%
    
100.00
%
    
-
  
Inversiones en Autopistas S.A.
    
100.00
%
    
-
      
-
      
-
  
Cam Holding S.p.A.
    
100.00
%
    
-
      
100.00
%
    
-
  
Adexus S.A.
    
99.99
%
    
0.01
%
    
100.00
%
    
-
  












































All investments in subsidiaries have been included in the consolidation. The proportion of voting rights in such subsidiaries is held directly by the Company and does not differ significantly from the proportion of shares held.

In June 2018, the Company expanded its shareholding to 100% of the subsidiary Adexus S.A. (Note 32-a).

In 2018, the subsidiary Cam Servicios del Perú S.A. was sold, as well as the following indirect subsidiaries: i) Stracon GyM S.A. through GyM S.A. and ii) Cam Chile S.p.A., through Cam Holding S.p.A.. In that year, these investments were deconsolidated by the Company, and their operations are shown in Note 36.

As of December 31, 2019 the non-controlling interest is attributed to the following subsidiaries:
- 43 -

Non Controlling Participation
  
2018
    
2019
  
 
            
Viva GyM S.A. and subsidiaries
    
168,612
      
168,839
  
GyM S.A. and subsidiaries
    
67,639
      
61,569
  
Norvial S.A.
    
65,918
      
63,031
  
GMP S.A.
    
23,424
      
24,413
  
GyM Ferrovias S.A.
    
55,986
      
77,564
  
Promotora Larcomar S.A.
    
13,121
      
3,058
  
Other
    
6,871
      
(199
 )
 
    
401,571
      
398,275
  

In December 2019, the subsidiary Viva GyM S.A. through the General Shareholders' Meeting, it agreed to capitalize its supplementary premium for the amount of S/65.3 million to subsequently reduce the share capital in a non-proportional manner by returning contributions amounting to S/82.3 million. The return did not generate cash outflow as the reciprocal obligations between its shareholders with the subsidiary were offset. Consequently, the Company modified its participation in its subsidiary from 63.4% to 56.2%, in turn its subsidiary GyM S.A. (also a shareholder of Viva GyM S.A.) modified its stake from 36.1% to 43.3%.

In addition, in December 2019 the subsidiary GyM S.A. through the General Shareholders' Meeting agreed to the capital increase for monetary contributions in the amount of S/146.1 million. Minority shareholders voluntarily waived the pre-emptive subscription right, causing the Company's participation percentage to increase from 98.2% to 98.9%.

Summarized financial information of subsidiaries with material non-controlling interests

Set out below is the summarized financial information for each subsidiary that has non-controlling interests that are material to the Group.

Summarized statement of financial position

   
Viva GyM S.A.
    
GyM S.A.
              
   
and subsidiaries
    
and subsidiaries
    
Norvial S.A.
    
GyM Ferrovías S.A.
  
   
At December 31,
    
At December 31,
    
At December 31,
    
At December 31,
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
Current:
                                                
Assets
    
720,976
      
591,402
      
1,262,588
      
1,232,486
      
109,778
      
84,889
      
534,148
      
449,180
  
Liabilities
    
(310,132
)
    
(263,592
)
    
(1,467,953
)
    
(1,491,747
)
    
(66,506
)
    
(53,715
)
    
(563,081
)
    
(93,879
)
Current net assets (liabilities)
    
410,844
      
327,810
      
(205,365
)
    
(259,261
)
    
43,272
      
31,174
      
(28,933
)
    
355,301
  
                                                                 
Non-current:
                                                                
Assets
    
98,504
      
121,529
      
980,653
      
1,100,218
      
462,739
      
442,186
      
974,688
      
623,033
  
Liabilities
    
(37,154
)
    
(37,851
)
    
(413,026
)
    
(486,924
)
    
(306,261
)
    
(282,358
)
    
(716,946
)
    
(668,080
)
Non-current net assets (liabilities)
    
61,350
      
83,678
      
567,627
      
613,294
      
156,478
      
159,828
      
257,742
      
(45,047
)
Net assets
    
472,194
      
411,488
      
362,262
      
354,033
      
199,750
      
191,002
      
228,809
      
310,254
  
- 44 -
Summarized income statement

   
Viva GyM S.A.
    
GyM S.A.
              
   
and subsidiaries
    
and subsidiaries
    
Norvial S.A.
    
GyM Ferrovías S.A.
  
   
For the year ended
    
For the year ended
    
For the year ended
    
For the year ended
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
                                                 
Revenue
    
630,130
      
264,401
      
1,704,998
      
2,279,786
      
163,117
      
272,679
      
577,993
      
397,853
  
                                                                 
                                                                 
Profit (loss) before income tax
    
226,945
      
30,729
      
(154,452
)
    
(116,081
)
    
21,104
      
24,067
      
116,822
      
121,079
  
Income tax
    
(69,166
)
    
(7,000
)
    
18,559
      
(30,843
)
    
(3,885
)
    
(6,815
)
    
(35,524
)
    
(39,634
)
Profit (loss) for the year
    
157,779
      
23,729
      
(135,893
)
    
(146,924
)
    
17,219
      
17,252
      
81,298
      
81,445
  
Discontinued operations
    
-
      
-
      
44,096
      
-
      
-
      
-
      
-
      
-
  
Other comprehensive income
    
-
      
-
      
(14,061
)
    
(7,436
)
    
-
      
-
      
-
      
-
  
Total comprehensive income for the year
    
157,779
      
23,729
      
(105,858
)
    
(154,360
)
    
17,219
      
17,252
      
81,298
      
81,445
  
                                                                 
Dividends paid to non-controlling
                                                                
interest (Note 35-d)
    
84,870
      
-
      
4,241
      
-
      
8,184
      
8,580
      
-
      
-
  

Summarized statement of cash flows

   
Viva GyM S.A.
    
GyM S.A.
                          
   
and subsidiaries
    
and subsidiaries
    
Norvial S.A.
    
GyM Ferrovías S.A.
  
   
For the year ended
    
For the year ended
    
For the year ended
    
For the year ended
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
                                                 
Net cash provided from
                                                
operating activities
    
259,992
      
28,791
      
148,754
      
(25,502
)
    
70,939
      
12,514
      
(161,318
)
    
379,882
  
Net cash (applied to) provided from
                                                                
investing activities
    
(8,460
)
    
(2,613
)
    
233,150
      
(20,173
)
    
(2
)
    
(33
)
    
1,928
      
2,845
  
Net cash (applied to) provided from
                                                                
financing activities
    
(255,979
)
    
(58,722
)
    
(388,836
)
    
209,514
      
(43,536
)
    
(46,045
)
    
189,495
      
(273,009
)
(Decrease) increase in cash
                                                                
and cash equivalents, net
    
(4,447
)
    
(32,544
)
    
(6,932
)
    
163,839
      
27,401
      
(33,564
)
    
30,105
      
109,718
  
Cash and cash equivalents
                                                                
 at the beginning of the year
    
97,709
      
93,262
      
179,560
      
172,628
      
72,449
      
99,850
      
161,073
      
191,178
  
Cash and cash equivalents
                                                                
 at the end of the year
    
93,262
      
60,718
      
172,628
      
336,467
      
99,850
      
66,286
      
191,178
      
300,896
  

The information above is the amount before inter-company eliminations.

 
b)
Public services concessions

The Group has public service concessions. When applicable, the income attributable to the construction or restoration of infrastructure has been accounted for by applying the models described in Note 2.5 (financial asset model, intangible asset and forked model).

After the termination of the Contract between TGNCA and the Ministry of Energy and Mines, Management is preparing new gas compression and liquefaction projects. Additionally, it is evaluating the centralization of the gas business through this vehicle, a decision that must be approved by the Board of Directors in 2020.

In all the Group's concessions, the infrastructure returns to the Grantor at the end of the Contract.
- 45 -
Name of



Estimated
      
Ordinary
   Concession   Accounting
Concession
Description

investment
Consideration
   shares held   termination   model
           
 
       
Survial S.A.
  
This company operates and maintains
  
US$99 million
  
Transaction secured by
  
99.90%
  
2032
  
Financial asset
   
a 750 km road from the San Juan de
      
the Peruvian Government
            
   
Marcona port to Urcos, Peru, which is
      
involving from annual
            
   
connected to an interoceanic road.
      
payments for the
            
   
The road has five toll stations and
      
maintenance and operation
            
   
three weigh stations.
      
of the road, which is in
            
           
charge of the Peruvian
            
           
Ministry of Transport and
            
           
Communications (MTC).
            
                         
Canchaque S.A.C.
  
This company operates and periodically
  
US$31 million
  
Transaction secured by
  
99.96%
  
2025
  
Financial asset


maintains a 78 km road which connects the towns
  

the Peruvian Government
  
 
 
   
of Buenos Aires and Canchaque, in Peru.
      
regardless the traffic
            
   
The road has one toll station.
      
volume.
            
           
Revenue is secured by
            
           
an annual minimum
            
           
amount of US$0.3 million.
            
                         
Concesionaria.
  
Designing, financing, constructing,
  
S/250 million
  
Transaction secured by
  
50.00%
  
2036
  
Financial asset
La Chira S.A.
  
operating and maintaining project
      
the Peruvian Government
            
   
called “Planta de Tratamiento de Aguas
      
consisting of monthly and
            
   
Residuales y Emisario Submarino La Chira”.
      
quarterly payments settled by
            
   
The Project will treat approximately 25%
      
Sedapal´s collection trust.
            
   
of wastewaters in Lima.
                    
                         
GyM Ferrovias S.A.
  
Concession for the operation of Line 1
  
S/642 million
  
Transaction secured by
  
75.00%
  
2041
  
Financial asset
   
of Lima Metro, Peru’s only urban
      
the Peruvian Government
            
   
railway system in Lima city, which
      
involving a quarterly
            
   
includes (i) operation and maintenance
      
payment received from
            
   
of the existing trains (24 initial investment
      
MTC based on km travelled
            
   
trains and 20 additional trains), (ii) operation
      
per train.
            
   
and maintenance of the railway system
                    
   
(railway and infrastructure).
                    


- 46 -
Name of
  
  Estimated
     Ordinary    Concession    Accounting
concession
  
Description
   investment
Consideration    shares held    termination    model
                         
Norvial S.A.
  
The Company operates and maintains
  
US$187 million
  
From users (self-financed
  
67.00%
  
2028
  
Intangible
   
the highway that connects
      
concession; revenue is
            
   
Lima to the northwest of Peru.
      
derived from collection of
            
   
This 183 km road known as Red Vial 5
      
tolls).
            
   
runs from the cities of Ancon to Pativilca
                    
   
and has three toll stations.
                    
                         
Via Expresa Sur S.A.
  
The Company obtained the concession
  
US$197 million
  
The contract gives the right
  
99.98%
  
2053
  
Bifurcated
   
for designing, financing, building,
      
of collection from users; however
            
   
operating and maintaining the
      
the Peruvian Government shall pay
            
   
infrastructure associated with the Via
      
the difference when the operating
            
   
Expresa Sur Project.
      
revenue obtained is below
            
   
This project involves the second stage
      
US$18 million during the first
            
   
expansion of the Via Expresa - Paseo
      
two years and US$19.7 million
            
   
de la Republica,between Av. Republica
      
from the third year to the
            
   
de Panama and and Panamericana
      
fifteenth year of the effective
            
   
highway.
      
period of the financing, with a ceiling
            
           
of US$10 million. In June 2017,
            
           
the contract was suspended temporarily
            
           
for one year by agreement between
            
           
the Concessionaire and the grantor.
            
           
The suspension was extended until
            
           
June 2020.
            

 
- 47 -
 
c)
Main joint operations

At December 31, 2019, the Group is a partner to 51 Joint Operations with third parties (51 at December 31, 2018). The table below lists the Group’s major Joint Operations.

         
Percentage of interest
  
Joint operations
  
2018
    
2019
  
             
Graña y Montero S.A.A.
            
 - Concesionaria La Chira S.A.
    
50
%
    
50
%
                 
GyM S.A.
                
- Consorcio CDEM
    
85
%
    
-
  
- Consorcio Huacho Pativilca
    
67
%
    
67
%
- Consorcio GyM – CONCIVILES
    
67
%
    
67
%
- Consorcio AMDP norte
    
-
      
50
%
- Consorcio Chicama - Ascope
    
50
%
    
50
%
- Consorcio Constructor Alto Cayma
    
50
%
    
50
%
- Consorcio Energía y Vapor
    
50
%
    
-
  
- Consorcio Ermitaño
    
50
%
    
50
%
- Consorcio GyM Sade Skanska
    
50
%
    
50
%
- Consorcio GYM-OSSA
    
-
      
50
%
- Consorcio GyM-Stracon
    
-
      
50
%
- Consorcio HV GyM
    
50
%
    
50
%
- Consorcio La Chira
    
50
%
    
50
%
- Consorcio Lima Actividades Comerciales Sur
    
50
%
    
50
%
- Consorcio Menegua
    
50
%
    
-
  
- Consorcio para la Atención y Mantenimiento de Ductos
    
50
%
    
-
  
- Consorcio Rio Mantaro
    
50
%
    
50
%
- Consorcio Río Urubamba
    
50
%
    
50
%
- Consorcio TNT Vial y Vives - DSD Chile LTDA
    
50
%
    
-
  
- Constructora Incolur DSD Limitada
    
50
%
    
-
  
- Consorcio Alto Cayma
    
49
%
    
49
%
- Consorcio La Gloria
    
49
%
    
49
%
- Consorcio Norte Pachacutec
    
49
%
    
49
%
- Consorcio Italo Peruano
    
48
%
    
48
%
- Consorcio Vial Quinua
    
46
%
    
46
%
- Consorcio Chiquintirca
    
40
%
    
40
%
- Consorcio Constructor Ductos del Sur
    
29
%
    
29
%
- Consorcio Constructor Chavimochic
    
27
%
    
27
%
- Consorcio Construcciones y Montajes CCM
    
25
%
    
25
%
- Consorcio Vial ICAPAL
    
10
%
    
10
%
                 
GMP S.A.
                
- Consorcio Terminales
    
50
%
    
50
%
- Terminales del Perú
    
50
%
    
50
%

- 48 -
 
         
Percentage of interest
  
Joint operations
  
2018
    
2019
  
             
CONCAR S.A.
            
- Consorcio Ancón-Pativilca
    
67
%
    
67
%
- Consorcio Peruano de Conservación
    
50
%
    
50
%
- Consorcio Manperán
    
67
%
    
67
%
- Consorcio Vial Sierra
    
100
%
    
50
%
- Consorcio Vial Ayahuaylas
    
99
%
    
99
%
- Consorcio Vial Sullana
    
99
%
    
99
%
- Consorcio Vial del Sur
    
99
%
    
99
%
                 
GMI S.A.
                
- Consorcio Vial la Concordia
    
88
%
    
88
%
- Consorcio GMI- Haskoningdhv
    
70
%
    
70
%
- Consorcio Supervisor Ilo
    
55
%
    
55
%
- Consorcio Poyry-GMI
    
40
%
    
40
%
- Consorcio Internacional Supervisión Valle Sagrado
    
33
%
    
33
%
- Consorcio Ecotec - GMI - PIM
    
30
%
    
30
%
- Consorcio Ribereño Chinchaycamac
    
-
      
40
%

All the joint agreements listed above are operated in Peru, Chile and Colombia.

On November 2, 2019, the operation contract of Consorcio Terminales of the subsidiary GMP S.A., corresponding to the terminals of Pisco, Mollendo, Ilo, Cusco and Juliaca, was terminated, and the assets and operations were delivered to Petroperú. Currently, it is in the process of liquidating assets and liabilities.

The main activities of the joint operations correspond to:

Joint Operations in
  
Economic activity
     
Graña y Montero S.A.A.
  
Construction, operation and maintenance of La Chira wastewater treatment plant in the south of Lima.  The project is aimed to solve Lima’s environmental problems caused by sewage discharged directly into the sea.
     
GyM S.A.
  
These joint operations were created exclusively to development of construction contracts.
     
GMP S.A.
  
Consorcio Terminales and Terminales del Peru provide services for receiving, storing, shipping and transporting liquid hydrocarbons, such as gasoline, jet fuel, diesel fuel and residual among others.
     
CONCAR S.A.
  
Concar’s joint operations provides rehabilitation service, routine and periodic maintenance of the road; and road conservation and preservation services.
     
GMI S.A.
  
Engineering consulting services in, study and project execution, project management and Works supervision.

The consolidated financial statements do not include any other type of entities in addition to those mentioned above, such as trust funds or special purpose entities.

- 49 -


 7
SEGMENT REPORTING

Operating segments are reported consistently with the internal reports that are reviewed by the Group’s chief decision-maker; that is, the Executive Committee, which is led by the Corporate General Manager.  This Committee acts as the maximum authority in operations decision making and is responsible for allocating resources and evaluating the performance of each operating segment.

The Group’s operating segments are assessed by the activities of the following business units: (i) engineering and construction, (ii) infrastructure, (iii) real estate and (iv) parent company operations.

As set forth under IFRS 8, reportable segments based on the level of revenue is: ‘engineering and construction’.  However, the Group has voluntarily decided to report on all its operating segments as detailed in this Note.

The revenues derived from foreign operations (Chile y Colombia) comprise 14% of the Group’s total revenue reported in 2019 (20.3% in 2018).

Sales between segments are carried out at arm’s length, are not material, and are eliminated on consolidation. The revenue from external parties is measured in a manner consistent with that in the income statement. Sale of goods relate to the real estate segment. Revenue from services relate to all other segments.

Group sales and receivables are not concentrated in a few private customers.  There is no external customer that represents 10% or more of the Group’s revenue.

The principal activities of the Group in each operating segments are as follows:

a)
Engineering and construction: This segment includes from traditional engineering services such as structural, civil and design engineering, and architectural planning to advanced specialties including process design, simulation, and environmental services at three divisions; i) civil works, such as the construction of hydroelectric power stations and other large infrastructure facilities; (ii) electro-mechanic construction, such as concentrator plants, oil, and natural gas pipelines, and transmission lines; iii) building construction, such as office buildings, residential buildings, hotels, affordable housing projects, shopping centers, and industrial facilities.
   
b)
Infrastructure: The Group has long-term concessions or similar contractual arrangements in Peru for three toll roads, the Lima Metro, a wastewater treatment plant in Lima, four producing oil fields, a gas processing plant and operation and maintenance services for infrastructure assets.
   
c)
Real Estate: The Group develops and sells homes targeted to low and middle-income population sectors which are experiencing a significant increase in disposable income, as well as, office and commercial space to a lesser extent.
   
d)
Parent Company Operation corresponds to services provided to related entities of the Group such as strategic and functional advisory services and operational leasing of offices.

The Executive Committee uses adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) to assess the performance of operating segments. In 2019, additional provisions have been considered for some of the Group´s asses, such as impairment of investments, impairment of account receivables, impairment of goodwill, provision for civil repair and legal claims.

Profit before income tax reconciles to EBITDA as follows:
- 50 -


  
2018
    
2019
  
             
Net profit (loss)
    
57,415
      
(838,642
)
Financial income and expenses
    
197,057
      
157,053
  
Income tax
    
113,318
      
319,957
  
Impairment of investments
    
-
      
218,276
  
Impairment of accounts receivables
    
-
      
311,309
  
Impairment of goodwill
    
-
      
33,089
  
Provisions: civil repair and legal litigartion
    
-
      
118,105
  
Impairment recovery
    
-
      
(40,124
)
Depreciation and amortization
    
189,508
      
202,630
  
EBITDA (*)
    
557,298
      
481,653
  

(*)Adjusted EBITDA of impairment provisions
Discontinued operations not included.

EBITDA for each segment is as follows:
 
   
2018
    
2019
  
             
Engineering and construction
    
19,243
      
15,298
  
Infrastructure
    
411,502
      
403,295
  
Real estate
    
240,991
      
56,791
  
Parent company operations
    
(27,803
)
    
(477,400
)
Intercompany eliminations
    
(86,635
)
    
483,669
  
EBITDA
    
557,298
      
481,653
  

Backlog refers to the expected future revenue under signed contracts and legally binding letters of intent. The breakdown by operating segments as of December 31, 2019, and the dates in which they are estimated to be realized is shown in the following table:

         
Anual Backlog
   
2019
    
2020
    
2021
      
2022
+
Engineering and Construction
    
3,018,822
      
2,592,976
      
425,846
      
-
  
Infrastructure
    
1,837,305
      
643,999
      
586,760
      
606,546
  
Real estate
    
209,893
      
209,894
       -
      
-
  
Intercompany eliminations
    
(434,039
)
    
(144,389
)
    
(144,589
)
    
(145,061
)
     
4,631,981
      
3,302,480
      
868,017
      
461,485
  

The following table shows the Group’s financial statements by operating segments:

- 51 -
Operating segments financial position
                                                      
Segment reporting
                                                      
                           
Infrastructure
                          



As of December 31, 2018
  

Engineering and construction
    



Energy
    



Toll roads
    



Transportation
    


Water
treatment
    



Real estate
    

Parent
Company operations
    



Eliminations
    



Consolidated
  
                                                       
Assets.-
                                                      
Cash and cash equivalent
    
177,455
      
34,816
      
168,460
      
191,178
      
6,700
      
93,262
      
129,269
      
-
      
801,140
  
Trade accounts receivables, net
    
583,842
      
54,350
      
78,013
      
226,919
      
598
      
63,038
      
1,068
      
-
      
1,007,828
  
Work in progress, net
    
24,962
      
-
      
-
      
-
      
-
      
-
      
3,576
      
-
      
28,538
  
Accounts receivable from related parties
    
203,583
      
492
      
40,820
      
758
      
9,930
      
60,759
      
98,308
      
(379,747
)
    
34,903
  
Other accounts receivable
    
386,467
      
37,611
      
28,492
      
31,012
      
199
      
55,508
      
49,160
      
2
      
588,451
  
Inventories, net
    
27,852
      
18,823
      
9,206
      
25,282
      
-
      
448,328
      
-
      
(15,444
)
    
514,047
  
Prepaid expenses
    
3,825
      
1,345
      
3,068
      
874
      
135
      
81
      
1,221
      
-
      
10,549
  
     
1,407,986
      
147,437
      
328,059
      
476,023
      
17,562
      
720,976
      
282,602
      
(395,189
)
    
2,985,456
  
Non-current assets classified as held for sale
    
-
      
-
      
-
      
-
      
-
      
-
      
247,798
      
-
      
247,798
  
Total current assets
    
1,407,986
      
147,437
      
328,059
      
476,023
      
17,562
      
720,976
      
530,400
      
(395,189
)
    
3,233,254
  
                                                                         
Long-term trade accounts receivable, net
    
14,455
      
-
      
33,380
      
966,202
      
-
      
6,030
      
-
      
-
      
1,020,067
  
Long-term work in progress, net
    
-
      
-
      
32,212
      
-
      
-
      
-
      
-
      
-
      
32,212
  
Long-term accounts receivable from related parties
    
254,660
      
-
      
39,341
      
-
      
-
      
-
      
744,655
      
(260,430
)
    
778,226
  
Prepaid expenses
    
-
      
-
      
28,214
      
5,152
      
840
      
-
      
-
      
(509
)
    
33,697
  
Other long-term accounts receivable
    
77,028
      
63,797
      
7,058
      
64,817
      
7,346
      
30,268
      
52,645
      
(2
)
    
302,957
  
Investments in associates and joint ventures
    
114,676
      
7,230
      
-
      
-
      
-
      
5,604
      
2,213,023
      
(2,082,768
)
    
257,765
  
Investment property
    
-
      
-
      
-
      
-
      
-
      
29,133
      
-
      
-
      
29,133
  
Property, plant and equipment, net
    
205,678
      
171,430
      
14,585
      
1,586
      
109
      
9,237
      
69,088
      
(1,159
)
    
470,554
  
Intangible assets, net
    
160,088
      
183,614
      
466,153
      
749
      
-
      
1,105
      
23,514
      
11,872
      
847,095
  
Deferred income tax asset
    
166,624
      
5,025
      
11,876
      
-
      
620
      
17,127
      
218,201
      
5,963
      
425,436
  
Total non-current assets
    
993,209
      
431,096
      
632,819
      
1,038,506
      
8,915
      
98,504
      
3,321,126
      
(2,327,033
)
    
4,197,142
  
Total assets
    
2,401,195
      
578,533
      
960,878
      
1,514,529
      
26,477
      
819,480
      
3,851,526
      
(2,722,222
)
    
7,430,396
  
                                                                         
Liabilities.-
                                                                        
Borrowings
    
232,409
      
26,621
      
15,384
      
209,463
      
-
      
133,105
      
209,492
      
-
      
826,474
  
Bonds
    
-
      
-
      
25,745
      
13,422
      
-
      
-
      
-
      
-
      
39,167
  
Trade accounts payable
    
777,130
      
49,254
      
61,233
      
104,652
      
121
      
31,173
      
55,968
      
-
      
1,079,531
  
Accounts payable to related parties
    
179,351
      
1,933
      
46,099
      
65,256
      
58
      
35,085
      
91,754
      
(363,595
)
    
55,941
  
Current income tax
    
5,898
      
2,797
      
1,398
      
9,888
      
226
      
4,219
      
1,381
      
-
      
25,807
  
Other accounts payable
    
389,896
      
13,147
      
72,823
      
11,677
      
631
      
106,286
      
38,209
      
-
      
632,669
  
Provisions
    
521
      
5,412
      
-
      
-
      
-
      
264
      
-
      
-
      
6,197
  
Non-current liabilities classified as held for sale
    
-
      
-
      
-
      
-
      
-
      
-
      
225,828
      
-
      
225,828
  
Total current liabilities
    
1,585,205
      
99,164
      
222,682
      
414,358
      
1,036
      
310,132
      
622,632
      
(363,595
)
    
2,891,614
  
                                                                         
Borrowings
    
9,314
      
87,166
      
556
      
-
      
-
      
10,684
      
268,478
      
-
      
376,198
  
Long-term bonds
    
-
      
-
      
299,637
      
598,238
      
-
      
-
      
-
      
-
      
897,875
  
Other long-term accounts payable
    
357,146
      
-
      
31,477
      
154,756
      
1,656
      
26,470
      
2,605
      
-
      
574,110
  
Long-term accounts payable to related parties
    
8,880
      
-
      
1,167
      
81,207
      
23,445
      
-
      
183,826
      
(276,676
)
    
21,849
  
Provisions
    
32,122
      
20,234
      
-
      
-
      
-
      
-
      
51,055
      
-
      
103,411
  
Derivative financial instruments
    
-
      
61
      
-
      
-
      
-
      
-
      
-
      
-
      
61
  
Deferred income tax liability
    
5,564
      
24,541
      
7,010
      
37,178
      
-
      
-
      
1,054
      
-
      
75,347
  
Total non-current liabilities
    
413,026
      
132,002
      
339,847
      
871,379
      
25,101
      
37,154
      
507,018
      
(276,676
)
    
2,048,851
  
Total liabilities
    
1,998,231
      
231,166
      
562,529
      
1,285,737
      
26,137
      
347,286
      
1,129,650
      
(640,271
)
    
4,940,465
  
Equity attributable to controlling interest in the Company
    
331,178
      
323,943
      
332,406
      
171,594
      
340
      
193,483
      
2,708,803
      
(1,973,387
)
    
2,088,360
  
Non-controlling interest
    
71,786
      
23,424
      
65,943
      
57,198
      
-
      
278,711
      
13,073
      
(108,564
)
    
401,571
  
Total liabilities and equity
    
2,401,195
      
578,533
      
960,878
      
1,514,529
      
26,477
      
819,480
      
3,851,526
      
(2,722,222
)
    
7,430,396
  
- 52 -
Operating segments financial position
                                                      
Segment reporting
                                                      
         
Infrastructure
                          
As of December 31, 2019
  
Engineering and construction
    
Energy
    
Toll roads
    
Transportation
    
Water treatment
    
Real estate
    
Parent Company operations
    
Eliminations
    
Consolidated
  
                                                       
Assets.-
                                                      
Cash and cash equivalent
    
372,991
      
53,118
      
123,020
      
300,896
      
6,388
      
60,718
      
31,847
      
-
      
948,978
  
Trade accounts receivables, net
    
531,591
      
63,402
      
44,513
      
97,059
      
1,168
      
83,019
      
985
      
-
      
821,737
  
Work in progress, net
    
49,457
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
49,457
  
Accounts receivable from related parties
    
202,181
      
369
      
43,852
      
1,853
      
-
      
1,144
      
99,794
      
(312,535
)
    
36,658
  
Other accounts receivable
    
327,977
      
30,853
      
30,228
      
18,548
      
109
      
9,509
      
27,274
      
2
      
444,500
  
Inventories, net
    
57,093
      
32,366
      
7,109
      
30,594
      
-
      
437,012
      
-
      
(11,601
)
    
552,573
  
Prepaid expenses
    
6,812
      
1,271
      
2,779
      
231
      
133
      
-
      
122
      
-
      
11,348
  
     
1,548,102
      
181,379
      
251,501
      
449,181
      
7,798
      
591,402
      
160,022
      
(324,134
)
    
2,865,251
  
Non-current assets classified as held for sale
    
2,398
      
-
      
-
      
-
      
-
      
-
      
203,020
      
-
      
205,418
  
Total current assets
    
1,550,500
      
181,379
      
251,501
      
449,181
      
7,798
      
591,402
      
363,042
      
(324,134
)
    
3,070,669
  
                                                                         
Long-term trade accounts receivable, net
    
97,256
      
-
      
36,273
      
619,086
      
-
      
587
      
-
      
-
      
753,202
  
Long-term work in progress, net
    
-
      
-
      
23,117
      
-
      
-
      
-
      
-
      
-
      
23,117
  
Long-term accounts receivable from related parties
    
290,966
      
-
      
836
      
-
      
10,475
      
-
      
552,687
      
(308,023
)
    
546,941
  
Prepaid expenses
    
-
      
887
      
24,462
      
2,307
      
788
      
-
      
-
      
(510
)
    
27,934
  
Other long-term accounts receivable
    
113,879
      
63,649
      
5,156
      
-
      
7,346
      
50,449
      
59,844
      
-
      
300,323
  
Investments in associates and joint ventures
    
109,839
      
8,006
      
-
      
-
      
-
      
6,062
      
1,495,422
      
(1,582,294
)
    
37,035
  
Investment property
    
1,450
      
-
      
-
      
-
      
-
      
26,876
      
-
      
-
      
28,326
  
Property, plant and equipment, net
    
186,589
      
184,819
      
11,106
      
841
      
153
      
11,742
      
49,779
      
(1,159
)
    
443,870
  
Intangible assets, net
    
136,547
      
244,901
      
443,420
      
794
      
-
      
1,029
      
19,490
      
7,134
      
853,315
  
Right-of-use assets, net
    
5,638
      
24,038
      
3,860
      
5
      
7
      
5,048
      
55,532
      
(15,315
)
    
78,813
  
Deferred income tax asset
    
176,740
      
4,741
      
13,054
      
-
      
720
      
19,736
      
20,752
      
5,176
      
240,919
  
Total non-current assets
    
1,118,904
      
531,041
      
561,284
      
623,033
      
19,489
      
121,529
      
2,253,506
      
(1,894,991
)
    
3,333,795
  
Total assets
    
2,669,404
      
712,420
      
812,785
      
1,072,214
      
27,287
      
712,931
      
2,616,548
      
(2,219,125
)
    
6,404,464
  
                                                                         
Liabilities.-
                                                                        
Borrowings
    
180,535
      
42,760
      
2,383
      
5
      
6
      
116,231
      
121,379
      
(9,039
)
    
454,260
  
Bonds
    
-
      
-
      
28,995
      
15,742
      
-
      
-
      
-
      
-
      
44,737
  
Trade accounts payable
    
932,142
      
67,444
      
34,762
      
28,508
      
132
      
39,645
      
33,488
      
-
      
1,136,121
  
Accounts payable to related parties
    
206,907
      
2,233
      
35,554
      
21,024
      
-
      
23,437
      
58,951
      
(309,190
)
    
38,916
  
Current income tax
    
18,451
      
961
      
3,710
      
23,887
      
-
      
704
      
286
      
-
      
47,999
  
Other accounts payable
    
441,271
      
16,721
      
53,987
      
4,713
      
835
      
83,345
      
34,433
      
-
      
635,305
  
Provisions
    
6,031
      
18,459
      
6,183
      
-
      
-
      
230
      
82,580
      
-
      
113,483
  
Non-current liabilities classified as held for sale
    
-
      
-
      
-
      
-
      
-
      
-
      
210,025
      
-
      
210,025
  
Total current liabilities
    
1,785,337
      
148,578
      
165,574
      
93,879
      
973
      
263,592
      
541,142
      
(318,229
)
    
2,680,846
  
                                                                         
Borrowings
    
32,620
      
116,218
      
2,070
      
-
      
-
      
11,010
      
190,671
      
(7,783
)
    
344,806
  
Long-term bonds
    
-
      
-
      
276,550
      
602,755
      
-
      
-
      
-
      
-
      
879,305
  
Other long-term accounts payable
    
222,887
      
-
      
15,989
      
2,176
      
2,106
      
26,841
      
3,102
      
-
      
273,101
  
Long-term accounts payable to related parties
    
120,255
      
-
      
836
      
22,583
      
23,784
      
-
      
165,286
      
(310,161
)
    
22,583
  
Provisions
    
80,125
      
40,268
      
24,691
      
1,394
      
-
      
-
      
68,474
      
-
      
214,952
  
Derivative financial instruments
    
-
      
52
      
-
      
-
      
-
      
-
      
-
      
-
      
52
  
Deferred income tax liability
    
31,037
      
36,476
      
5,806
      
39,172
      
-
      
-
      
243
      
-
      
112,734
  
Total non-current liabilities
    
486,924
      
193,014
      
325,942
      
668,080
      
25,890
      
37,851
      
427,776
      
(317,944
)
    
1,847,533
  
Total liabilities
    
2,272,261
      
341,592
      
491,516
      
761,959
      
26,863
      
301,443
      
968,918
      
(636,173
)
    
4,528,379
  
Equity attributable to controlling interest in the Company
    
330,992
      
346,415
      
258,223
      
232,692
      
424
      
137,542
      
1,644,707
      
(1,473,185
)
    
1,477,810
  
Non-controlling interest
    
66,151
      
24,413
      
63,046
      
77,563
      
-
      
273,946
      
2,923
      
(109,767
)
    
398,275
  
Total liabilities and equity
    
2,669,404
      
712,420
      
812,785
      
1,072,214
      
27,287
      
712,931
      
2,616,548
      
(2,219,125
)
    
6,404,464
  

- 53 -
Operating segment performance
                                                      
Segment Reporting
                                                      
                           
Infrastructure
                          


For the year ended December 31, 2018 -
  

Engineering and construction
    



Energy
    



Toll roads
    



Transportation
    


Water treatment
    



Real estate
    
Parent Company operations
    



Eliminations
    



Consolidated
  
                                                       
Revenue
    
1,960,863
      
560,506
      
733,148
      
586,329
      
3,270
      
630,130
      
62,098
      
(636,882
)
    
3,899,462
  
Gross profit (loss)
    
62,095
      
120,360
      
107,092
      
122,567
      
592
      
287,959
      
(10,564
)
    
(15,612
)
    
674,489
  
Administrative expenses
    
(136,066
)
    
(20,898
)
    
(35,626
)
    
(12,007
)
    
(296
)
    
(50,730
)
    
(62,890
)
    
40,080
      
(278,433
)
Other income and expenses, net
    
(13,515
)
    
1,243
      
(11
)
    
31
      
-
      
(1,971
)
    
(47,779
)
    
660
      
(61,342
)
Operating (loss) profit
    
(87,486
)
    
100,705
      
71,455
      
110,591
      
296
      
235,258
      
(121,233
)
    
25,128
      
334,714
  
Financial expenses
    
(82,861
)
    
(15,631
)
    
(26,691
)
    
(20,604
)
    
6
      
(11,859
)
    
(115,077
)
    
24,735
      
(247,982
)
Financial income
    
15,122
      
4,593
      
2,560
      
35,147
      
554
      
3,556
      
31,752
      
(42,359
)
    
50,925
  
Dividends
    
-
      
-
      
-
      
-
      
-
      
-
      
8,344
      
(8,344
)
    
-
  
Share of profit or loss in associates
                                                                        
and joint ventures
    
11,366
      
1,608
      
-
      
-
      
-
      
(10
)
    
84,138
      
(100,811
)
    
(3,709
)
(Loss) profit before income tax
    
(143,859
)
    
91,275
      
47,324
      
125,134
      
856
      
226,945
      
(112,076
)
    
(101,651
)
    
133,948
  
Income tax
    
14,361
      
(26,275
)
    
(15,737
)
    
(38,017
)
    
(517
)
    
(69,166
)
    
22,867
      
(834
)
    
(113,318
)
(Loss) profit from continuing operations
    
(129,498
)
    
65,000
      
31,587
      
87,117
      
339
      
157,779
      
(89,209
)
    
(102,485
)
    
20,630
  
 Profit (Loss) from discontinuing operations
    
44,096
      
-
      
-
      
-
      
-
      
-
      
(3,709
)
    
(3,602
)
    
36,785
  
(Loss) profit for the year
    
(85,402
)
    
65,000
      
31,587
      
87,117
      
339
      
157,779
      
(92,918
)
    
(106,087
)
    
57,415
  
                                                                         
(Loss) profit from attributable to:
                                                                        
Owners of the Company
    
(86,857
)
    
59,866
      
26,731
      
65,338
      
339
      
28,921
      
(85,715
)
    
(91,811
)
    
(83,188
)
Non-controlling interest
    
1,455
      
5,134
      
4,856
      
21,779
      
-
      
128,858
      
(7,203
)
    
(14,276
)
    
140,603
  
     
(85,402
)
    
65,000
      
31,587
      
87,117
      
339
      
157,779
      
(92,918
)
    
(106,087
)
    
57,415
  
- 54 -
Operating segment performance
                                                      
Segment Reporting
                                                      
                           
Infrastructure
                          



For the year ended December 31, 2019
 

Engineering and construction
    



Energy
    


Toll roads
    



Transportation
    


Water treatment
    


Real estate
    

Parent Company operations
    



Eliminations
    



Consolidated
  
                                                       
Revenue
    
2,797,326
      
552,584
      
633,301
      
397,853
      
3,555
      
264,401
      
87,476
      
(651,492
)
    
4,085,004
  
Gross profit (loss)
    
98,362
      
108,291
      
96,164
      
119,464
      
500
      
70,787
      
(2,168
)
    
(49,637
)
    
441,763
  
Administrative expenses
    
(141,421
)
    
(24,230
)
    
(28,623
)
    
(17,991
)
    
(397
)
    
(22,045
)
    
(40,402
)
    
61,201
      
(213,908
)
Other income and expenses, net
    
9,937
      
606
      
(47,998
)
    
(2,661
)
    
12
      
20,020
      
(305,749
)
    
(921
)
    
(326,754
)
Gain from sale of investments
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Operating (loss) profit
    
(33,122
)
    
84,667
      
19,543
      
98,812
      
115
      
68,762
      
(348,319
)
    
10,643
      
(98,899
)
Financial expenses
    
(74,171
)
    
(13,266
)
    
(27,297
)
    
(10,948
)
    
(12
)
    
(42,320
)
    
(101,914
)
    
38,219
      
(231,709
)
Financial income
    
5,643
      
2,033
      
2,245
      
33,215
      
826
      
3,829
      
73,832
      
(46,967
)
    
74,656
  
Dividends
    
-
      
-
      
-
      
-
      
-
      
-
      
12,688
      
(12,688
)
    
-
  
Share of profit or loss in associates
                                                                        
and joint ventures
    
(3,558
)
    
2,293
      
-
      
-
      
-
      
458
      
(711,962
)
    
493,995
      
(218,774
)
(Loss) profit before income tax
    
(105,208
)
    
75,727
      
(5,509
)
    
121,079
      
929
      
30,729
      
(1,075,675
)
    
483,202
      
(474,726
)
Income tax
    
(35,457
)
    
(22,911
)
    
(17,112
)
    
(39,634
)
    
(506
)
    
(7,000
)
    
(196,219
)
    
(1,118
)
    
(319,957
)
(Loss) profit from continuing operations
    
(140,665
)
    
52,816
      
(22,621
)
    
81,445
      
423
      
23,729
      
(1,271,894
)
    
482,084
      
(794,683
)
Loss from discontinuing operations
    
-
      
-
      
-
      
-
      
-
      
-
      
(42,857
)
    
(1,102
)
    
(43,959
)
(Loss) profit for the year
    
(140,665
)
    
52,816
      
(22,621
)
    
81,445
      
423
      
23,729
      
(1,314,751
)
    
480,982
      
(838,642
)
                                                                         
(Loss) profit from attributable to:
                                                                        
Owners of the Company
    
(137,110
)
    
48,056
      
(28,270
)
    
61,084
      
423
      
(4,995
)
    
(1,304,675
)
    
480,766
      
(884,721
)
Non-controlling interest
    
(3,555
)
    
4,760
      
5,649
      
20,361
      
-
      
28,724
      
(10,076
)
    
216
      
46,079
  
     
(140,665
)
    
52,816
      
(22,621
)
    
81,445
      
423
      
23,729
      
(1,314,751
)
    
480,982
      
(838,642
)

- 55 -

Segments by geographical areas
            
             
   
2018
    
2019
  
Revenues:
            
- Peru
    
3,347,540
      
3,454,959
  
- Chile
    
226,891
      
388,284
  
- Colombia
    
325,031
      
241,761
  
     
3,899,462
      
4,085,004
  
                 
Non-current assets:
                
- Peru
    
3,896,920
      
3,063,146
  
- Chile
    
142,383
      
146,891
  
- Colombia
    
157,839
      
123,758
  
     
4,197,142
      
3,333,795
  

8     FINANCIAL INSTRUMENTS
8.1    Financial instruments by category

The classification of financial assets and liabilities by category is as follows:

         
At December, 31
  
   
2018
    
2019
  
Financial assets according to the statement of financial position
        
Loans and accounts receivable at amortized cost:
            
- Cash and cash equivalents
    
801,140
      
948,978
  
- Trade accounts receivable and other accounts receivable
                
   (excluding financial assets)
    
1,302,358
      
1,258,476
  
- Financial assets related to concession agreements
    
1,227,994
      
748,365
  
- Accounts receivable from related parties
    
813,129
      
36,658
  
     
4,144,621
      
2,992,477
  


Financial assets related to concession agreements are recorded in the consolidated statement of financial position as the line items short-term trade accounts receivable and long-term trade accounts receivable.

         
At December, 31
  
   
2018
    
2019
  
Financial liabilities according to the statement of financial position
        
Other financial liabilities at amortized cost:
            
- Other financial liabilities
    
1,169,184
      
695,870
  
- Finance leases
    
33,488
      
22,980
  
- Lease liability for right-of-use asset
    
-
      
80,216
  
- Bonds
    
937,042
      
924,042
  
- Trade and other accounts payable
                
  (excluding non-financial liabilities)
    
1,453,933
      
1,364,131
  
- Accounts payable to related parties
    
77,790
      
61,499
  
     
3,671,437
      
3,148,738
  
Hedging derivatives:
                
- Derivative financial instruments
    
61
      
52
  

- 56 -

8.2    Credit quality of financial assets

The credit quality of financial assets that are neither past due nor impaired can be assessed with reference to external risk ratings (if they exist), or based on historical information on the default rates of their counterparties.

As of December 31, the credit quality of financial assets is presented below:

   
At December 31,
  
   
2018
    
2019
  
Cash and cash equivalents (*)
            
Banco de Credito del Peru (A+)
    
350,403
      
302,743
  
Banco Continental (A+)     114,067
      186,238
 
Citibank (A)
    
134,990
      
183,719
  
Banco Scotiabank (A+)
    
73,039
      
64,101
  
Banco de la Nacion (A)
    
23,766
      
56,085
  
Credicorp Capital Colombia (AAA)
    
-
      
44,338
  
Banco Interbank (A)
    
14,075
      
41,681
  
JP Morgan (AAA)
    
257
      
17,853
  
Santander Colombia (AAA)
    
-
      
15,183
  
Banco Scotiabank - Chile  (A+)
    
-
      
9,801
  
Banco Bogota (BB+)
    
16,782
      
7,255
  
Banco Santander - Chile (AAA)
    
3,325
      
5,817
  
Banco Santander - Perú (A)
    
12,221
      
114
  
Fondo de Inversion Alianza (AA+)
    
39,051
      
46
  
Banco de crédito e Inversiones - Chile (AA+)
    
5,909
      
-
  
Others
    
8,312
      
7,017
  
     
796,197
      
941,991
  

The risk ratings in the previous table of “A” and “AAA” represent high quality ratings. For banks in Peru, these risk ratings are obtained from the risk rating agencies authorized by the Superintendence of Banking, Insurance and AFP (SBS). For banks in Chile, ratings are obtained from the risk rating agencies authorized by the Superintendence of Securities and Insurance (SVS) of Chile (Fitch Chile Clasificadora de Riesgo Ltda. and ICR International Credit Rating Cia Clasificadora de Riesgo Ltda.). For banks in Colombia, ratings are obtained from the following financial institutions: Fitch Ratings, Value and Risk Rating S.A., BRC Standard and Poor’s Rating and Technical Committe of BRC Investor Services S.A. SCV.

(*) The difference between the balances shown and the balances of the statement of financial position correspond to cash and remittances in transit (Note 9).

The credit quality of customers is assessed in three categories (internal classification):

A:
New customers/related parties (less than six months),
B:
Existing customers/related parties (with more than six months of trade relationship) with no previous default history; and
C:
Existing customers/related parties (with more than six months of trade relationship) with previous default history.

- 57 -



   
2018
    
2019
  
Trade accounts receivable (Note 10)
            
Counterparties with no external risk rating
            
A
    
302,369
      
58,999
  
B
    
1,579,400
      
1,373,424
  
C
    
146,126
      
142,516
  
     
2,027,895
      
1,574,939
  
Receivable from related parties and
                
 joint operators (Note 12)
                
B
    
813,129
      
583,599
  


The total balance of trade accounts receivable and accounts receivable from related parties is subject to the terms and conditions of the respective contract, none of which has been renegotiated.

9     CASH AND CASH EQUIVALENTS

At December 31 this account comprises:

 
   
2018
    
2019
  
Cash on hand
    
1,377
      
1,323
  
Remittances in-transit     3,566
      5,664
 
Bank accounts
    
313,253
      
223,378
  
Escrow account (a)
    
334,579
      
552,439
  
Time deposits (b)
    
148,365
      
166,174
  
     
801,140
      
948,978
  

(a)
The Group maintains trust accounts in local and foreign banks that includes reserve funds for bond payments issued by the subsidiaries GyM Ferrovias S.A. and Norvial S.A. for the year 2019 S/181 million and S/18 million, respectively (for the year 2018 S/133 million and S/13 million, respectively), as shown in the following detail:

   
2018
    
2019
  
             
Reserve funds issued bonds
    
146,590
      
199,192
  
Real estate projects
    
38,961
      
31,794
  
Engineering and construction projects Colombia
    
39,084
      
44,457
  
Engineering and construction projects  Perú
    
47,537
      
192,069
  
Infrastructure projects
    
62,406
      
84,926
  
     
334,579
      
552,439
  

(b)
Time deposits have maturities less than 90 days and may be renewed upon maturity. These deposits earn interest that fluctuates between 1.15% and 2.85%.


- 58 -



  Financial
Interest
          

  entities   rate    
2018
     2019  
                       
GyM Ferrovias S.A.
  
Banco de crédito del Perú
    
2.70
%
    
32,000
      
32,300
  
GyM Ferrovias S.A.
  
Banco Continental
    
1.15
%
    
-
      
69,531
  
GyM S.A.
  
Banco de crédito del Perú
    
2.40
%
    
1,906
      
28,213
  
Survial S.A.
  
Banco de crédito del Perú
    
2.85
%
    
-
      
15,400
  
GMI S.A.
  
Banco de crédito del Perú
    
2.52
%
    
-
      
9,993
  
Graña y Montero S.A.A.
  
Banco de crédito del Perú
    
2.40
%
    
110,281
      
5,312
  
Norvial S.A.
  
Banco de crédito del Perú
    
2.85
%
    
-
      
4,763
  
Concesión Canchaque S.A.C.
  
Banco de crédito del Perú
    
2.85
%
    
-
      
662
  
Concesionaria la Chira S.A.
  
Banco de crédito del Perú
    
2.50
%
    
4,170
      
-
  
GMP S.A.
  
Banco de crédito del Perú
    
2.50
%
    
7
      
-
  
Viva GyM S.A.
  
Banco de crédito del Perú
    
2.50
%
    
1
      
-
  
                 
148,365
      
166,174
  

The above figures are reconciled with the amount of cash shown in the consolidated statement of cash flows at the end of the year as follows:

   
2018
    
2019
  
             
Cash and Cash Equivalent on consolidated statement of financial position
    
801,140
      
948,978
  
Bank overdrafts (Note 18)

(119
)
    
-
Balances per consolidated statement of cash flows
    
801,021
      
948,978
  
                 

10    TRADE ACCOUNTS RECEIVABLES, NET

At December 31 this account comprises:

         
Total
          
Current
          
Non-current
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
                                     
Receivables (a)
    
1,376,517
      
923,316
      
907,007
      
380,135
      
469,510
      
543,181
  
Unbilled receivables - Subsidiaries (b)
    
79,847
      
421,841
      
79,847
      
336,272
      
-
      
85,569
  
Unbilled receivables - Concessions (c)
    
584,174
      
234,688
      
33,617
      
110,236
      
550,557
      
124,452
  
     
2,040,538
      
1,579,845
      
1,020,471
      
826,643
      
1,020,067
      
753,202
  
Impairment of account receivables
    
(12,643
)
    
(4,906
)
    
(12,643
)
    
(4,906
)
    
-
      
-
  
     
2,027,895
      
1,574,939
      
1,007,828
      
821,737
      
1,020,067
      
753,202
  

a) The non-current portion of commercial receivables is mainly related to the financial asset model (Note 2.5) of the subsidiary GyM Ferrovias S.A. whose fair values ​​of the non-current portion of commercial receivables amount to S/1,013 million (S/1,060 million as of December 31, 2018), these values ​​are based on discounted cash flows using rates of 7.70% (7.33% as of December 31, 2018).

The detail of the age of the commercial receivables corresponds as follows:
 
   
2018
    
2019
  
Current
    
890,100
      
802,341
  
Past due up to 30 days
    
259,062
      
28,216
  
Past due from 31 days up to 180 days
    
28,575
      
21,490
  
Past due from 181 days up to 360 days
    
152,732
      
28,327
  
Past due over 360 days
    
33,405
      
38,036
  
     
1,363,874
      
918,410
  

- 59 -
b) The unbilled receivables by subsidiaries are documents related to the estimates of the degree of progress for services rendered that were not billed, according detail:
 
   
2018
    
2019
  
GYM S.A.
    
14,455
      
384,660
  
Concar S.A.
    
38,770
      
10,737
  
GMI S.A.
    
26,622
      
24,787
  
GMP S.A.
    
-
      
1,657
  
     
79,847
      
421,841
  

Below are the unbilled receivables by the subsidiaries grouped by the main projects:

   
2018
    
2019
  
Infrastructure
            
Operation and maintenance of roads
    
38,066
      
9,837
  
Oil services
    
-
      
1,657
  
Others
    
703
      
901
  
     
38,769
      
12,395
  
                 
Engineering and Construction
                
Talara Refinery
    
-
      
190,831
  
North Concentrator Plant - Quellaveco
    
-
      
52,488
  
Oxide Plant - Marcobre
    
-
      
26,658
  
Civil works, assembly and electromechanics - Acero Arequipa
    
-
      
16,449
  
Project Mina Gold Fields La Cima S.A.
    
11,980
      
3,409
  
Generating Plant Machu Picchu
    
-
      
13,098
  
Others
    
29,098
      
106,513
  
     
41,078
      
409,446
  
     
79,847
      
421,841
  

c) The unbilled receivables – Concessions, corresponds to future collections for public services granted according detail below:

   
2018
    
2019
  
Linea 1 - Metro de Lima
    
558,179
      
208,205
  
Operation and maintenance of roads
    
25,397
      
25,315
  
Others
    
598
      
1,168
  
     
584,174
      
234,688
  

In 2019, Management recognized in the period an impairment in trade accounts receivable for S/1 million (S/3.10 million in 2018). The maximum exposure to credit risk at the reporting date is the carrying amount of accounts receivable and work in progress (Note 11).

- 60 -

11    WORK IN PROGRESS, NET

At December 31 this account comprises:

         
Total
          
Current
          
Non-current
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
                                     
Unbilled receivable concessions in progress
    
32,212
      
23,117
      
-
      
-
      
32,212
      
23,117
  
Work in progress
    
28,538
)
    
49,457
      
28,538
      
49,457
)
    
-
      
-
  
     
60,750
      
72,574
      
28,538
      
49,457
      
32,212
      
23,117
  

The ongoing work costs include all expenses incurred by the Group under construction contracts currently in force. The Group estimates that all the cost incurred will be billed and collected.

Below are the work in progress grouped by the main projects:
 
   
2018
    
2019
  
Infrastructure
            
Road operation and maintenance
    
32,212
      
23,117
  
     
32,212
      
23,117
  
                 
Engineering and construction
                
Engineering and Construction Works - GYM Chile S.p.A.
    
13,007
      
19,531
  
Talara Refinery
    
-
      
20,126
  
North Concentrator Plant of Quellaveco
    
-
      
1,033
  
Others
    
15,531
      
8,767
  
     
28,538
      
49,457
  
     
60,750
      
72,574
  

12    TRANSACTIONS WITH RELATED PARTIES AND JOINT OPERATORS

a)
Transactions with related parties

Major transactions between the Company and its related parties are summarized as follows:

   
2018
    
2019
  
Revenue from sales of goods and services:
            
- Joint operations
    
56,560
      
44,130
  
- Associates     1,704
      108
 
     
58,264
      
44,238
  
Purchase of goods and services:
                
- Joint operations
    
601
      
1,765
  
- Associates
    
2,130
      
-
  
     
2,731
      
1,765
  

Transactions between related parties are made based on current price lists and the terms and conditions are the same as those agreed with third parties.

b)
Key management compensation

- 61 -

The key management includes directors (executives and non-executives), members of the Executive Committee and Internal Audit Management. Compensation paid or payable to key management in 2019 amounted to S/87.4 million, which includes S/0.4 million of discontinued operations (in 2018, the balance of S/58 million includes S/0.4 million corresponding to discontinued operations) and It only includes short-term benefits.

c)
Balances at the end of the year were:

   
At December 31,
    
At December 31,
  
   
2018
    
2019
  
   
Receivable
    
Payable
    
Receivable
    
Payable
  
Current portion:
                        
Joint operations
                        
Consorcio Rio Urubamba
    
9,122
      
-
      
9,042
      
-
  
Consorcio Peruano de Conservacion
    
6,417
      
-
      
3,592
      
-
  
Consorcio Italo Peruano
    
3,322
      
4,996
      
1,011
      
363
  
Consorcio Constructor Chavimochic
    
2,138
      
6,199
      
-
      
5,953
  
Consorcio GyM Conciviles
    
1,855
      
-
      
1,257
      
1,958
  
Consorcio La Gloria
    
1,369
      
1,006
      
1,750
      
1,017
  
Consorcio Ermitaño
    
781
      
624
      
831
      
440
  
Consorcio Terminales del Peru S.A.
    
459
      
-
      
1,176
      
-
  
Consorcio TNT Vial y Vives - DSD Chile Ltda
    
-
      
11,804
      
-
      
1,088
  
Consorcio Rio Mantaro
    
-
      
6,655
      
-
      
5,869
  
Consorcio Vial Quinua
    
-
      
1,970
      
-
      
2,048
  
Consorcio Huacho Pativilca
    
-
      
475
      
1,419
      
5,895
  
Consorcio CDEM
    
-
      
-
      
638
      
-
  
Consorcio GyM-Stracon
    
-
      
-
      
2,230
      
-
  
Consorcio GyM-OSSA
    
-
      
-
      
7,202
      
-
  
Consorcio Chicama Ascope
    
-
      
-
      
2,471
      
-
  
Other minors
    
9,215
      
11,323
      
1,407
      
2,102
  
     
34,678
      
45,052
      
34,026
      
26,733
  
                                 
Other related parties
                                
Ferrovías Argentina
    
-
      
10,242
      
-
      
12,183
  
Perú Piping Spools S.A.C.
    
225
      
-
      
2,632
      
-
  
Other minors
    
-
      
647
      
-
      
-
  
     
225
      
10,889
      
2,632
      
12,183
  
Current portion
    
34,903
      
55,941
      
36,658
      
38,916
  
                                 
                                 
Non-current portion
                                
Gasoducto Sur Peruano S.A.
    
773,927
      
-
      
544,842
      
-
  
Ferrovías Participaciones
    
-
      
21,849
      
-
      
22,583
  
Other minors
    
4,299
      
-
      
2,099
      
-
  
Non-current
    
778,226
      
21,849
      
546,941
      
22,583
  

Accounts receivable and payable are mainly of current maturity and have no specific guarantees; except for accounts receivable from GSP and Ferrovías participations. These balances do not generate interest considering their maturity in the short term. The balance of the GyM Conciviles Consortium includes S/31 million registered in 2018. These accounts do not bearn interests due to its short-term nature.

The non-current balance corresponds to the obligations arising from the early termination of the GSP project (Note 15 a-i). As of December 31, 2019, the book value of the non-current account receivable registered by the Company, for S/331 million, was recorded using the discounted cash flow method, at a rate of 3.46% that originated a value of discount of S/57 million (S/17.8 million in 2018). Additionally, as a result of the early termination of the GSP, and related facts, the subsidiary GyM S.A. it has balances from the Constructor Constructo Ductos del Sur to those who had previously deteriorated in 2016, it was integrated in the consolidation under the proportional participation method. The value of accounts receivable from CCDS corresponds mainly to collection rights to GSP for S/270 million.
- 62 -

Transactions with non-controlling interests are disclosed in Note 35.

13    OTHER ACCOUNTS RECEIVABLE

At December 31 this account comprises:

         
Total
          
Current
          
Non-current
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
                                     
Advances to suppliers (a)
    
146,536
      
135,481
      
81,719
      
135,481
      
64,817
      
-
  
Income tax on-account payments (b)
    
91,353
      
70,647
      
91,353
      
70,647
      
-
      
-
  
VAT credit (c)
    
105,238
      
45,910
      
79,076
      
31,646
      
26,162
      
14,264
  
Guarantee deposits (d)
    
180,010
      
181,400
      
167,769
      
98,046
      
12,241
      
83,354
  
Claims to third parties (e)
    
62,163
      
79,772
      
62,163
      
38,875
      
-
      
40,897
  
Petroleos del Peru S.A.- Petroperu S.A. (f)
    
75,750
      
80,941
      
11,953
      
17,292
      
63,797
      
63,649
  
ITAN and other tax receivable
    
45,890
      
60,883
      
20,246
      
30,233
      
25,644
      
30,650
  
Restricted funds (g)
    
67,972
      
15,974
      
39,394
      
973
      
28,578
      
15,001
  
Rental and sale of equipment - GyM S.A. projects
    
34,768
      
30,798
      
34,768
      
30,798
      
-
      
-
  
Accounts receivable from personneel
    
3,479
      
2,836
      
3,479
      
2,836
      
-
      
-
  
Consorcio Constructor Ductos del Sur (h)
    
52,114
      
27,782
      
-
      
-
      
52,114
      
27,782
  
Consorcio Panorama
    
27,132
      
23,491
      
5,306
      
-
      
21,826
      
23,491
  
Other minors
    
23,837
      
16,488
      
16,059
      
15,253
      
7,778
      
1,235
  
     
916,242
      
772,403
      
613,285
      
472,080
      
302,957
      
300,323
  
Impairment
    
(24,834
)
    
(27,580
)
    
(24,834
)
    
(27,580
)
    
-
      
-
  
     
891,408
      
744,823
      
588,451
      
444,500
      
302,957
      
300,323
  

The fair value of the other short-term accounts receivable is similar to their book value due to their short-term maturity. The non-current portion corresponds mainly to non-financial assets such as advances to suppliers and tax credits. Other non-current accounts receivable have maturities that vary between 2 and 5 years.

The maximum exposure to credit risk at the reporting date is the carrying amount of each class of other accounts receivable mentioned. The Group does not request guarantees.

Below is a description and composition of the main accounts receivable:

(a) Advance to suppliers - corresponds mainly to the following:

         
Total
          
Current
          
Non-current
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
                                     
Alsthom Transporte - Linea 1
    
66,395
      
2,597
      
1,578
      
2,597
      
64,817
      
-
  
Advances - Refineria Talara
    
9,755
      
48,303
      
9,755
      
48,303
      
-
      
-
  
Advances - joint operations vendors
    
42,410
      
49,181
      
42,410
      
49,181
      
-
      
-
  
Others
    
27,976
      
35,400
      
27,976
      
35,400
      
-
      
-
  
     
146,536
      
135,481
      
81,719
      
135,481
      
64,817
      
-
  


- 63 -

(b) Income tax on-account payments, consist of income tax payments and credits in the following subsidiaries:

         
Current
  
   
2018
    
2019
  
             
GyM S.A.
    
55,377
      
45,628
  
GMI S.A.
    
3,877
      
7,203
  
GMP S.A.
    
8,511
      
2,400
  
Concar S.A.
    
8,563
      
3,709
  
Viva GyM S.A.
    
8,114
      
3,485
  
Graña y Montero S.A.A.
    
6,463
      
2,895
  
Norvial S.A.
    
-
      
4,266
  
Survial S.A.
    
334
      
426
  
Others
    
114
      
635
  
     
91,353
      
70,647
  

(c) Tax credit related to VAT on the following subsidiaries:

         
Total
          
Current
          
Non-current
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
                                     
GyM S.A.
    
39,183
      
12,963
      
38,653
      
12,963
      
530
      
-
  
GyM Ferrovias S.A.
    
25,453
      
11,970
      
25,453
      
11,970
      
-
      
-
  
Graña y Montero S.A.A.
    
9,821
      
-
      
9,821
      
-
      
-
      
-
  
Concar S.A.
    
2,382
      
1,653
      
2,382
      
1,653
      
-
      
-
  
Survial SA.
    
-
      
1,817
      
-
      
1,817
      
-
      
-
  
GMI S.A.
    
589
      
1,513
      
589
      
1,513
      
-
      
-
  
Viva GyM S.A.
    
7,255
      
6,874
      
511
      
513
      
6,744
      
6,361
  
Negocios del Gas S.A.
    
8,411
      
-
      
-
      
-
      
8,411
      
-
  
GMP S.A.
    
456
      
396
      
456
      
396
      
-
      
-
  
Norvial S.A.
    
1,997
      
-
      
-
      
-
      
1,997
      
-
  
Concesionaria Vesur S.A.
    
6,074
      
-
      
1,015
      
-
      
5,059
      
-
  
Others
    
3,617
      
8,724
      
196
      
821
      
3,421
      
7,903
  
     
105,238
      
45,910
      
79,076
      
31,646
      
26,162
      
14,264
  

Management considers that VAT credit will be recovered in the regular course of future operations of subsidiaries.

(d) Guarantee deposits

Corresponds to funds held by customers for construction contracts mainly from the subsidiary GyM S.A. These deposits are retained by customers to ensure the subsidiary’s compliance with its obligations under the contracts. The amounts retained will be recovered once the work is completed.

         
Total
          
Current
          
Non-current
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
Talara Refinery
    
72,992
      
55,567
      
72,992
      
308
      
-
      
55,259
  
Retention Toquepala
    
15,633
      
19,630
      
15,633
      
19,630
      
-
      
-
  
Retention Minera Teck
    
2,848
      
16,075
      
2,848
      
16,075
      
-
      
-
  
Retention Quellaveco
    
2,996
      
15,926
      
2,996
      
15,926
      
-
      
-
  
Joint operations retention
    
43,268
      
29,575
      
43,268
      
15,654
      
-
      
13,921
  
Retention  Morelco
    
16,282
      
15,261
      
16,282
      
15,261
      
-
      
-
  
Retention Marcobre
    
-
      
5,052
      
-
      
5,052
      
-
      
-
  
SBLC guarantees - Sale of CAM Chile S.p.A.
    
20,221
      
14,726
      
7,980
      
3,576
      
12,241
      
11,150
  
Others
    
5,770
      
9,588
      
5,770
      
6,564
      
-
      
3,024
  
     
180,010
      
181,400
      
167,769
      
98,046
      
12,241
      
83,354
  

(e) Third-party claims

As of December 31, 2018, it mainly includes the claim of S/27.2 million (net of provision for doubtful accounts of S/19.4 million) for termination of the Purchase and Sale Contract for Real Estate Development Megaproject of Social Housing Construction “Ciudad Alameda de Ancon” signed between the subsidiary Viva GyM S.A., together with the Ministry of Housing, Construction and Sanitation and “Mi Vivienda” fund. Such contract was terminated, and in accordance with the civil code 1372, it is appropriate for the parties to fully return the services executed: return of the S/22 million from the Ministry of Housing and S/5.2 million from the “Mi Vivienda” fund.

As of December 31, 2019, the net amount amounts to S/20 million, which corresponds to the present value in a term of 11 years and at a rate of 8%. The amount of the lawsuit filed by the subsidiary Viva GyM S.A. against the Ministry of Housing, Construction and Sanitation amounts to S/116.3 million; which includes compensation for damages (emergent damage and loss of earnings). According to the opinions of Management and legal advisors, it is expected that the amount of the claim will be collected within a maximum period of 11 years.
- 64 -

(f) Other accounts receivable from Petroperu S.A.

It corresponds to accounts receivable to Petroperu S.A., for the additional investments of the Terminales del Perú S.A. Consortium of the subsidiary GMP S.A.

(g) Restricted funds

As of December 31, 2019, includes restricted funds of  S/7.7 million of the Company related to the sale of GMD S.A. and S/0.9 million of the subsidiary Viva GyM S.A. for bank certificates under guarantee and S/7.3 corresponds to the bank accounts for the reserve account of the Concesionaria La Chira S.A. (S/28 million, S/11 million and S/7.3 million as of December 31, 2018, respectively).

(h) Consorcio Constructor Ductos del Sur

In 2019, it corresponds to a penalty for termination of contract for S/27.8 million. The decrease compared to the previous year is mainly due to the compensation of debts assumed by the subsidiary GyM S.A. related to CCDS suppliers for S/21.5 million (S/30.6 million in 2018).

14    INVENTORIES

At December 31 this account comprises:
   
2018
    
2019
  
Land
    
230,689
      
183,218
  
Work in progress - Real estate     135,376
      158,010
 
Finished properties
    
76,027
      
86,190
  
Construction materials
    
27,852
      
59,879
  
Merchandise and supplies
    
53,310
      
74,959
  
     
523,254
      
562,256
  
Impairment of inventories
    
(9,207
)
    
(9,683
)
     
514,047
      
552,573
  

Land

Land comprises properties, net of impairment and includes properties for the development of the following projects of the subsidiary GyM Viva S.A. As of December 31, 2019, the land impairment provision equals S/5.2 million (S/9.2 million in 2018):
- 65 -

   
2018
    
2019
  
Lurin (a)
    
72,080
      
71,902
  
San Isidro (b)
    
49,664
      
51,285
  
San Miguel (c)
    
28,811
      
-
  
Nuevo Chimbote (d)
    
17,262
      
17,457
  
Barranco (e)
    
13,585
      
14,202
  
Huancayo (f)
    
8,282
      
-
  
Piura
    
8,105
      
11,805
  
Carabayllo III
    
14,941
      
16,567
  
Others (g)
    
8,752
      
-
  
     
221,482
      
183,218
  

(a)
Plot of land of 107 hectares that corresponds to Inmobiliaria Almonte S.A.C. and a land 210 hectares that corresponds to Inmobiliaria Almonte 2 S.A.C.; both lands located in the district of Lurin, province of Lima, destined for the purposes of industrial development and public housing.
   
(b)
Land located on David Samanez Ocampo street N° 140 in San Isidro district where a 15-story building with 24 apartments and 124 parking lots will be built.
   
(c)
Regarding the Parques del Mar project located in San Miguel, a traditional multi-family housing condominium with 248 apartments and 185 parking lots is developed. In December 2019, the construction of the condominium began, which is why it is shown in products in process.
   
(d)
Land located in Chimbote of 11.5 hectares for the development of a real estate social housing project.
   
(e)
Land located in Paul Harris St. N°332 and N°336 in Barranco district, for the development of a residential building project.
   
(f)
With respect to the project located in the province of Huancayo, in December 2019, the deliveries of land from the second stage began; That is why the stock of them is shown in finished products.
   
(g)
With respect to others, it includes the Strip project that delivered commercial premises and was transferred from land to finished products for S/22.9 million, as of December 2019 there is a stock in finished products of S/6.3 million.

Land properties correspond to assets maintained since 2015, for which construction has not yet begun. Increase in costs of the year is mainly due to engineering, license paperwork, and other smaller costs. Construction in these land properties is expected to begin in the second half of 2020.

Real estate - work in progress

At December 31, real state work in progress comprises the following projects:
- 66 -

   
2018
    
2019
  
Los Parques de Comas
    
69,743
      
77,757
  
Los Parques del Callao
    
46,697
      
35,549
  
Los Parques de Piura
    
11,066
      
5,658
  
Los Parques del Mar
    
-
      
32,183
  
Inmobiliaria Pezet 417 S.A.C.
    
3,563
      
4,091
  
Others
    
4,307
      
2,772
  
     
135,376
      
158,010
  

During 2019 the Group has capitalized financing costs of these construction projects (Note 2.19) amounting to S/3.7 million at annual interest rates between 7% and 12% (S/7.9 million in 2018 at interest rates between 7% and 12%).

Finished properties

At December 31, the balance of finished properties consists of the following investment properties:

   
2018
    
2019
  
El Rancho
    
19,314
      
2,347
  
Los Parques de San Martín de Porres
    
4,029
      
903
  
Los Parques de Callao
    
389
      
10,914
  
Rivera Navarrete
    
4,053
      
131
  
Los Parques de Carabayllo
    
942
      
168
  
Los Parques de Comas
    
18,785
      
37,605
  
Los Parques de Villa El Salvador II
    
4,277
      
117
  
Klimt
    
5,911
      
5,978
  
Huancayo
    
15,546
      
19,672
  
Others
    
2,781
      
3,900
  
     
76,027
      
81,735
  

As of December 31, 2019, the balance of finished properties is net of an impairment of S/4.5 million.

Construction materials

As of December 31, 2019, the construction materials correspond mainly to projects of the subsidiary GyM S.A. for S/57.4 million (GyM S.A. for S/27.8 million as of December 31, 2018).

15    INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

At December 31 this account comprises:

   
2018
    
2019
  
Associates
    
250,282
      
28,875
  
Joint ventures
    
7,483
      
8,160
  
     
257,765
      
37,035
  

The amounts recognized in the income statement are as follows:

   
2018
    
2019
  
Associates
    
(5,308
)
    
(220,993
)
Joint ventures
    
1,599
      
2,219
  
     
(3,709
)
    
(218,774
)

- 67 -

a)   Investment in associates

Set out in the table below are the associates of the Group at December 31, 2018, and 2019 the associates listed below have share capital solely consisting of common shares, which are held directly by the Group. None of the associates are listed companies; therefore, there is no quoted market price available for their shares.
 
                       
Carrying amount
  

 Class
Interest in capital
    
At December 31,
Entity
  
of share
  
2018
    
2019
    
2018
    
2019
  
       
%
    
%
              
                             
Gasoducto Sur Peruano S.A. (*)
  
Common
    
21.49
      
21.49
      
218,276
      
-
  
Concesionaria Chavimochic S.A.C.
  
Common
    
26.50
      
26.50
      
20,524
      
18,320
  
Peru Piping Spools S.A.C.
  
Common
    
33.33
      
33.33
      
5,102
      
4,166
  
Obratres S.A.C.
  
Common
    
37.50
      
37.50
      
3,758
      
3,756
  
Inversiones Majes S.A.
  
Common
    
9.59
      
9.59
      
1,846
      
2,306
  
Others
                        
776
      
327
  
                         
250,282
      
28,875
  

(*) Mainly corresponds to a write-off of the investment in Gasoducto Sur Peruano S.A. as a whole.

The movement of the investments in associates is as follows:

   
2018
    
2019
  
Opening balance
    
250,053
      
250,282
  
Contributions received
    
5,616
      
-
  
Equity interest in results
    
(5,308
)
    
(220,993
)
Decrease in capital
    
(30
)
    
-

Impairment of investment
    
-
      
(374
)
Conversion adjustment
    
(49
)
    
(40
)
Final balance
    
250,282
      
28,875
  

The most significant associates are described as follows:

 
i)
Gasoducto Sur Peruano S.A.

In November 2015, the group acquired a 20% interest in Gasoducto Sur Peruano S.A. (hereinafter “GSP”) and obtained a 29% interest in Consorcio Constructor Ductos del Sur (hereinafter “CCDS”) through its subsidiary GyM S.A. GSP signed on July 22, 2014, a concession contract with the Peruvian Government to build, operate and maintain the pipelines transportation system of natural gas to meet the demand of cities in the south of Peru (hereinafter, the “Concession Contract”).  Additionally, GSP signed an engineering, procurement, and construction contract with CCDS. The Group made an investment of US$242.5 million (S/819 million) and was required to assume 20% of the performance guarantee established in the concession contract for US$262.5 million (equivalent to S/887 million) and 21.49% of the guarantee for a bridge loan obtained by GSP of US$600 million (equivalent to S/2,027 million).

Early termination of the Concession Agreement

On January 24, 2017 the Ministry of Energy and Mines (hereinafter “MEM”) notified the early termination of the Concession Contract under its clause 6.7 based on GSP’s failure to provide evidence of the project’s financial closing within the contractual deadline and proceeded to the immediate enforcement of the performance guarantee. This situation generated the enforcement of the guarantees provided by the Company for US$52.5 million (S/176.4 million nominal value) and US$129 million (S/433.3 million nominal value) to secure GSP’s obligation with its lenders under a bridge loan granted to it.  Under the Concession Agreement, the guarantees were paid by the Company on behalf of GSP, therefore the Company recognized a right to collect from GSP an amount equal to US$181.5 million (S/613.3 million nominal value) that was recorded in 2016 as accounts receivable from related parties.

- 68 -
On October 11, 2017, GSP and MEM entered into an agreement to deliver the concession asstes pursuant to the Concession Agreement. These assets included all the works, equipment, facilities and engineering studies needed for the development of the project.

After the termination of the Concession Contract, the Peruvian Government should have appointed a recognized international audit firm to calculate the net book value of the concession assets (hereinafter "VCN") and conducted up to three public auctions of the GSP concession pursuant to clause 20 of the Concession Agreement. However, as of the date hereof, the Peruvian Government continues to be in breach of such contractual obligation.An independent audit firm engaged by GSP calculated the VCN to equal US$2,602 million as of December 31, 2016.

On December 4, 2017, GSP entered into a bankruptcy proceeding before the National Institute for the Defense of Competition and Intellectual Protection of Peru. The Group registered a claim for accounts receivable for US$0.4 million (S/1.4 million) and and an additional accounts receivable of US$169.3 million (S/572.1 million) that is held in trust in benefit of the Company’s creditors.  The process is in the debt recognition stage to determine the parties who will be entitled to participate in the Creditors’ Assembly to convoked under the mentioned bankrupcy proceeding.

The fair value of the investment in GSP, as a Group associated, is based on the amount of the VCN, taking into consideration the payments anticipated in the insolvency proceedings, the subordination contracts and the loan assignment agreements entered into by the Company and its partners in the project. Based on management’s estimate of such payments, an impairment of the investment value for US$220 million (S/739 million), corresponding to the year end 2019 US$65 million (S/218 million).  In addition, Management has applied, at the consolidated financial statements of the company, an impairment of US$81.5 million (S/276 million) to the long-term account receivable from GSP, and also discount under the amortized cost for US$17 million (S/58 million). In addition, write-off of US$54 million (S/180 million) was made over the deferred tax asset. These effects amounted to US$163.5 million (S/552 million) before taxes recorded in the income statement for the year ended December 31, 2019 and US$54 million (S/180 million) related to income tax expense.

In the opinion of our internal and external legal advisors, any proceeds received by GSP from the Peruvian Government derived from the former’s obligation to reimburse the VCN of the concession assets would not be subject to retention under Law 30737 since this payment does not include a net profit margin, nor does it correspond to the sale of assets.

On December 21, 2018, the Company. submitted to the Peruvian Government a request for direct negotiations demanding the payment of the VCN in favor of GSP therefore, commencing the cool off period under the Concession Contract.  This request is based on the right that creditors have under article 1219 of the Peruvian Civil Code to initiate actions against its debtor's debtors that the former to collect a credit that would allow the payment of the outstanding debt.

Upon the conclusion of the contractual cool off period, the Company filed on October 18, 2019 a request for arbitration before CIADI. The Company withdrew its request for arbitration on December 27 of the same year the preliminary plea bargain agreement entered on the same date by the Company with the Prosecutor and the Ad hoc State Counsel (Note 1).
 
Such withdrawal does not imply the loss of the Company's right of collection against GSP nor does it restrict, limit or obstruct the possibility that GSP has of exercising its rights against the Government in the future.

 
ii)
Concesionaria Chavimochic S.A.C.

- 69 -
Concesionaria Chavimochic S.A.C. was awarded the concession to develop and operate the Chavimochic irrigation project for 25 years to: a) design and construction the third-phase of the Chavimochic irrigation project in the province of La Libertad; b) operation and maintenance of works; and c) water supply to the project users. Construction activities started in 2015 and the total investment amounts US$647 million.

The civil works of the third stage of the Chavimochic Irrigation Project were structured in two phases. To date, the works of the first phase (Palo Redondo Dam) are 70% completed. However, at the beginning of 2017, the procedure for early termination of the Concession Contract was initiated due to the breach of contract by the government, and all activities were suspended in December 2017. Not having reached an agreement, the arbitration process was initiated subject to UNCITRAL rules, and the Arbitral Tribunal was installed. The Company and its legal advisors believe that the ruling will be favorable and the corresponding investment will be recovered.

The following table shows the financial information of the principal associates:

Summarized financial information for associates –

   
Gasoducto Sur
Peruano S.A.

Concesionaria
Chavimochic S.A.C.
  
   
At December, 31
          
At December, 31
  
Entity
  
2018
    
2018
    
2019
  
   
(Liquidation base)
              
Current
                  
Assets
    
7,006,473
      
66,052
      
55,586
  
Liabilities
    
(5,294,214
)
    
(2,183
)
    
(1,521
)
                         
Non-current
                        
Assets
    
-
      
13,580
      
16,007
  
Liabilities
    
-
        -      
-
  
Net assets
    
1,712,259
      
77,449
      
70,072
  
 

   
Gasoducto Sur
          
Concesionaria
  
   
Peruano S.A.
          
Chavimochic S.A.C.
  
Entity
  
2018
    
2018
    
2019
  
                   
Administrative expenses
             (8,455
 )
    (11,916
 )
Loss of the year before tax
    
-
      
(8,455
)
    
(11,916
)
Income tax
    
-
      
2,543
      
3,600
  
Loss of the year
    
-
      
(5,912
)
    
(8,316
)
Other comprehensive loss
    
-
      
-
      
-
  
Total comprehensive loss
    
-
      
(5,912
)
    
(8,316
)

  b)
Investment in Joint Ventures

Set out below are the joint ventures of the Group as of December 31:
- 70 -
 
   
   
Carrying amount
  
   Class    Interest in capital
     At December 31,
 
Entity
of share
  
2018
    
2019
    
2018
    
2019
  
     
%
    
%
              
                           
Logistica Químicos del Sur S.A.C.
Common
    
50.00
      
50.00
      
7,230
      
8,006
  
Constructora SK-VyV Ltda.
Common
    
50.00
      
50.00
      
34
      
29
  
Others
      
-
      
-
      
219
      
125
  
                       
7,483
      
8,160
  

The movement of the investments in joint ventures was as follows:

   
2018
    
2019
  
Opening balance
    
18,618
      
7,483
  
Equity interest in results
    
1,599
      
2,219
  
Disposal of Investment
    
(10,112
)
    
-
  
Dividends received
    
(1,823
)
    
(1,517
)
Conversion adjustment
    
79
      
(14
)
Write-off of Investment
    
(878
)
    
(11
)
Final balance
    
7,483
      
8,160
  

The following table shows the financial information of the principal joint ventures:

Summarized financial information for joint ventures

         
At December, 31
  
Logistica Quimicos del Sur S.A.C.
  
2018
    
2019
  
             
Current
            
Cash and cash equivalents
    
1,520
      
2,131
  
Other current assets
    
1,549
      
2,416
  
Total current assets
    
3,069
      
4,547
  
                 
Other current liabilities
    
(3,513
)
    
(4,381
)
Total current liabilities
    
(3,513
)
    
(4,381
)
                 
Non-current
                
Total non-current assets
    
37,349
      
37,620
  
Total non-current liabilities
    
(22,445
)
    
(21,773
)
Net assets
    
14,460
      
16,013
  
                 
                 
Revenue
    
11,399
      
12,622
  
Depreciation and amortization
    
(2,313
)
    
(2,505
)
Interest expense
    
(668
)
    
(644
)
Profit from continuing operations
    
4,698
      
6,500
  
Income tax expense
    
(1,482
)
    
(1,913
)
Profit from continuing operations
   after income tax
    
3,216
      
4,587
  
Other comprehensive income
    
-
      
-
  
Total comprehensive income
    
3,216
      
4,587
  

The Group received dividends in 2019 from Logística Quimicos del Sur S.A. for S/1.5 million (S/1.8 million in 2018).

- 71 -
16      PROPERTY, PLANT AND EQUIPMENT, NET AND RIGHT-OF-USE ASSETS

16.1.  PROPERTY, PLANT AND EQUIPMENT

  The movement in property, plant and equipment accounts and its related accumulated depreciation for the year ended December 31, 2016, 2017 and 2018 is as follows:

                           
Furniture
                          
                           
and
    
Other
    
Replacement
    
Work in
        
   
Land
    
Buildings
    
Machinery
    
Vehicles
    
fixtures
    
equipment
    
units
    
progress
    
Total
  
                                                       
At January 1, 2018
                                                      
Cost
    
23,678
      
157,949
      
998,207
      
380,724
      
62,435
      
180,409
      
22,882
      
19,047
      
1,845,331
  
Accumulated depreciation and  impairment
    
-
      
(44,988
)
    
(553,937
)
    
(199,474
)
    
(47,451
)
    
(133,385
)
    
(9
)
    
(352
)
    
(979,596
)
Net carrying amount
    
23,678
      
112,961
      
444,270
      
181,250
      
14,984
      
47,024
      
22,873
      
18,695
      
865,735
  
                                                                         
Net initial carrying amount
    
23,678
      
112,961
      
444,270
      
181,250
      
14,984
      
47,024
      
22,873
      
18,695
      
865,735
  
Additions
    
-
      
13,216
      
11,318
      
9,377
      
2,145
      
14,122
      
5,577
      
27,431
      
83,186
  
Desconsolidation, net
    
(3,183
)
    
(33,989
)
    
(108,993
)
    
(110,859
)
    
(1,539
)
    
(32,878
)
    
-
      
(715
)
    
(292,156
)
Reclassifications
    
-
      
17,129
      
16,626
      
(1,415
)
    
(1,430
)
    
75
      
(10,577
)
    
(20,408
)
    
-
  
Deduction for sale of assets
    
-
      
(3,527
)
    
(55,567
)
    
(32,399
)
    
(2,164
)
    
(2,200
)
    
(124
)
    
-
      
(95,981
)
Disposals, net
    
-
      
(9,723
)
    
(2,607
)
    
(1,418
)
    
(292
)
    
(461
)
    
-
      
(118
)
    
(14,619
)
Depreciation charge
    
-
      
(14,257
)
    
(67,430
)
    
(19,391
)
    
(3,954
)
    
(18,068
)
    
-
      
-
      
(123,100
)
Impairment loss
    
-
      
-
      
(5,664
)
    
-
      
-
      
-
      
-
      
-
      
(5,664
)
Depreciation for sale deductions
    
-
      
1,189
      
37,452
      
14,868
      
1,813
      
1,702
      
-
      
-
      
57,024
  
Translations adjustments
    
(286
)
    
3,383
      
(3,310
)
    
(788
)
    
(134
)
    
(2,415
)
    
-
      
(321
)
    
(3,871
)
Net final carrying amount
    
20,209
      
86,382
      
266,095
      
39,225
      
9,429
      
6,901
      
17,749
      
24,564
      
470,554
  
                                                                         
At December 31, 2018
                                                                        
Cost
    
20,209
      
112,548
      
694,284
      
83,345
      
57,222
      
106,068
      
17,758
      
24,916
      
1,116,350
  
Accumulated depreciation and impairment
    
-
      
(26,166
)
    
(428,189
)
    
(44,120
)
    
(47,793
)
    
(99,167
)
    
(9
)
    
(352
)
    
(645,796
)
Net carrying amount
    
20,209
      
86,382
      
266,095
      
39,225
      
9,429
      
6,901
      
17,749
      
24,564
      
470,554
  


- 72 -

                           
Furniture
           Replacement
             
                           
and
    
Other
    
and in-transit
    
Work in
        
   
Land
    
Buildings
    
Machinery
    
Vehicles
    
fixtures
    
equipment
    
units
    
progress
    
Total
  
                                                       
At January 1, 2019
                                                      
Cost
    
20,209
      
112,548
      
694,284
      
83,345
      
57,222
      
106,068
      
17,758
      
24,916
      
1,116,350
  
Accumulated depreciation and impairment
    
-
      
(26,166
)
    
(428,189
)
    
(44,120
)
    
(47,793
)
    
(99,167
)
    
(9
)
    
(352
)
    
(645,796
)
Net carrying amount
    
20,209
      
86,382
      
266,095
      
39,225
      
9,429
      
6,901
      
17,749
      
24,564
      
470,554
  
                                                                         
Net initial carrying amount
    
20,209
      
86,382
      
266,095
      
39,225
      
9,429
      
6,901
      
17,749
      
24,564
      
470,554
  
Additions
    
290
      
396
      
23,011
      
861
      
687
      
8,693
      
7,036
      
39,584
      
80,558
  
Transfer to investment property (i)
    
(273
)
    
(1,187
)
    
-
      
-
      
-
      
-
      
-
      
-
      
(1,460
)
Reclassifications
    
-
      
1,544
      
40,840
      
1,033
      
118
      
2,054
      
(14,163
)
    
(31,426
)
    
-
  
Deduction for sale of assets
    
-
      
(78
)
    
(22,885
)
    
(9,531
)
    
(133
)
    
(2,789
)
    
(9
)
    
-
      
(35,425
)
Disposals, net
    
-
      
-
      
(316
)
    
(101
)
    
(187
)
    
(229
)
    
-
      
(804
)
    
(1,637
)
Depreciation charge
    
-
      
(5,992
)
    
(48,035
)
    
(9,782
)
    
(2,092
)
    
(6,137
)
    
-
      
-
      
(72,038
)
Impairment loss
    
-
      
-
      
(4,226
)
    
-
      
-
      
-
      
-
      
(15,786
)
    
(20,012
)
Depreciation for sale deductions
    
-
      
78
      
20,597
      
5,232
      
86
      
2,717
      
-
      
-
      
28,710
  
Translations adjustments
    
(525
)
    
(360
)
    
(3,725
)
    
(726
)
    
(13
)
    
(31
)
    
-
      
-
      
(5,380
)
Net final carrying amount
    
19,701
      
80,783
      
271,356
      
26,211
      
7,895
      
11,179
      
10,613
      
16,132
      
443,870
  
                                                                         
At December 31, 2019
                                                                        
Cost
    
19,974
      
113,339
      
726,167
      
74,434
      
55,710
      
111,696
      
10,624
      
32,270
      
1,144,214
  
Accumulated depreciation and impairment
    
(273
)
    
(32,556
)
    
(454,811
)
    
(48,223
)
    
(47,815
)
    
(100,517
)
    
(11
)
    
(16,138
)
    
(700,344
)
Net carrying amount
    
19,701
      
80,783
      
271,356
      
26,211
      
7,895
      
11,179
      
10,613
      
16,132
      
443,870
  

- 73 -
(i) During 2019, a property owned by Morelco S.A.S (subsidiary of GyM S.A) was transferred to investment properties to the leased to a third party.

In 2018 and 2019, additions to cost correspond to acquisitions of fixed assets made under financial leases or direct purchases.

The balance of work in progress as of December 31, 2019, is related to investments made by the subsidiary GMP S.A. for S/15.2 million (S/17.3 million as of December 31, 2018) for drilling activities to increase the exploitation of oil and gas.  In 2018, the balance includes the construction works of the Larcomar Hotel Project for S/15.8 million).

In 2019 the sale of fixed assets amounted to S/12.7 million (S/31.9 million in 2018), generating a gain of S/6.1 million (loss of S/7.1 million in 2018), which is shown in the statement of income under the caption “other income and expenses, net” (Note 28). The difference of income from the sale of fixed assets and the gain generated are presented under the caption “income from construction activities” and in “gross profit”, respectively.

Depreciation of property, plant and equipment and investment property is distributed in the income statement as follows:

   
2018
    
2019
  
             
Cost of services and goods (Note 26)
    
81,199
      
95,445
  
Administrative expenses (Note 26)
    
5,135
      
1,907
  
(+) Depreciation discontinued operations
    
39,085
      
-
  
Total depreciation related to property, plant and
    equipment and investment property
    
125,419
      
97,352
  
(-) Depreciation related to investment property
    
(2,319
)
    
(2,356
)
(-) Depreciation related to right-of-use assets
    
-
      
(22,958
)
Total depreciation of property, plant
    and equipment
    
123,100
      
72,038
  

At 31 December 2019, the Group had fully depreciated assets in use of S/319.2 million (S/424.5 million in 2018).

The net carrying amount of machinery and equipment, vehicles and furniture and fixtures acquired under finance lease contracts is broken down as follows:

         
At December 31,
  
   
2018
    
2019
  
             
Cost of acquisition
    
86,881
      
67,310
  
Accumulated depreciation
    
(38,026
)
    
(44,671
)
Net carrying amount
    
48,855
      
22,639
  

Other financial liabilities are secured by property, plant and equipment for S/111.9 million (S/162.9 million in 2018).

- 74 -

16.2. RIGHT-OF-USE ASSETS

As of December 31, 2019, the Group recognized assets and liabilities for right-of-use, as shown in the following table:

   
Buildings
    
Machinery
and
equipments
    
Vehicles
    
Total
  
                         
At January 1, 2019
                        
Additions
    
63,479
      
18,597
      
19,669
      
101,745
  
Depreciation charge
    
(7,541
)
    
(6,899
)
    
(8,518
)
    
(22,958
)
Translations adjustments
    
26
      
-
      
-
      
26
  
Net final carrying amount
    
55,964
      
11,698
      
11,151
      
78,813
  
                                 
At December 31, 2019
                                
Cost
    
63,505
      
18,597
      
19,669
      
101,771
  
Accumulated depreciation
    
(7,541
)
    
(6,899
)
    
(8,518
)
    
(22,958
)
Net carrying amount
    
55,964
      
11,698
      
11,151
      
78,813
  


The expense for depreciation of right-of-use assets for the year ended December 31, 2019 has been distributed in the following items of the consolidated statement of income:

   
2019
  
       
Cost of services and goods
    
20,011
  
Administrative expenses
    
2,947
  
     
22,958
  

The costs related to the leasing of machinery and equipment for which the Group applied the exceptions described in paragraph 5 of IFRS 16 are the following:

Leases under 12 months: S/167.3 million.
Leases of low value assets: S/7 million.

Likewise, leases whose payments are entirely variable, which depend on their future performance or use, were excluded, during the year 2019 the expenditure was: S/0.6 million.


- 75 -

17    INTANGIBLE ASSETS

The movement in intangible assets and the related accumulated amortization as of December 31, 2018 and 2019 is as follows:

                     
Contractual
    
Software and
    
Costs of
    
Land
              
         
Trade-
    
Concession
    
relations
    
development
    
development
    
use
    
Other
        
   
Goodwill
    
marks
    
rights
    
with clients
    
costs
    
of wells
    
rights
    
assets
    
Total
  
At January 1, 2018
                                                      
Cost
    
197,547
      
110,486
      
841,229
      
98,607
      
59,913
      
396,806
      
13,288
      
59,324
      
1,777,200
  
Accumulated amortization and impairment
    
(80,743
)
    
(45,386
)
    
(313,002
)
    
(64,342
)
    
(42,289
)
    
(280,073
)
    
-
      
(11,295
)
    
(837,130
)
Net cost
    
116,804
      
65,100
      
528,227
      
34,265
      
17,624
      
116,733
      
13,288
      
48,029
      
940,070
  
                                                                         
Net initial cost
    
116,804
      
65,100
      
528,227
      
34,265
      
17,624
      
116,733
      
13,288
      
48,029
      
940,070
  
Additions
    
-
      
-
      
23,803
      
-
      
3,267
      
68,544
      
-
      
5,067
      
100,681
  
Capitalization of interest
    
-
      
-
      
3,361
      
-
      
-
      
-
      
-
      
-
      
3,361
  
Desconsolidation, net
    
(20,086
)
    
(8,358
)
    
(22,758
)
    
(8,909
)
    
(10,153
)
    
-
      
-
      
(1,863
)
    
(72,127
)
Transfers from assets under construction
    
-
      
-
      
-
      
-
      
199
      
-
      
-
      
(199
)
    
-
  
Derecognition - cost
    
-
      
-
      
(16
)
    
-
      
(1,941
)
    
(4,126
)
    
-
      
-
      
(6,083
)
Amortization
    
-
      
-
      
(50,776
)
    
(7,996
)
    
(5,834
)
    
(41,930
)
    
-
      
(5,536
)
    
(112,072
)
Translations adjustments
    
(3,430
)
    
(4,301
)
    
199
      
(303
)
    
830
      
-
      
-
      
270
      
(6,735
)
Net final cost
    
93,288
      
52,441
      
482,040
      
17,057
      
3,992
      
139,221
      
13,288
      
45,768
      
847,095
  
                                                                         
At December 31, 2018
                                                                        
Cost
    
174,031
      
97,097
      
836,254
      
85,482
      
16,177
      
461,224
      
13,288
      
58,267
      
1,741,820
  
Accumulated amortization and impairment
    
(80,743
)
    
(44,656
)
    
(354,214
)
    
(68,425
)
    
(12,185
)
    
(322,003
)
    
-
      
(12,499
)
    
(894,725
)
Net cost
    
93,288
      
52,441
      
482,040
      
17,057
      
3,992
      
139,221
      
13,288
      
45,768
      
847,095
  
- 76 -

                     
Contractual
    
Software and
    
Costs of
    
Land
              
         
Trade-
    
Concession
    
relations
    
development
    
development
    
use
    
Other
        
   
Goodwill
    
marks
    
rights
    
with clients
    
costs
    
of wells
    
rights
    
assets
    
Total
  
At January 1, 2019
                                                      
Cost
    
174,031
      
97,097
      
836,254
      
85,482
      
16,177
      
461,224
      
13,288
      
58,267
      
1,741,820
  
Accumulated amortization and impairment
    
(80,743
)
    
(44,656
)
    
(354,214
)
    
(68,425
)
    
(12,185
)
    
(322,003
)
    
-
      
(12,499
)
    
(894,725
)
Net cost
    
93,288
      
52,441
      
482,040
      
17,057
      
3,992
      
139,221
      
13,288
      
45,768
      
847,095
  
                                                                         
Net initial cost
    
93,288
      
52,441
      
482,040
      
17,057
      
3,992
      
139,221
      
13,288
      
45,768
      
847,095
  
Additions
    
-
      
-
      
26,645
      
-
      
3,745
      
102,022
      
-
      
5,212
      
137,624
  
Capitalization of interest expenses
    
-
      
-
      
2,725
      
-
      
-
      
-
      
-
      
802
      
3,527
  
Transfers from assets under construction
    
-
      
-
      
-
      
-
      
672
      
-
      
-
      
(672
)
    
-
  
Derecognition - net
    
(930
 )
   
-
      
-
      
-
      
(2,015
 )
   
-

   
-
      
(4,106
)
    
(7,051
)
Amortization
    
-
      
-
      
(49,049
)
    
(3,682
)
    
(5,308
)
    
(43,552
)
    
-
      
(3,687
)
    
(105,278
)
Impairment loss
    
(33,089
)
    
-
      
(3,257
)
    
-
      
-
      
-
      
(2,468
)
    
-
      
(38,770
)
Impairment reversal
    
-
      
20,676
      
-
      
-
      
-
      
-
      
-
      
-
      
20,676
  
Translations adjustments
    
(1,902
)
    
(2,471
)
    
-
      
(114
)
    
(21
)
    
-
      
-
      
-

   
(4,508
)
Reclassifications
     -        49        (15,198 )
     (12,760 )
     19,410        (3,717 )
     -        12,216        -  
Net final cost
    
57,367
      
70,695
      
443,950
      
501
      
20,475
      
193,974
      
10,820
      
55,533
      
853,315
  
                                                                         
At December 31, 2019
                                                                        
Cost
    
93,887
      
73,836
      
710,290
      
72,810
      
48,073
      
558,530
      
13,288
      
113,057
      
1,683,771
  
Accumulated amortization and impairment
    
(36,520
)
    
(3,141
)
    
(266,340
)
    
(72,309
)
    
(27,598
)
    
(364,556
)
    
(2,468
)
    
(57,524
)
    
(830,456
)
Net cost
    
57,367
      
70,695
      
443,950
      
501
      
20,475
      
193,974
      
10,820
      
55,533
      
853,315
  
 

- 77 -
 
a)
Goodwill

Management reviews the results of its businesses on the basis of the type of economic activity carried on.  At December 31, the goodwill of the cash-generating units (CGUs) is distributed as follows:

   
2018
    
2019
  
             
Engineering and construction
    
71,621
      
36,632
  
Electromechanical
    
20,737
      
20,735
  
IT equipment and services
    
930
      
-
  
     
93,288
      
57,367
  

As a result of management’s annual impairment tests on goodwill, the recoverable amount of cash-generating units was determined on the basis of the greater their value in use and fair value less disposal costs. The value in use was determined on the basis of expected future cash flows generated by the evaluation of CGUs.

As a result of these evaluations in 2019, an impairment was identified in Morelco S.A.S. for S/33 million and Adexus S.A. for S/0.9 million. Through the subsidiary GyM S.A., the loss due to deterioration in Morelco was generated by the decrease in expected flows as a result of the reduction in the contracting of new projects during the year (“Backlog”). Additionally, the Company impaired the value of goodwill in Adexus, because the subsidiary submitted a request for bankruptcy reorganization before the courts of justice of Chile, under the law 20,720 of that country (Note 36 B). In 2018, no provision for impairment was recorded.

The main assumptions used by the Group to determine fair value less disposal costs and value in use are as follows:

   
Engineering
        
   
and
    
Electro-
  
   
construction
    
mechanical
  
   
%
    
%
  
             
2018
            
Gross margin
    
12.67
%
    
7.63
%
Terminal growth rate
    
3.00
%
    
2.00
%
Discount rate
    
12.55
%
    
11.44
%
                 
2019
                
Gross margin
    
12.43
%
    
8.86
%
Terminal growth rate
    
3.00
%
    
2.00
%
Discount rate
    
11.83
%
    
11.40
%

These assumptions have been used for the analysis of each CGUs for a period of 5 years.

Management determines budgeted gross margins based on past results and market development expectations. Average growth rates are consistent with those prevailing in the industry.  The discount rates used are pre-tax or post-tax, as applicable, and reflect the specific risks associated with the CGUs evaluated.
- 78 -

 
b)
Trademarks

This item mainly includes the brands acquired in the business combination processes with Vial y Vives S.A.C. (S/75.4 million) in August 2013, Morelco S.A.S. (S/33.33 million) in December 2014 and Adexus S.A. (S/9.1 million) in August 2016. Management determined that the brands from Vial y Vives, Morelco and Adexus have indefinite useful lives; consequently, annual impairment tests are performed on these intangible assets as explained in paragraph a) above.

As a result of these evaluations, as of December 31, 2019, the Vial y Vives - DSD the brand impairment was reversed for S/20.7 million (equivalent to CLP4,782 million). Management considered that the market value of the brand has increased due to the increase of projects in execution and projects and award process.

Additionally, in 2019, the Company impaired the value of the Adexus brand, because the subsidiary submitted a request for bankruptcy reorganization before the courts of justice of Chile, under the law 20,720 of that country (Note 36 B).

The main assumptions used by the Group to determine fair value less cost of sales are as follows:

         
Engineering
  
   
and construction
        
   
Morelco
    
Vial y Vives-DSD
  
   
%
    
%
  
             
2018
            
Average revenue growth rate
    
12.25
%
    
19.58
%
Terminal growth rate
    
3.00
%
    
3.00
%
Discount rate
    
12.55
%
    
14.00
%
                 
                 
2019
                
Average revenue growth rate
    
5.70
%
    
19.58
%
Terminal growth rate
    
3.00
%
    
2.00
%
Discount rate
    
11.83
%
    
14.12
%

 
c)
Concessions

As of December 31, 2019, mainly include intangibles of Norvial S.A.:
- 79 -
   
2018
    
2019
  
             
EPC Contract
    
70,133
      
62,319
  
Construction of the second tranch of the “Ancon-
                
      Huacho-Pativilca” highway
    
12,463
      
4,809
  
Cost of capitalized indebtedness at effective interest
                
      rates between 7.14% and 8.72%
    
9,836
      
950
  
Road improvement
    
15,558
      
14,449
  
Implementation for road safety
    
6,283
      
8,152
  
Work capitalization of second roadway
    
310,417
      
314,614
  
Disbursements for land adquisition
    
4,757
      
4,233
  
Other intangible assets contracted for the
                
      delivery process
    
6,775
      
7,477
  
Total Norvial S.A.
     436,222
       417,003
  
Other concessions
     45,818
  
     26,947
  
     
482,040
      
443,950
  


 
d)
Cost of well’s development

Through one of its subsidiaries, GMP S.A., the Group operates and extracts oil from two fields (Lot I and Lot V) located in the province of Talara, in northern Peru.  Both fields are operated under long-term service contracts in which the Group provides hydrocarbon extraction services to Perupetro. The expiration date of these contracts are December 2021 and October 2023 for Lot 1 and Lot V, respectively.

On December 10, 2014, the Peruvian State granted the subsidiary GMP S.A. the right to exploit for 30 years the oil lots III and IV (owned by the Peruvian State - Perupetro) located in the Talara basin, Piura. The investment committed is estimated at US$400 million and corresponds to the drilling of 230 wells in Lot III and 330 wells in Lot IV. The drilling began in April 2015 in both lots.

As part of the Group’s obligations under the infrastructure, it is necessary to incur certain costs to prepare the wells located in Lots I, III, IV and V. These costs are capitalized as part of the intangible assets with a value of S/108 million during 2019 (S/68 million in 2018), which includes the capitalization of the provision for dismantling wells and instalations in Lots I, III, IV and V, for S/36 million (S/3 million during 2018).

The lots are amortized on the basis of the useful lives of the wells (determined as five years for lots I and V and units produced for lots III and IV), which is less than the total service contract period with Perupetro.

 
e)
Amortization of intangible assets

Amortization of intangibles is broken down in the consolidated income statement as follows:

   
2018
    
2019
  
             
Cost of sales and services (Note 26)
    
98,318
      
99,589
  
Administrative expenses (Note 26)
    
4,856
      
5,689
  
(+) Amortization discontinued operations
    
8,898
      
-
  
     
112,072
      
105,278
  

18    BORROWINGS

As of December 31, this item includes:
- 80 -

         
Total
          
Current
          
Non-current
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
                                     
Bank overdrafts (Note 9)
    
119
      
-
      
119
      
-
      
-
      
-
  
Bank loans (a)
    
1,023,481
      
553,658
      
810,188
      
424,362
      
213,293
      
129,296
  
Finance leases (b)
    
33,488
      
22,980
      
13,514
      
9,749
      
19,974
      
13,231
  
Lease liability for right-of-use asset (c)
    
-
      
80,216
      
-
      
18,246
      
-
      
61,970
  
Other financial entities (d)
    
145,584
      
142,212
      
2,653
      
1,903
      
142,931
      
140,309
  
     
1,202,672
      
799,066
      
826,474
      
454,260
      
376,198
      
344,806
  
                                                 

a) Bank Loans

As of December 31, 2018, and 2019 includes bank loans in local and foreign currency for working capital. These obligations bear fixed interest rates ranging from 1.6% to 15.8% in 2018 and from  1.0% to 12.0% in 2019.

                     
Current
          
Non-current
  
   
Interest
    
Date of
          
At December, 31
          
At December, 31
  
   
rate
    
maturity
    
2018
    
2019
    
2018
    
2019
  
                                     
GyM S.A.
    
1.00% / 11.00
%
    
2022
      
227,770
    
170,798
  (iii)    
-
      
26,401
  
Graña y Montero S.A.A.
    
9.10% / 10.10
%
    
2022
    
206,836
 (ii)
 
112,854
 (iv)
   
125,547
(i)
    
-
  
Viva GyM S.A.
    
7.00% / 12.00
%
    
2020
      
129,617
      
110,343
      
2,102
      
-
  
GMP S.A.
    
5.05% / 6.04
%
    
2026
      
22,587
      
30,367
      
85,644
      
102,895
  
GyM Ferrovías S.A.
  
Libor USD 1M
      
2019
      
209,463
      
-
      
-
      
-
  
     + 2%                                          
Concar S.A.
    
6.85
%
    
2019
      
13,915
      
-
      
-
      
-
  
                     
810,188
      
424,362
      
213,293
      
129,296
  
                                                 

 
i)
Credit Suisse Syndicated Loan

In December 2015, the Company entered into a US$200 million (equivalent to S/672 million) medium-term loan agreement with Credit Suisse AG, Cayman Islands Branch and Credit Suisse Securities (USA) LLC. The loan term is five years with quarterly installments starting on the 18th month. The loan bears interest at a rate of three months Libor plus 4.9% per year. The funds were used to finance the equity participation in GSP.  On June 27, 2017, the Company renegotiated the terms of this loan to correct defaults related to the cancellation of the GSP concession.

On June 26, 2019, the capital balance of the loan was paid in full (As of December 31, 2018, the principal balance of the loan amounts to US$37.5 million (equivalent to S/126.7 million).

 
ii)
GSP Bridge Loan

As of December 31, 2016, the balance of bank loans included US$129 million (S/433 million) of the corporate guarantee issued by the Company to guarantee the bridge loan granted to GSP,.  However, on June 27, 2017, the Company reached a refinancing agreement with Natixis, BBVA, SMBC and MUFJ for US$78.7 million (S/256.3 million), this amount was used to repay the GSP bridge loan. The new loan matures in June 2020.

On June 28, 2019, the capital balance of the loan was paid in full, (As of December 31, 2018 the principal balance of the loan was US$63.5 million (equivalent to S/214.5 million).

 
iii)
Financial Stability Framework Agreement

- 81 -
On July 31, 2017, the Company, and certain of our subsidiaries, GyM S.A., Construyendo Pais S.A., Vial y Vives — DSD and Concesionaria Vía Expresa Sur S.A., entered into a Financial Stability Framework Agreement (together with certain complementary contracts, the “Framework Agreement”) with the following financial entities: Scotiabank Perú S.A., Banco Internacional del Perú S.A.A., BBVA Banco Continental, Banco de Crédito del Perú, Citibank del Peru SA and Citibank N.A. The Framework Agreement aims to: (i) grant GyM S.A. a syndicated revolving line of credit for working capital for up to US$1.6 million and S/143.9 million, which may be increased by an additional US$14 million subject to certain conditions; (ii) grant GyM S.A. a line of credit of up to US$51.6 million and S/33.6 million; (iii) grant the Company, GyM S.A., Construyendo Pais S.A., Vial y Vives – DSD and Concesionaria Vía Expresa Sur S.A. a non-revolving line of credit to finance reimbursement obligations under performance bonds; (iv) grant a syndicated line of credit in favor of the Company and GyM S.A. for the issuance of performance bonds up to an amount of US$100 million (which may be increased by an additional US$50 million subject to compliance with certain conditions); and (v) to commit to maintain existing standby letters of credit issued at the request of GyM S.A. and the Company, as well as the request of Construyendo Pais S.A., Vial y Vives – DSD and Concesionaria Vía Expresa Sur S.A. In April of 2018, the Group repaid US$72.7 million (equivalent to S/245.8 million) of the facility with the proceeds of the sale of Stracon GyM S.A., and in July of 2018, an additional of US$15.4 million (equivalent to S/52.1 million). In August 2019, the Group paid the entire balance of Tranche B, equivalent to S/9.7 million and US$9.2 million. In September and October 2019, Tranche A was partially paid for S/.0.4 million and US$0.1 million; and S/0.5 million, respectively.

As of December 31, 2019, and the date of this annual report, there was US$44.2 million (equivalent to S/146.6 million).

GyM S.A. requested a waiver for a change in the Financial Stability Framework Agreement, in which at least 50% of the amount of Tranche A and up to 50% of the amount of Tranche A (project valuations) should be presented; the request was accepted by the lenders. As of December 31, 2019 and the date of this report, the value of client invoices and the value of project valuations is 65% and 134%, respectively, both percentages comply with the provisions of the approved waivers.

As of December 31, 2019 and the date of this report, GyM S.A. is in compliance with the ratios established under the Financial Stability Framework Agreement

 
iv)
CS Peru Infrastructure Holdings LLC Loan

In July 2019, the Company entered into a medium term loan credit agreement for up to US$35 million with CS Peru Infrastructure Holdings LLC. The term of the loan is three years, with quarterly installments of principal starting on the 18th month. The loan accrued interest at the following rates per annum: (i) for the period from and including the July 31, 2019 (“Closing Date”) to but excluding the date that is 6 months after the Closing Date, 9.10%; (ii) for the period from and including the date that is 6 months after the Closing Date to but excluding the date that is 1 year after the Closing Date, 9.35%; (iii) for the period from and including the date that is 1 year after the Closing Date to but excluding the date that is 30 months after the Closing Date, 9.60%; and (iv) for the period from and including the date that is 30 months after the Closing Date to the third anniversary of the Loan, 10.10%.

The proceeds were used for working capital in the Company, GyM S.A. and Adexus S.A. As of the date of this report, the principal amount outstanding under this loan is still US$35 million (equivalent to S/112.9 million).

On November 21, 2019, due to the filing of a preventive bankruptcy process by its Chilean subsidiary, Adexus S.A., the Company received a communication from CS Peru Infrastracture Holdings LLC informing of the occurrence of an event of default under the terms of the credit agreement, according to section 7.02(e) and 9.09 of the agreement. As a result, the loan was classified as a current liabilities. As of December 31, 2019, the Company was in the process of obtaining a waiver from lenders, which was granted at the date of the report.
- 82 -

b) Financial Leases

                     
Current
          
Non-current
  
   
Interest
    
Date of
          
At December, 31
          
At December, 31
  
   
rate
    
maturity
    
2018
    
2019
    
2018
    
2019
  
                                     
Viva GyM S.A.
    
7.79% / 9.04
%
    
2023
      
3,488
      
4,297
      
8,582
      
7,399
  
GyM S.A.
    
1.98% / 9.07
%
    
2023
      
4,523
      
3,395
      
9,314
      
5,678
  
GMP S.A.
    
4.02% / 6.28
%
    
2022
      
4,034
      
1,511
      
1,522
      
154
  
Concar S.A.
    
4.30% / 5.05
%
    
2020
      
1,469
      
546
      
556
      
-
  
                     
13,514
      
9,749
      
19,974
      
13,231
  

The minimum payments to be made according to their maturity and the present value of the leasing obligations are as follows:


  
At December 31,
  
   
2018
    
2019
  
             
Up to 1 year
    
15,151
      
10,826
  
From 1 to 5 years
    
21,583
      
16,813
  
     
36,734
      
27,639
  
Future financial charges
    
(3,246
)
    
(4,659
)
Present value of the obligations for finance lease contracts
    
33,488
      
22,980
  












The present value of the finance lease agreements obligations are as follows:
 
   
At December 31,
  
   
2018
    
2019
  
             
Up to 1 year
    
13,514
      
9,749
  
From 1 year to 5 years
    
19,974
      
13,231
  
     
33,488
      
22,980
  

 
Lease liability for right-of-use asset (Note 3.1)

                     
At December, 31
  
   
Interest
    
Date of
          
2019
  
   
rate
    
maturity
    
Current
    
Non-current
  
                         
GMP S.A.
    
6.59% / 7.80
%
    
2023
      
10,584
      
10,261
  
Graña y Montero S.A.A.
    
7.88
%
    
2027
      
4,888
      
50,362
  
GyM S.A.
    
7.65
%
    
2022
      
1,592
      
541
  
Concar S.A.
    
5.55
%
    
2024
      
1,171
      
806
  
Other minors
    
6.31% / 10.00
%
    
2020
      
11
      
-
  
                     
18,246
      
61,970
  

The minimum payments to be made according to their maturity and the present value of the lease liability for right-of-use asset obligations are as follows:
- 83 -

   
At
  
   
December 31,
  
   
2019
  
       
Up to 1 year
    
24,966
  
From 1 to 5 years
    
69,955
  
Over 5 years
    
7,603
  
     
102,524
  
Future financial charges
    
(22,308
)
Present value of the lease liability for right-of-use asset obligations
    
80,216
  

The present value of the lease liability for right-of-use asset obligations are as follows:

   
At
  
   
December 31,
  
   
2019
  
       
Up to 1 year
    
18,247
  
From 1 year to 5 years
    
54,595
  
Over 5 years
    
7,374
  
     
80,216
  

 
c)
Other financial entities

Monetization of Norvial dividends

On May 29, 2018, an investment agreement was signed between the Company and Inversiones Concesion Vial S.A.C. (“BCI Peru”) - with the intervention of Fondo de Inversion BCI NV (“Fondo BCI”) and BCI Management Administradora General de Fondos S.A. (“BCI Asset Management”) to monetize the future dividends on Norvial S.A. that our Company will receive. The transaction amount was US$42.3 million (equivalent to S/138 million) and was completed on June 11, 2018.

It has also been agreed that the Company will have call options on 48.8% of the economic rights of Norvial that BCI Peru will maintain through its participation in Inversiones en Autopistas S.A. Such options will be subject to certain conditions such as the maturity of different terms, recovery of the investment made with the funds of the BCI Fund (according to different economic estimates) and/or the occurrence of a change of control. As of December 31, 2019, the balance of the loan payable amounts to S/142.2 million (S/145.6 million as of December 31, 2018).

  e)
Fair value of debt

The book value and fair value of financial liabilities are as follows:
- 84 -

   
Carrying amount
    
Fair value
  
         
At December, 31
          
At December, 31
  
   
2018
    
2019
    
2018
    
2019
  
                         
Bank overdrafts
    
119
      
-
      
119
      
-
  
Bank loans
    
1,023,481
      
553,658
      
1,152,885
      
572,019
  
Finance leases
    
33,488
      
22,980
      
38,399
      
23,027
  
Lease liability for right-of-use asset
    
-
      
80,216
      
-
      
96,799
  
Other financial entities
    
145,584
      
142,212
      
145,584
      
142,212
  
     
1,202,672
      
799,066
      
1,336,987
      
834,057
  

In 2019, fair values are based on discounted cash flows using debt rates between 2.9% and 11.0% (between 2.4% and 8.9% in 2018) and are within level 2 of the fair value hierarchy.

19    BONDS

As of December 31, this item includes:

         
Total
          
Current
          
Non-current
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
                                     
GyM Ferrovías S.A. (a)
    
611,660
      
618,497
      
13,422
      
15,742
      
598,238
      
602,755
  
Norvial S.A. (b)
    
325,382
      
305,545
      
25,745
      
28,995
      
299,637
      
276,550
  
     
937,042
      
924,042
      
39,167
      
44,737
      
897,875
      
879,305
  

 
a)
GyM Ferrovias S.A.

In February 2015, the subsidiary GyM Ferrovías S.A. issue corporate bonds under Regulation S of the United States of America. The issuance was made in VAC soles (adjusted for the Constant Update Value) for an amount of S/629 million. The bonds expire in November 2039 and accrue interest at a rate of 4.75% (plus the VAC adjustment), present a risk rating of AA + (local scale) granted by Support & International Associates Risk Classifier. As of December 31, 2019, an accumulated amortization amounting to S/79 million (S/67.7 million as of December 31, 2018) has been made.

As of December 31, 2019, the balance includes accrued interest payable and VAC adjustments for S/86.8 million (S/72 million as of December 31, 2018).

As of December 31, 2018 and 2019, the movement of this account is as follows:

   
2018
    
2019
  
             
Balance at January, 1
    
603,657
      
611,660
  
Amortization
    
(10,178
)
    
(11,330
)
Accrued interest
    
48,130
      
48,253
  
Interest paid
    
(29,949
)
    
(30,086
)
Balance at December, 31
    
611,660
      
618,497
  

As part of the bond structuring process, GyM Ferrovías S.A. pledged to report and verify compliance with the following, measured according to their individual financial statements (covenants):
- 85 -

 
-
Debt service coverage ratio not less than 1.2 times;
 
-
Maintain a minimum balance in the trust equal to one-quarter of operating and maintenance costs (including VAT);
 
-
Maintain a constant balance in the minimum trust equal to the following two coupons according to the bond schedule.

On August 23, 2017, GyM Ferrovias S.A. and Line One CPAO Purchaser LLC signed the purchase-sale contract and assignment of collection rights for the “Annual Payment for Complementary Investment (PAO Complementary)” derived from the Concession Contract for an amount equivalent to US$316 million. The last payment for the sale of the CPAO was mad on December 10, 2019.

On August 23, 2017, GyM Ferrovias S.A. as Borrower, Mizuho Bank, Ltd., and Sumitomo Mitsui Banking Corporation as Lenders and Mizuho Bank, Ltd. as Administrative Agent signed a Working Capital loan agreement for an amount equivalent to US$80 million to partially finance the Lima Metro Line 1 Expansion Project. In May 2019, the Working Capital loan was fully prepaid and the Working Capital Loan Agreement terminated. (As of December 31, 2018, the account payable amounted to US$62 million).

 
b)
Norvial S.A.

Between 2015 and 2016, the subsidiary, Norvial S.A., issued the First Corporate Bond Program on the Lima Stock Exchange for S/365 million. The rating companies Equilibrium Risk and Apoyo & Asociados Internacionales gave the rating of AA to this debt instrument.

The purpose of the awarded funds was to finance the construction works of the Second Stage of the Road Network No. 5 and the financing of the VAT linked to the execution of the expenses of the Project.

As of December 31, 2018, and 2019, the movement in this account is as follows:

   
2018
      2019  
 
Balance at January, 1
    
343,910
       325,382  
Amortization
    
(18,736
)
     (20,005 )
Accrued interest
    
24,170
       23,482  
Capitalized interest
    
3,361
       2,725  
Interest paid
    
(27,323
)
     (26,039 )
Balance at December, 31
    
325,382
       305,545  

As part of the bond structuring process, Norvial S.A. undertook to periodically report and verify compliance with the following covenants:

 
-
Debt service coverage ratio not less than 1.3 times;
 
-
Proforma leverage ratio less than 4 times.

The fair value of both obligations at December 31, 2019 amounts to S/1,014 million (at December 31, 2018, amounts to S/1,037 million), and is based on discounted cash flows using rates between 4.32% and 7.59% (between 4.09% and 5.45% at December 31, 2018) corresponding to level 2 of the fair value hierarchy.
- 86 -
As of December 31, 2018, and 2019, the Company has complied with the covenants of both types of bonds.

20    TRADE ACCOUNTS PAYABLE

As of December 31, this item includes:

   
2018
    
2019
  
             
Invoices payable (a)
    
591,619
      
352,287
  
Provision of contract costs (b)
    
378,670
      
746,408
  
Notes payable
    
109,242
      
37,426
  
     
1,079,531
      
1,136,121
  

(a) Invoices payable are obligations accredited with formal documents. The following are the invoices payable according to main projects:

   
2018
    
2019
  
Infrastructure
            
Linea 1 - Metro de Lima
    
93,463
      
15,125
  
Oil services
    
49,254
      
46,932
  
Operation and maintenance - Roads
    
60,334
      
16,131
  
     
203,051
      
78,188
  
                 
Engineering and Construction
                
Works and Consortiums
    
128,159
      
64,571
  
Talara Refinery
    
101,103
      
59,740
  
Engineering and Construction Works VYV - DSD Chile Ltda.
    
26,184
      
26,368
  
Civil Works, Assembly and Electromechanics - Toquepala
    
23,957
      
10,325
  
North Concentrator Plant - Quellaveco
    
7,564
      
26,589
  
Engineering and Construction Works - Morelco S.A.S.
    
19,504
      
8,141
  
Generating Plant Machu Picchu
    
7,789
      
6,575
  
Project Mina Gold Fields La Cima S.A.
    
5,060
      
5,302
  
Civil works, assembly and electromechanics - Acero Arequipa
    
3,062
      
5,421
  
Others
    
5,319
      
15,091
  
     
327,701
      
228,123
  
Real Estate
    
18,365
      
26,072
  
Parent Company Operation
    
42,502
      
19,904
  
     
591,619
      
352,287
  

b)  Provision of contract costs are obligations not accredited with formal documents. Below are the services received not billed according to main projects:
- 87 -
   
2018
    
2019
  
Infrastructure
            
Linea 1 - Metro de Lima
    
11,189
      
13,383
  
Oil services
    
-
      
20,512
  
Operation and maintenance - Roads
    
1,020
      
18,763
  
     
12,209
      
52,658
  
                 
Engineering and Construction
                
Talara Refinery
    
115,870
      
418,540
  
Works and Consortiums
    
105,681
      
68,239
  
Engineering and Construction Works VYV - DSD
    
51,412
      
68,140
  
Engineering and Construction Works - Morelco SAS
    
27,570
      
34,804
  
North Concentrator Plant - Quellaveco
    
10,030
      
24,185
  
Mina Project of Gold Fields La Cima S.A.
    
8,520
      
15,050
  
Civil Works, Assembly and Electromechanics - Acero Arequipa
    
4,932
      
17,382
  
Civil Works, Assembly and Electromechanics - Toquepala
    
5,283
      
5,055
  
Generating Plant Machu Picchu
    
2,376
      
4,633
  
Others
    
8,513
      
23,063
  
     
340,187
      
679,091
  
Real estate
    
12,808
      
13,573
  
Parent Company Operation
    
13,466
      
1,086
  
     
378,670
      
746,408
  

21    OTHER ACCOUNTS PAYABLE

As of December 31, this item includes:

   
    Total    
   Current     Non-current  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
                                     
Advances received from customers (a)
    
496,547
      
307,839
      
301,868
      
270,714
      
194,679
      
37,125
  
Consorcio Ductos del Sur - payable (b)
    
234,978
      
148,076
      
-
      
-
      
234,978
      
148,076
  
Salaries and other payable
    
97,774
      
87,869
      
97,774
      
87,869
      
-
      
-
  
Put option liability on Morelco acquisition (Note 32-b)
    
103,649
      
106,444
      
-
      
71,341
      
103,649
      
35,103
  
Third-party loans
    
11,560
      
11,619
      
11,560
      
9,545
      
-
      
2,074
  
Other taxes payable
    
132,775
      
104,444
      
111,444
      
84,235
      
21,331
      
20,209
  
Acquisition of additional non-controlling interest
    
22,963
      
22,697
      
22,963
      
22,697
      
-
      
-
  
Guarantee deposits
    
15,137
      
13,201
      
15,137
      
13,201
      
-
      
-
  
Consorcio Rio Mantaro - payables
    
35,531
      
35,625
      
35,531
      
35,625
      
-
      
-
  
Other accounts payables
    
55,865
      
70,592
      
36,392
      
40,078
      
19,473
      
30,514
  
     
1,206,779
      
908,406
      
632,669
      
635,305
      
574,110
      
273,101
  

 
(a)
Advances received from customers relate mainly to construction projects, and are discounted from invoicing, in accordance with the terms of the contracts.

- 88 -
         
Total
          
Current
          
Non-current
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
                                     
Advances Customers Consortiums
    
154,660
      
115,250
      
146,764
      
113,093
      
7,896
      
2,157
  
Autoridad Autonoma del Sistema Electrico de Transporte
    
164,218
      
-
      
9,781
      
-
      
154,437
      
-
  
Customer advances for real estate projects
    
67,519
      
66,258
      
67,519
      
66,258
      
-
      
-
  
Concentradora Norte - Quellaveco
    
-
      
64,118
      
-
      
44,932
      
-
      
19,186
  
Special National Transportation Infrastructure Project
    
69,943
      
42,030
      
38,959
      
26,534
      
30,984
      
15,496
  
Talara Refinery
    
10,835
      
-
      
10,835
      
-
      
-
      
-
  
Others
    
29,372
      
20,183
      
28,010
      
19,897
      
1,362
      
286
  
     
496,547
      
307,839
      
301,868
      
270,714
      
194,679
      
37,125
  

 
(b)
The other accounts payable of Consorcio Constructor Ductos del Sur correspond to payment obligations to suppliers and the main subcontractors for S/235 million, assumed by the subsidiary GyM S.A; as a result of the termination of GSP operations.

The fair value of short-term accounts approximates their book value due to their short-term maturities. The non-current part mainly includes non-financial liabilities such as advances received from customers; the remaining balance is not significant in the financial statements for the periods shown.

22    OTHER PROVISIONS

At December 31, this item includes:

         
Total
          
Current
          
Non-current
  
   
2018
    
2019
    
2018
    
2019
    
2018
    
2019
  
                                     
Legal claims
    
84,728
      
278,319
      
6,049
      
103,635
      
78,679
      
174,684
  
Contingent liabilities from the acquisition of subsidiaries
    
4,498
      
-
      
-
      
-
      
4,498
      
-
  
Provision for well closure (Note 5.1 d)
    
20,382
      
50,116
      
148
      
9,848
      
20,234
      
40,268
  
     
109,608
      
328,435
      
6,197
      
113,483
      
103,411
      
214,952
  

Additions for legal claims correspond to:

i) Provision for civil reparation

As of December 31, 2019, the Group updated the present value of the estimated provision amounting to S/154 million (S/73.5 million as of December 31, 2018), corresponding to the legal contingency estimated by the Management for exposure of the Company and its subsidiaries to the probable imposition of an obligation to compensate the government in relation to their participation as minority partners in certain entities that developed infrastructure projects in Peru with companies belonging to the Odebrecht group and in projects associated with the Construction Club.

ii) Class Action

Two class action lawsuits have been filed against the company and certain of our former officials in before the United States Court for theEastern District of New York during the first quarter of 2017 that were later consolidated into a single claim. The plaintiffs allege that during the class period the Company obtained equity investments from investors based on false and misleading statements that were made in breach of the Securities Act and that caused material losses to such investors In particular, it is complaint alleges that the defendant did not disclose, among other things, that: a) the Company knew that its partner Odebrecht was involved in illegal activities; and that, b) the Company profited from such activities in violation of its own corporate governance rules.
- 89 -

As of the date of this report, the Company has entered into term sheet with the plaintiffs' counsel, whereby the parties undertake to ensure the termination of the class action, through the negotiation, conclusion and filing of the final settlement agreement before court. The amount stipulated for the termination of the class action equals to US $ 20 million. As of December 31, 2019, the Company has made a provision of S/49.8 million (US $ 15 million) and the surplus of US $ 5 million will be covered by a professional liability policy pursuant to settlement agreement entered with the insurer.

iii) Other provisions

Other provisions correspond mainly to claims received from clients for S/46 million in the subsidiary GyM S.A.

The gross movement of other provisions is as follows:

         
Contingent
              
         
liabilities
    
Provision
        
   
Legal
    
resulting from
    
for well
        
Other provisions
  
claims
    
acquisitions
    
closure
    
Total
  
                         
At January 1, 2018
    
23,364
      
7,249
      
16,804
      
47,417
  
Additions
    
75,369
      
-
      
3,578
      
78,947
  
Reversals of provisions
    
(4,875
)
    
(1,343
)
    
-
      
(6,218
)
Deconsolidation of subsidiaries
    
(2,340
)
    
-
      
-
      
(2,340
)
Reclasification liabilities classified as held for sale
    
-
      
(1,093
)
    
-
      
(1,093
)
Payments
    
(6,615
)
    
-
      
-
      
(6,615
)
Translation adjustments
    
(175
)
    
(315
)
    
-
      
(490
)
At December 31, 2018
    
84,728
      
4,498
      
20,382
      
109,608
  
                                 
At January 1, 2019
    
84,728
      
4,498
      
20,382
      
109,608
  
Additions
    
197,721
      
-
      
30,998
      
228,719
  
Reversals of provisions
    
(3,122
)
    
(4,349
)
    
-
      
(7,471
)
Payments
    
(914
)
    
-
      
(1,264
)
    
(2,178
)
Translation adjustments
    
(94
)
    
(149
)
    
-
      
(243
)
At December 31, 2019
    
278,319
      
-
      
50,116
      
328,435
  

23    EQUITY

 
a)
Capital

The General Shareholders’ Meeting held on November 6, 2018, approved a capital increase of up to US$130 million equivalent to 211,864,407 shares at a price of US$0.6136.  As of December 31, 2018, during the first stage of the placement and the conclusion of two preferred subscription rounds, a total of 69,380,402 shares were subscribed. Therefore, the Company's capital is represented by 729,434,192 shares with a par value of S/1.00 each, out of which 660,053,790 are registered in the Public Registry, and 69,380,402 are in the process of registration.

On April 2, 2019, the Company concluded the capital increase process by completing the subscription of 142,483,663 new common shares, therefore the capital of the company is represented by S/871,917,855, after the end of the private offer and considering the contributions made during the 2 preferential subscription rounds.

As of December 31, 2018, a total of 207,931,660 shares were represented in ADS, equivalent to 41,586,332 ADS at a rate of 5 shares per ADS; and 218,043,480 shares were represented in ADS equivalent to 43,608,696 ADS as of December 31, 2019.

- 90 -

As of December 31, 2019, the Company's shareholding structure is as follows:

         
Total
  
Percentage of individual
  
Number of
    
percentage of
  
interest in outstanding capital
  
shareholders
    
interest
  
             
Up to 1.00
    
1,725
      
12.19
%
From 1.01 to 5.00
    
16
      
30.98
%
From 5.01 to 10.00
    
2
      
18.34
%
Over 10
    
2
      
38.49
%
     
1,745
      
100.00
%

At December 31, 2019, the Company's shares registered a stock price at the end of the year of S/1.70 per share and a trading frequency of 95.24% (S/1.99 per share and a trading frequency of 91.6% at 31 December 2018).

 
b)
Legal reserve

In accordance with the Peruvian General Law of Corporations, the legal reserve of the Company is constituted with the transfer of 10% of the annual profit until reaching an amount equivalent to 20% of the paid-in capital.  In the absence of profits or unrestricted reserves, the legal reserve must be applied to the compensation of losses and must be replenished with the profits of subsequent years.  This reserve may be capitalized; and its replacement is also mandatory.

 
c)
Voluntary reserve

As of December 31, 2018, and 2019, this S/29.97 million reserve is related to the excess of the legal reserve; this reserve is above the requirement to constitute a reserve until it reaches the equivalent of 20% of the paid-in capital.

 
d)
Share premium

This item includes the excess of total income obtained by shares issued in 2013 compared to their nominal value of S/1,055.5 million and by shares issued in 2018 and 2019 an amount of S/68.2 million and S/138.9 million, respectively.

In addition, this account recognizes the difference between the nominal value and the transaction value for acquisitions of shares in non-controlling interests.

 
e)
Retained earnings

Dividends distributed to shareholders other than domiciled legal entities are subject to the rates of 4.1% (earnings until 2014), 6.8% (2015 and 2016 earnings) and 5.00% (2017 and thereafter) for income tax charged to these shareholders; such tax is withheld and settled by the Company. Dividends for fiscal years 2018 and 2019 were not distributed (Note 33).

24    DEFERRED INCOME TAX

Deferred income tax is classified by its estimated reversal term as follows:
- 91 -

       
At December 31,
  
   
2018
    
2019
  
             
Deferred income tax asset:
            
Reversal expected in the following twelve months
    
48,889
      
37,927
  
Reversal expected after twelve months
    
376,547
      
202,992
  
Total deferred tax asset
    
425,436
      
240,919
  
                 
Deferred income tax liability:
                
Reversal expected in the following twelve months
    
(9,067
)
    
(19,791
)
Reversal expected after twelve months
    
(66,280
)
    
(92,943
)
Total deferred tax liability
    
(75,347
)
    
(112,734
)
Deferred income tax asset, net
    
350,089
      
128,185
  
                 
                 
The gross movement of the deferred income tax item is as follows:
                
                 
         
At December 31,
  
     
2018
      
2019
  
                 
Opening balance
    
364,225
      
350,089
  
Debit (credit) to income statement (Note 29)
    
25,118
      
(206,273
)
Adjustment for changes in rates of income tax
    
(1,524
)
    
(622
)
Sale of a subsidiary
    
(40,460
)
    
-
  
IFRIC 23 adoption
    
-
      
(986
)
Debit (credit) to equity
    
(95
)
    
(3
)
Other movements
    
2,825
      
(14,020
)
Final balance
    
350,089
      
128,185
  

- 92 -
As of December 31, 2019, the total tax loss amounts to S/517.3 million and is composed as follows:

   
Difference in
    
Work
          
Borrowing
                    
Deferred income
  
depreciation
    
Deferred
    
in
    
Tax
    
costs
                          
tax liabilities
  
rates
    
income
    
process
    
receivable
    
capitalized
    
PPA
    
Others
    
Total
        
                                                       
At January 1, 2018
    
165,851
      
-
      
2,530
      
32,189
      
19,945
      
15,338
      
9,357
      
245,210
        
(Charge) credit to P&L
    
(74,679
)
    
13,574
      
2,926
      
689
      
(4,229
)
    
(11,699
)
    
7,828
      
(65,590
)
      
Sale of subsidiary
    
(16,189
)
    
-
      
-
      
-
      
-
      
(5,201
)
    
(3,377
)
    
(24,767
)
      
At December 31, 2018
    
74,983
      
13,574
      
5,456
      
32,878
      
15,716
      
(1,562
)
    
13,808
      
154,853
        
                                                                       
(Charge) credit to P&L
    
9,937
      
10,571
      
33,403
      
3,312
      
(780
)
    
11,385
      
18,821
      
86,649
        
At December 31, 2019
    
84,920
      
24,145
      
38,859
      
36,190
      
14,936
      
9,823
      
32,629
      
241,502
        
                                                                       
                                                                       
           
Accelerated
            
Accrual for
                                
Deferred income
          
tax
    
Tax
    
Work
    
unpaid
            
Tax
                
tax assets
  
Provisions
    
depreciation
    
losses
    
in process
    
vacations
    
Impairment
    
Goodwill
    
Others
    
Total
  
                                                                       
At January 1, 2018
    
52,439
      
86,651
      
144,089
      
39,487
      
13,440
      
224,780
      
20,413
      
28,136
      
609,435
  
Charge (credit) to P&L
    
702
      
(83,561
)
    
25,733
      
(5,482
)
    
1,784
      
35,289
      
(2,365
)
    
(14,096
)
    
(41,996
)
Charge (credit) to equity
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(95
)
    
(95
)
Sale of subsidiary
    
(14,775
)
    
(2,169
)
    
(33,512
)
    
-
      
(6,215
)
    
(6,462
)
    
-
      
(944
)
    
(64,077
)
Others
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
1,675
      
1,675
  
At December 31, 2018
    
38,366
      
921
      
136,310
      
34,005
      
9,009
      
253,607
      
18,048
      
14,676
      
504,942
  
                                                                         
Charge (credit) to P&L
    
804
      
7,512
      
14,343
      
11,715
      
1,842
      
(205,265
)
    
(4,526
)
    
53,329
      
(120,246
)
Charge (credit) to equity
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(3
)
    
(3
)
IFRIC 23 adoption
    
-
      
-
      
(986
)
    
-
      
-
      
-
      
-
      
-
      
(986
)
Others
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(14,020
)
    
(14,020
)
At December 31, 2019
    
39,170
      
8,433
      
149,667
      
45,720
      
10,851
      
48,342
      
13,522
      
53,982
      
369,687
  

- 93 -
As of December 31, 2019, the total tax loss amounts to S/517.3 million and is composed as follows:

         
Tax loss
                          
   
Tax
    
aplication
                
Application
    
Statute of
  
   
loss
    
method
    
2020
    
2021
    
Forward
    
limitations
  
                                     
GyM S.A.
    
328,946
       B

   
23,985
      
13,270
      
291,691
        
Vial y Vives-DSD S.A.
    
115,027
      
N/A
      
71,010
      
6,018
      
37,999
        
Viva GyM S.A.
    
21,530
        A
   
16,917
      
4,613
      
-
      
2022
  
Graña y Montero S.A.A.
    
17,875
        A
   
-
      
-
      
17,875
      
2022
  
TGNCA S.A.C.
    
15,989
        B
   
-
      
-
      
15,989
          
Morelco S.A.S.
    
5,650
      
N/A
      
5,650
      
-
      
-
          
GMP S.A.
    
4,869
       A

   
4,869
      
-
      
-
      
2021
  
GyM Chile S.p.A.
    
4,052
      
N/A
      
-
      
-
      
4,052
          
Survial S.A.
    
2,053
        A

   
1,437
      
616
      
-
      
2023
  
Incolur DSD
    
1,278
      
N/A
      
-
      
-
      
1,278
          
Others
    
47
              
47
      
-
      
-
          
     
517,316
              
123,915
      
24,517
      
368,884
          

     According to Peruvian legislation, there are two ways to compensate tax losses:

 
1.
System A, it is allowed to offset the tax loss in future years up to the following four (4) years from the date the loss is incurred.

 
2.
System B. The tax loss may be offset in future years up to 50% of the net rent of each year. This option does not consider a statute of limitations.

The taxable goodwill relates to the tax credit generated in the reorganization of the Chilean subsidiaries in 2014, in accordance with such legislation. In 2016, the arbitration related to the Collahuasi project was closed, and an additional payment to the sellers of the Chilean subsidiary was determined, which originated the increase of this temporary item.

Deferred income corresponds to income that, according to Colombian tax regulations, is not recognized as such for tax purposes until certain requirements are met.

25    WORKERS’ PROFIT SHARING

The distribution of the workers’ profit sharing in the income statement for the years ended December 31 is shown below:

   
2018
    
2019
  
             
Cost of sales of goods and services
    
5,274
      
4,661
  
Administrative expenses
    
2,588
      
1,679
  
     
7,862
      
6,340
  

26    COSTS AND EXPENSES BY NATURE

For the years ended December 31, the detail of this item is as follows:
- 94 -

   
Cost
              
   
of goods
    
Administrative
        
   
and services
    
expenses
    
Total
  
2018
                  
Services provided by third-parties
    
1,064,687
      
98,060
      
1,162,747
  
Salaries, wages and fringe benefits (i)
    
817,392
      
105,505
      
922,897
  
Purchase of goods
    
755,209
      
-
      
755,209
  
Other management charges
    
375,308
      
43,533
      
418,841
  
Amortization
    
98,318
      
4,856
      
103,174
  
Depreciation
    
81,199
      
5,135
      
86,334
  
Impairment of accounts receivable (ii)
    
45,658
      
19,418
      
65,076
  
Taxes
    
8,727
      
1,926
      
10,653
  
Impairment of property, plant and equipment
    
5,468
      
-
      
5,468
  
Inventory recovery
    
(26,993
)
    
-
      
(26,993
)
     
3,224,973
      
278,433
      
3,503,406
  
                         
                         
   
Cost
                  
   
of goods
    
Administrative
          
   
and services
    
expenses
    
Total
  
2019
                        
Services provided by third-parties
    
1,450,577
      
58,728
      
1,509,305
  
Salaries, wages and fringe benefits (i)
    
951,455
      
117,426
      
1,068,881
  
Purchase of goods
    
855,743
      
-
      
855,743
  
Other management charges
    
174,678
      
27,708
      
202,386
  
Amortization
    
99,589
      
5,689
      
105,278
  
Depreciation
    
95,445
      
1,907
      
97,352
  
Impairment of accounts receivable (ii)
    
4,900
      
-
      
4,900
  
Taxes
    
6,941
      
2,450
      
9,391
  
Impairment of property, plant and equipment
    
3,907
      
-
      
3,907
  
Impairment of investments
    
255
      
-
      
255
  
Inventory recovery
    
(249
)
    
-
      
(249
)
     
3,643,241
      
213,908
      
3,857,149
  

(i) For the years ended on December 31, salaries, wages and fringe benefits comprise the following:

   
2018
    
2019
  
             
Salaries
    
629,641
      
786,346
  
Statutory gratification
    
80,697
      
88,369
  
Social contributions
    
73,297
      
61,533
  
Employee’s severance indemnities
    
50,852
      
49,944
  
Vacations
    
39,221
      
39,298
  
Workers' profit sharing (Note 25)
    
7,862
      
6,340
  
Others
    
41,327
      
37,051
  
     
922,897
      
1,068,881
  

(ii) For the years ended December 31, the impairment of accounts receivable includes the following:

   
2018
    
2019
  
Trade accounts receivables
    
3,065
      
955
  
Other accounts receivable
    
44,252
      
2,421
  
Accounts receivable from related parties
    
17,759
      
1,524
  
     
65,076
      
4,900
  

- 95 -

27    FINANCIAL INCOME AND EXPENSES

For the years ended on December 31, these items include the following:

   
2018
    
2019
  
             
Financial income:
            
Interest on loans to third parties
    
27,060
      
36,876
  
Fair value of accounts receivables
    
9,786
      
30,408
  
Interest on short-term bank deposits
    
3,811
      
4,056
  
Commissions and collaterals
    
1,448
      
535
  
Exchange rate gain, net
    
-
      
-
  
Others
    
8,820
      
2,781
  
     
50,925
      
74,656
  
                 
                 
Financial expenses:
                
Interest expense:
                
- Bank loans
    
90,349
      
78,293
  
- Bonds
    
27,388
      
26,113
  
- Commissions and collaterals
    
31,668
      
24,521
  
- Loans from third parties
    
31,296
      
14,162
  
- Right-of-use
    
-
      
5,472
  
- Financial lease
    
2,908
      
2,042
  
Loss by measurement of financial asset fair value
    
25,796
      
41,131
  
Exchange difference loss, net
    
23,276
      
32,570
  
Derivative financial instruments
    
268
      
92
  
Other financial expenses
    
23,200
      
14,542
  
Less capitalized interest
    
(8,167
)
    
(7,229
)
     
247,982
      
231,709
  

28    OTHER INCOME AND EXPENSES, NET

For the years ended December 31, these items include the following:
- 96 -

   
2018
    
2019
  
Other income:
            
Profit from Mizuho Agreement (a)
    
-
      
89,688
  
Recovery of provisions and accounting impairments
    
-
      
23,279
  
Trademarks revaluation
    
-
      
20,676
  
Supplier debt forgiveness
    
-
      
19,026
  
Sale of fixed assets
    
26,007
      
12,748
  
Sale of investments
    
13,475
      
-
  
Present value of the liability from put option
    
6,122
      
-
  
Others
    
12,815
      
14,368
  
     
58,419
      
179,785
  
                 
Other expenditures:
                
Asset impairment (b)
    
-
      
296,581
  
Civil repair to the Peruvian Government (c )
    
73,500
      
69,150
  
Legal litigation (class action) (Note 22)
    
-
      
49,754
  
Impairment of goodwill and trademarks (Note 17 a)
    
-
      
33,089
  
Net cost of fixed assets disposal
    
36,931
      
21,061
  
Others
    
9,323
      
36,904
  
     
119,754
      
506,539
  
     
(61,335
)
    
(326,754
)

(a) Corresponds to the refinancing agreement linked to the contract signed between GyM Ferrrovias S.A. and Mitzuho Bank Ltd. where the Company acted as an endorsement of the transaction. Under the contract, a bond letter was issued with Mitzuho Bank Ltd. for it to be covered with a financial derivative. The contract further indicated that in the event that the bank refinanced the debt, the Company received 70% of the gains obtained.

(b) Mainly corresponds to a provision for impairment of accounts receivable from GSP for S/276 million (Note 15 a) and the subsidiary Promotora Larco Mar S.A. recognized an impairment on work in progress balances for S/18 million.

(c) The Company increased the provision for civil reparation in S/69 million (Note 22).

29    TAX SITUATION

a)
Each company in the Group is individually subject to the applicable taxes in Peru, Chile and Colombia. Management considers that it has determined the taxable income under general income tax laws in accordance with the tax legislation current effective of each country.

b)
Changes in the Income Tax Law in Colombia -

With the entry into force of the law 2010 of December 2019 law of economic growth, employment, investment, strengthening of public finances and the progressivity, equity and efficiency of the tax system, the following was stipulated as of January 1 2020:

It is supposed that the liquid income is not less than 3.5% of its liquid assets of the previous year. The percentage of presumptive income will be reduced to 0.5% by 2020 and 0% from 2021.

The income tax rate applicable to national societies, permanent establishments and foreign legal entities will be 32%, 31% and 30% for the periods 2020, 2021 and 2022, respectively.

- 97 -

Individuals or corporation taxpayers who receive income from foreign sources subject to income in the country of origin, can deduct the tax paid abroad from this income.

Payments abroad for interest, commissions, fees, royalties, leases, personal services are subject to withholding tax at the rate of 20%. Payments for consulting, technical services and technical assistance provided by non-residents are subject to the 20% withholding tax rate. Payments for financial returns to non-residents are subject to the 15% withholding tax rate. Payments to the parent company for management fee, are subject to the 33% withholding tax rate.

Taxpayers may correct their tax returns within three (3) years after the closing date of tax submits and before they have been notified of a special requirement.

The statute of limitations for income taxpayers who compensate for tax losses or are subject to transfer prices will be five (5) years.

In case of an increase in taxable income of 30% with respect to the previous year, for fiscal years 2020 and 2021, the statute of limitation of the returns would be six (6) months and in the case of a 20% increase year will be close at month twelve (12).

c)
The income tax expense shown in the consolidated statement of income comprises:

   
2018
    
2019
  
             
Current income tax
    
150,020
      
113,062
  
Deferred income tax (Note 24)
    
(23,594
)
    
206,895
  
     
126,426
      
319,957
  
(-) Discontinued Operations
    
(13,108
)
        
Income tax expense
    
113,318
      
319,957
  

 
d)  The Group’s income tax differs from the theoretical amount that would have resulted from applying the weighted-average income tax rate applicable to the profit reported by of the consolidated companies, as follows:

- 98 -
   
2018
    
2019
  
             
Profit (loss) before income tax
    
133,948
      
(474,726
)
                 
Income tax by applying local applicable tax
                
rates on profit generated in the respective countries
    
40,507
      
(141,370
)
Tax effect on:
                
- Reversal of deferred income tax asset
    
-
      
174,716
  
- Non-recoverable item
    
-
      
85,301
  
- Non-deductible expenses
    
70,052
      
84,832
  
- Unrecognized deferred income tax asset
    
8,592
      
82,424
  
- Change in prior years estimations
    
3,235
      
36,529
  
- Provision of tax contingencies
    
-
      
7,079
  
- Adjustment for changes in rates of income tax
    
1,524
      
622
  
- Non-taxable income
    
(1,691
)
    
(1,195
)
- Equity method (profit) loss
    
(1,094
)
    
(64
)
- Others
    
(7,807
)
    
(8,917
)
Income tax
    
113,318
      
319,957
  
 

 
e)
The theoretical tax disclosed is the result of applying the income tax rate in accordance with the tax legislation of the country where each company that is part of the Group is domiciled. In this sense, companies domiciled in Peru, Chile, and Colombia applied in 2019 income tax rates of 29.5%, 27% and 33% respectively (29.5%, 27% and 37% for 2018). Norvial S.A., GyM Ferrovias S.A., Concesionaria Via Expresa Sur S.A. and GMP S.A. (Blocks III and IV) have legal stability contracts signed with the Peruvian Government in force during the term of the associated concessions.  Therefore, the consolidated theoretical amount is obtained from the weighting of the profit or loss before income tax and the applicable income tax rate.

- 99 -


   
Taxes
    
before the
        
   
local
    
Tax
    
Tax
  
Country
  
Applicable
    
to Rent
    
to rent
  
   
(A)
    
(B)
    
(A)*(B)
  
2018
                  
Peru
    
29.50
%
    
151,627
      
44,730
  
Peru - Norvial S.A.
    
27.00
%
    
21,104
      
5,698
  
Peru - GyM Ferrovías  S.A.
    
30.00
%
    
125,136
      
37,541
  
Peru - Vía Expresa Sur S.A.
    
30.00
%
    
2,951
      
885
  
Peru - GMP S.A.
    
29.00
%
    
35,421
      
10,272
  
Chile
    
27.00
%
    
(20,768
)
    
(5,607
)
Colombia - Morelco S.A.
    
37.00
%
    
11,851
      
4,385
  
Colombia - GyM S.A. Branch
    
33.00
%
    
1,984
      
655
  
Bolivia
    
25.00
%
    
(137
)
    
(34
)
Unrealized gains
            
(195,221
)
    
(58,018
)
             
133,948
      
40,507
  
                         
2019
                        
Peru
    
29.50
%
    
(1,612,192
)
    
(475,597
)
Peru - Norvial S.A.
    
27.00
%
    
24,066
      
6,498
  
Peru - GyM Ferrovías  S.A.
    
30.00
%
    
121,080
      
36,324
  
Peru - Vía Expresa Sur S.A.
    
30.00
%
    
(17,752
)
    
(5,326
)
Peru - GMP S.A.
    
29.00
%
    
35,421
      
10,272
  
Chile
    
27.00
%
    
(36,917
)
    
(9,967
)
Colombia - GyM S.A. Branch
    
33.00
%
    
(11,824
)
    
(3,902
)
Bolivia
    
25.00
%
    
681
      
170
  
Unrealized gains
            
1,022,711
      
300,158
  
             
(474,726
)
    
(141,370
)

In 2018, Colombia applied a 33% Income Tax rate and a 4% temporary surcharge on a taxable income greater than S/895 thousand (equivalent to COP800 million). The two subsidiaries domiciled in Colombia determined taxable income that generated the application of income tax rates of 37% and 33%.

 
f)
Peruvian tax authorities have the right to examine, and, if necessary, amend the income tax determined by the Company in the last four years - from January 1 of the year after the date when the tax returns are filed (open fiscal year). Therefore, years 2015 through 2019 are subject to examination by the tax authorities. Management considers that no significant liabilities will arise as a result of these possible tax examinations.  Additionally, income tax returns for fiscal years 2017 to 2019 remain open for examination by the Chilean tax authorities who have the right to carry out said examination within the three years following the date the income tax returns have been filed. Fiscal years 2016 to 2019 are open for tax audit by Colombian tax authorities. Colombian tax authorities are entitled to audit two consecutive years following the date the income tax returns were filed.

 
g)
In accordance with Peruvian current legislation, for determination of income tax and general sales tax, the transfer prices transactions with related companies and companies resident in territories with low or no taxation must be considered. For this purpose, documentation and information must be available to support the valuation methods used and the criteria considered for their determination (transfer pricing rules). The Tax Administration is authorized to request this information from the taxpayer. Based on the analysis of the Company's operations, Management and its legal advisors estimate that the transfer prices of transactions with related companies are based on market conditions, similar to those agreed with third parties, at 31 December 2019.

- 100 -
h)   Temporary tax on net assets (ITAN)

The temporary tax on net assets is applied by the companies which operate in Peru, to third category income generators subject to the Peruvian Income Tax General Regime.  Effective the year 2012, the tax rate is 0.4%, applicable to the amount of the net assets exceeding S/1 million.

The amount effectively paid may be used as a credit against payments on account of income tax or against the provisional tax payment of the income tax of the related period.

i)
The recoverability of the deferred income tax asset registered in Business of Gas at the end of 2018, related to the impairment of investments in GSP has been evaluated, finally ending in a write-off of S/172 million.
   
j)
In 2019, certain operations have not been recognized to have impact on income tax such as: additional impairment of investments in GSP (Negocios Gas S.A.) S/67 million, impairment of accounts receivable in GyM S.A. amount to S/7.7 million and work in progress in Concesionaria Vesur S.A. and Promotora Larcomar S.A. equal to S/10.8 million.
   
k)
 The current income tax payable, after applying the corresponding tax credits and whose due date is up to the first week of April of the following year, includes mainly:

 
-
GyM Ferrovias S.A.
  
S/7 million in 2019 and S/20 million in 2018
 
-
Inmobiliaria Almonte S.A.
  
S/10 million in 2018

30    OTHER COMPREHENSIVE INCOME

The analysis of this account is reflected below:

                     
Exchange
        
         
Foreign
    
Increase in
    
difference from
        
         
currency
    
fair value of
    
net investment
        
   
Cash flow
    
translations
    
available-for
    
in a foreign
        
   
hedge
    
adjustment
    
sale assets
    
operation
    
Total
  
                               
                               
At January 1, 2018
    
371
      
(63,722
)
    
7,461
      
(1,962
)
    
(57,852
)
                                         
(Charge) credit for the year
    
160
      
(7,875
)
    
-
      
(10,800
)
    
(18,515
)
Tax effects
    
(47
)
    
-
      
-
      
2,808
      
2,761
  
Transfer to profit or loss (*)
    
-
      
14,805
      
-
      
-
      
14,805
  
Other comprehensive income of the year
    
113
      
6,930
      
-
      
(7,992
)
    
(949
)
At December 31, 2018
    
484
      
(56,792
)
    
7,461
      
(9,954
)
    
(58,801
)
                                         
(Charge) credit for the year
    
8
      
(6,892
)
    
-
      
-
      
(6,884
)
Tax effects
    
(2
)
    
-
      
-
      
-
      
(2
)
Other comprehensive income of the year
    
6
      
(6,892
)
    
-
      
-
      
(6,886
)
At December 31, 2019
    
490
      
(63,684
)
    
7,461
      
(9,954
)
    
(65,687
)
                                         

(*) The amount of S/14.8 million corresponds to the recognition of the translation adjustment from CAM Chile S.A., an indirect subsidiary sold in December 2018.

The amounts in the above table only represent amounts attributable to the Company’s controlling interest, net of tax. The table below shows the movement in other comprehensive income per year:
- 101 -

   
2018
    
2019
  
Controlling interest
    
(949
)
    
(6,886
)
Non-controlling interest
    
(1,346
)
    
(1,734
)
Adjustment for actuarial gains and
                
  losses, net of tax
    
16,589
      
-
  
Total value in OCI
    
14,294
      
(8,620
)

31    CONTINGENCIES, COMMITMENTS, AND WARRANTIES

In the opinion of Management and its legal advisors, the provisions registered mainly for labor and tax claims are sufficient to cover the results of these probable contingencies. (Note 22).

a) Tax contingencies

The Company considers that the maximum exposure for tax contingencies of the Group amounts to S/71.4 million according to the following detail:

Contentious Administrative Process before the Judiciary regarding the assessment of IGV or VAT tax from 1998 to 2002 for S/0.6 million and for Income Tax and IGV or VAT tax from 2001 for S/3.3 million.

The appeal before SUNAT of income tax assessments from 2012 to 2016 amounting to S/48.5 million (S/37.5 million correspond to GyM SA, S/3.7 million to Viva GyM SA, S/6.1 million to GMI SA and S/1.2 million by Consorcio Río Mantaro).

The appeal before the Tax Court regarding VAT tax assessments for 2014 amounting to S/2.7 million (corresponding to the Consortium Constructor Ductos del Sur); income tax assessments from 2009 to 2013 equal to S/16.1 million (S/14.7 million for the Company, S/1.4 million for Viva GyM SA) and Non-domicilied Income Tax for 2011 amounting to S/0.1 million corresponding to Viva GyM S.A.

Management believes that all the aforementioned processes will be favorable considering their characteristics and the evaluation of their legal advisors.

b) Other contingencies

Civil lawsuits, demanding compensation of damages, contract terminations and the enforcement of payment obligations S/17.1 million (S/0.3 million for GyM SA, S/15.4 million correspond to Consorcio Constructor Ductos del Sur., S/0.6 million to Consorcio Peruano de Conservacion, S/0.1 to Las Lomas SAC, S/0.5 million to Consorcio Rio Urubamba and S/0.1 million to Consorcio Vial Ayacucho)

Administrative contentious proceedings amounting to S/0.6 million in fines imposed by OSINERGMIN  to GMP S.A.

Administrative processes amounting to S/2.5 million (S/1.08 million correspond to Viva GyM SA, S/0.2 million to Consorcio Toromocho, S/0.2 million to GMP SA, S/0.34 million to GMVBS SA, S/0.25 million to GyM SA, S/0.34 million to Inmobiliaria Almonte SAC and S/0.05 million to Terminales del Perú)

Labor dispute processes amounting to S/16.76 million (S/2.03 million correspond to Concar SA, S/1.52 million to Consorcio GyM - Conciviles, S/1 million to Consorcio Lima Commercial Activities, S/2.04 million to GMP SA, S/8.9 million to GyM SA, S/0.35 million to Morelco SA, S/0.30 million to Consorcio Rio Mantaro, S/0.15 million to Consorcio Tren electric, S/0.14 million to GyM International Operations SAC, S/0.03 million to Vial y Vives and S/0.3 million to Servisel SA).

c) Letters bonds and guarantees
- 102 -

The Group maintains letters of guarantee and guarantees in force in various financial institutions guaranteeing operations for US $ 376.1 million and US $ 13.9 million, respectively (US $ 471.6 million and US $ 13.9 million, respectively, as of December 31, 2018).

32    BUSINESS COMBINATIONS

 
a)
Morelco S.A.S. acquisition

On December 23, 2014, the Company acquired control through its subsidiary GyM S.A., with the purchase of 70% of its shares representing the capital stock. Morelco S.A.S. is an entity domiciled in Colombia, whose principal economic activity is the provision of construction and assembly services. This acquisition forms part of the Group’s expansion plans in markets with high growth potential such as Colombia and in attractive industries such as mining and energy.

At December 31, 2014, the Company determined goodwill on this acquisition based on an estimated purchase price of US$93.7 million (equivalent to S/277.1 million) which included cash payments made of US$78.5 million (S/237.5 million, approximately) and estimated payables of US$15.1 million (equivalent to S/45.7 million), which according to what was agreed between the parties, would be defined after the review of the balance sheet of the acquired entity mainly referring to working capital, cash and financial debt and the determination of the definitive value of the contracted works pending to execute (backlog) of the acquired business. The estimated purchase price was distributed among the provisional fair values of the assets acquired, and liabilities assumed.

As a result of this distribution, a goodwill of US$36.1 million (equivalent to S/105.8 million) was determined.

Non-controlling interest put and call options

In accordance with the shareholders’ agreement entered into for the purchase of Morelco, the Company signed put and call option contract on 30% of the shares of Morelco held by the non-controlling shareholders. Through this contract, the non-controlling shareholders obtain a right to sell their shares within the term and amount established in the contract (put options). The period for exercising the option begins on completion of the second year of the purchase and expires in the tenth year. The exercise price is based on a multiple of EBITDA less net financial debt and until the months 51 and 63 from the date of the agreement, a minimum value is set based on the price per share that the Company paid to acquire 70% of Morelco shares.
- 103 -

The Company obtains the right to purchase the same shares for a period of 10 years and at a determined price similar to that of the aforementioned put options, except that the minimum value applies to the entire term of the option (call options).

Into IFRS framework, the put option represents an obligation for the Company to purchase shares of the non-controlling interest and, consequently, the Group recognizes a liability measured by the fair value of that option, as of December 31, 2019, the value of the liability amounts to S/106.4 million (as of December 31, 2018, it was S/103.7 million). Because the Group concluded that as a result of this contract, did not acquire the significant risks and rewards inherent to the stock option package, the initial recognition of this liability was charged to an equity account of the controlling stockholders, under the heading of other reserves (Note 21).

On April 30, 2019, an addenda No. 01 was signed to the shareholders Agreement, which modifies:

Section 7.3 sale option in favor of the Initial shareholder, for the following:
As of December 31, 2020 and for a term of six (6) months, the initial shareholder may exercise a selling option, only once, for a number of shares held by the Initial shareholder equivalent to sixty-six point sixty-seven percent (66.67%) of the shares held by the Initial shareholder at the time of exercising the Low sale option this sub-clause (sale option 1). As of December 31, 2022 and for a term of six (6) months, the Initial shareholder may at any time exercise a sale option, for one time only, for the totality and not less than the totality of the shares held by the Initial shareholder at the time of exercising the sale option under this subclause, notwithstanding the foregoing, if GyM S.A. does not fulfill its obligations subject to the option of sale 1 within the period indicated in paragraph b of this Section 7.3, the term established for the exercise of option 2 is accelerated and may be exercised by the Initial shareholder at any time after the day following expiration of said period by sending a Notification of the option of sale to GyM S.A., so that in such event GyM S.A. will only fulfill its obligations by purchasing one hundred (100%) of the shares held by the previous shareholder.

Section 7.3 (c) is replaced in its entirety by the following:
(c) The price per share in each sale option shall be equal to the base price per share plus an interest charge. The base price per share shall be the result of dividing 5,375 times the EBITDA of the twelve (12) months prior to the date of receipt of the Notification of the option of sale by GyM S.A. minus DFN, between (and) all of the shares at the date of receipt of the Notice of option of sale by GyM S.A.; however, the corresponding base price per share shall not be less than the price per share corresponding to the purchase price [as that term is defined in the share sale Contract). The base price per Minimum action established in this Section 7.3 (c) shall not apply: (a) in a sale option that is triggered by the GyM S.A. share provision to a third party, when the GyM S.A. Stock provision does not result in a sale of the Company, and (b) in an Opt sales ion activated before an Exempt Operation. On the base price per share, remuneration interest will be caused at an annual interest rate composed of two point seventy percent (2.70%) as of (i) February 14, 2018 for option 1; (ii) December 31, 2019 for sale option 2 and (iii) in both cases, up to the effective payment date of the purchase contract price concluded as a result of the exercise of each sale option.

33    DIVIDENDS

In compliance with certain covenants, the company will not pay dividends for the years 2018 and 2019, except for transactions with non-controlling interests described in Note 35-d).


34    LOSS PER SHARE

The basic loss per common share has been calculated by dividing the loss of the year attributable to the Group’s common shareholders by the weighted average of the number of common shares outstanding during that year. No diluted loss per common share has been calculated because there is no potential diluent common or investment shares (ie, financial instruments or agreements that entitle to obtain common or investment shares); therefore, it is the same as the loss per basic share. The basic loss per common share is as follows:

- 104 -
 
         
2018
    
2019
  
                   
Loss attributable to owners of the Company
                  
during the year
          
(83,188
)
    
(884,721
)
Weighted average number of shares in issue
                      
at S/1.00 each, at December 31,
          
665,835,490
      
822,213,119
  
                       
Basic loss per share (in S/)
    
(
*)
    
(0.125
)
    
(1.076
)
                         
                         
                         
             
2018
      
2019
  
                         
Loss from continuing operations attributable to owners
                        
of the Company during the year
            
(65,888
)
    
(840,762
)
Weighted average number of shares in issue
                        
at S/1.00 each, at December 31,
            
665,835,490
      
822,213,119
  
                         
Basic loss per share (S/)
    
(
*)
    
(0.099
)
    
(1.023
)
                         
(*) The Group does not have common shares with dilutive effects at December 31, 2018 and 2019.
  

35    TRANSACTIONS WITH NON-CONTROLLING INTERESTS

 
a)
Acquisition of additional non-controlling interest

In May, November and December 2016, GyM Chile S.p.A. acquired 5.43%, 6.77%, and 1.49%, respectively of additional shares in Vial y Vives - DSD S.A. at a total purchase price of S/21.6 million, S/25.7 million and S/3.8 million, respectively. The carrying values of the non-controlling interest at the acquisition dates were S/13.9 million, S/17.9 million and S/3.9 million. The Group ceased to recognize the corresponding non-controlling interest, recording a decrease in equity attributable to the owners of the Company of S/15.4 million. At December 31, 2019, the outstanding balance was S/22.7 million (S/23 million in 2018) (Note 21).

 
b)
Contributions (returns) from non-controlling shareholders

Corresponds to the contributions and returns made by the partners of the subsidiary Viva GyM S.A. for the realization of real estate projects. As of December 31, the balances include:

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2018
    
2019
  
Viva GyM S.A.
            
Contributions received
    
3,399
      
152
  
Returns of contributions
    
(87,856
)
    
(33,148
)
     
(84,457
)
    
(32,996
)
                 
Plus (less):
                
Contributions from other subsidiaries
    
15,120
      
-
  
Increase (decrease) in equity of non controlling parties
    
(69,337
)
    
(32,996
)

36    DISCONTINUED OPERATIONS AND NON-CURRENT ASSET CLASSIFIED AS HELD FOR SALE

As part of the non-strategic asset divestment process initiated by the Company, in 2018, CAM Servicios del Peru S.A. and CAM Chile S.A., and Stracon GyM S.A. were sold (“completed”).

Additionally, information is presented on Adexus S.A., a subsidiary that has been reclassified as a non-current asset available for sale (“planned”) as of December 31, 2018 and 2019.

Below is the information on the financial result and cash flow from discontinued operations, Stracon GyM S.A., CAM Servicios del Peru S.A., CAM Chile S.A. (done) and Adexus S.A. (planned):
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Discontinued operations
  
   
At December 31,
  
         
2018
    
2019
  
   
Grupo CAM and
              
   
Stracon GyM
    
Adexus S.A.
    
Adexus S.A.
  
   
(Completed)
    
(Planned)
    
(Planned)
  
                   
Revenues
    
1,010,739
      
302,936
      
252,857
  
Operating costs
    
(968,375
)
    
(263,455
)
    
(244,183
)
Gross profit
    
42,364
      
39,481
      
8,674
  
                         
Administrative expenses
    
(56,950
)
    
(32,730
)
    
(34,744
)
Other (expenses) income, net
    
860
      
(4,519
)
    
(12,740
)
Operating (loss) profit
    
(13,726
)
    
2,232
      
(38,810
)
                         
Financial expenses
    
(19,971
)
    
(12,786
)
    
(24,359
)
Financial income
    
6,253
      
610
      
2,625
  
Loss before income tax
    
(27,444
)
    
(9,944
)
    
(60,544
)
Income tax
    
7,112
      
2,325
      
16,585
  
Loss from discontinued operations (a)
    
(20,332
)
    
(7,619
)
    
(43,959
)


   
Discontinued operations
  
   
At December 31,
  
             
2018
      
2019
  
   
Completed
    
Planned
    
Planned
  
                         
Cash flows relating to the discontinued operations are as follows:
                        
                         
Operating cash flows
    
6,967
      
36,450
      
437
  
Investing cash flows
    
(11,474
)
    
(18,141
)
    
-
  
Financing cash flows
    
526
      
(21,422
)
    
(1,250
)
Net increase generated in subsidiary
    
(3,981
)
    
(3,113
)
    
(813
)

A. Discontinued operations

 
i)
CAM Servicios del Peru S.A. and CAM Chile S.A.

On December 4, 2018, the Company entered into a purchase and sale agreement for all of its shares (representing 73.16%) of CAM Servicios del Peru S.A. and CAM Chile S.A. The Group received for its participation in CAM Chile S.A. and CAM Servicios del Peru S.A. the sum of (i) US$15.78 million (equivalent to S/51.7 million) for the shares of CAM Chile S.A. and (ii) US$3.0 million (equivalent to S/10.4 million) for the shares of CAM Servicios del Peru S.A., respectively.  The net gain on the sale of both subsidiaries amounted to S/31.7 million.

 
ii)
Stracon GyM S.A.

On March 28, 2018, the Company entered into a purchase and sale agreement for all of its shares (representing 87.59%) in Stracon GyM S.A. The sale price was agreed in US$76.8 million (equivalent to S/248.8 million), which is fully paid. The net gain on the sale amounted to S/41.9 million.

B.  Non-current asset classified as held for sale

At December 31, 2018 and 2019, non-current assets and liabilities held for sale correspond to investments in the company Adexus S.A. (hereinafter Adexus), whose main activity is to provide information technology solutions mainly in Chile and Peru.

On November 19, 2019, Adexus S.A. filed an application for reorganization under Law 20.720 with the Chilean courts of justice. The Company impaired the total investment value as of December 31, 2019.
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The reorganization allows companies with temporary liquidity problems to obtain financial protection for a period of 30 days, extendable for a period of 60 days, with the support of their creditors, to prepare, propose and negotiate a plan to restructure their assets and liabilities.

Although the Company investment in Adexus has been declared as an available-for-sale investment and on an exceptional basis, the Group decided that Adexus will be subject to the patrimonial protection law; after achieving this restructuring, the Group will focus on honoring it in the terms agreed while finding the right shareholder for the future development of the Company.

         
At December 31,
  
   
2018
    
2019
  
             
ASSETS
            
Cash and cash equivalets
    
6,074
      
1,723
  
Accounts receivables, net
    
157,351
      
129,739
  
Inventories, net
    
3,999
      
2,828
  
Other assets, net
    
80,374
      
68,730
  
Total assets
    
247,798
      
203,020
  
                 
LIABILITIES
                
Borrowings
    
71,810
      
91,529
  
Accounts payable
    
148,817
      
118,497
  
Deferred income tax liabilities
    
5,201
      
-
  
Total liabilities
    
225,828
      
210,026
  
Total net assets
    
21,970
      
(7,006
)

37    EVENTS AFTER THE DATE OF THE STATEMENT OF FINANCIAL POSITION

1.
On January 9, 2020, the Company communicated that the creditors committee of Adexus S.A. approved with the favorable vote of more than 80% of the pledge creditors and 85% of the unsecured creditors, respectively, the judicial reorganization agreement proposed by Adexus S.A. in the framework of the reorganization procedure. According to the terms of the judicial reorganization agreement, Adexus S.A. will restructure and pay the total of its reorganized liabilities within a maximum period of six years, according to the new agreed conditions, being authorized to continue with its commercial activities normally. As a result of the financial protection provided by the Chilean law and with the support of its creditors, Adexus S.A. has achieved the restructuring of its liabilities while continuing to serve all its customers.

2.
On February 3, 2020, the General Shareholders Meeting of the Company approved the decision to enter into the Preliminary Agreement and the withdrawal and dismissal of the Request for Arbitration filed by the Company pursuant to the Preliminary Agreement.  In addition, the ratification of the Act of Mutual Understanding for the Completion of Plea Agreement Procedure with the Peruvian Third Bureau of the Supraprovincial Corporate Prosecutor’s Office Specialized in Crimes of Corruption of Officials – Special Team and the Ad Hoc Peruvian National State Counsel.



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