Financial Accounting Engro

Corp.

Company Profile
Engro Corporation is one of the leading Pakistani business conglomerates with stakes in the fertilizer,
food, power generation, petrochemicals, automation and terminal storage industries. Having had
undergone an employee led buyout in 1992 it has expanded phenomenal in the past two decades. As a
holding company its subsidiaries include:

 Engro Fertilizers Limited

 Engro Foods Limited
 Avanceon Limited
 Engro PowerGen Limited
 Engro Polymers and Chemicals Limited
 Engro Vopak Limited

Board of Directors
 Hussain Dawood (Chairman)
 Asad Umar (President & Chief Executive)
 Asif Qadir
 Arshad Nasar
 Shahzada Dawood
 Shabbir Hashmi
 Isar Ahmad
 Khalid Mansoor
 Ruhail Mohammed
 Khalid S. Subhani
 Muhammad Aliuddin Ansari
 Abdul Samad Dawood
 Saad Raja

Company Secretary

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 Andalib Alavi

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Auditors Report
We have audited the annexed balance sheet of Engro Chemical Pakistan Limited (renamed as Engro
Corporation Limited with effect January 1, 2010, after demerger of fertilizer business) as at December
31, 2009 and the related profit and loss account, statement of comprehensive income, statement of
changes in equity and statement of cash flows, together with the notes forming part thereof, for the
year then ended and we state that we have obtained all the information and explanations which, to the
best of our knowledge and belief, were necessary for the purposes of our audit.

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

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

(a) as more fully explained in note 45 to the financial statements, due to a fire at the Company's
premises on 19 August 2007 certain records, documents and books of account of the Company relating
to prior years were destroyed. Records in electronic form remained intact and certain hard copy records
relating to financial year2005 and 2006 have not been recreated; in our opinion, except for the matter
referred to in paragraph

(b) in proper books of account have been kept by the Company as required by the Companies
Ordinance, 1984;

(c) in our opinion:

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(i) the balance sheet and profit and loss account together with the notes thereon have been
drawn up in conformity with the Companies Ordinance, 1984, and are in agreement with
the books of account and are further in accordance with accounting policies consistently
applied except for the changes resulted on initial application of standards, amendments or
an interpretation to existing standards and reclassificationof capital spares.
(ii) the expenditure incurred during the year was for the purpose of the Company's business;
and
(iii) the business conducted, investments made and the expenditure incurred during the year
were in accordance with the objects of the Company;

(d) in our opinion and to the best of our information and according to the explanations given to us, the
balance sheet, profit and loss account, statement of comprehensive income, statement of changes in
equity and statement of cash flows, together with the notes forming part thereof conform with the
approved accounting standards as applicable in Pakistan, and, give the information required by the
Companies Ordinance, 1984, in the manner so required and respectively give a true and fair view of the
state of the Company's affairs as at December 31, 2009 and of the profit, total comprehensive income,
changes in equity and cash flows for the year then ended; and

(e)in our opinion Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980)
was deducted by the Company and deposited in the Central Zakat Fund established under Section 7 of
that Ordinance.

Without qualifying our opinion, we draw attention to note 34.2 to the financial statements and as more
fully explained therein, the Company has recognised the effect of acquisition of taxable losses of a
subsidiary company amounting to Rs. 1,500,847 thousand, pending designation from Securities and
Exchange Commission of Pakistan (SECP) as entity entitled for group relief under Income Tax Ordinance,
2001.

The financial statements for the year ended December 31, 2008 were audited by another firm of
Chartered Accountants who vide their audit report dated January 27, 2009 expressed an unqualified
opinion in all respects except on the matter stated in paragraph (a) above. In addition, an emphasis of
matter paragraph has also been added pertaining to recognition of taxable losses of a subsidiary

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company pending designation by SECP, as explained above. Those financial statements however have
been restated in respect of hedging reserve, as reflected in note 19.2 to the financial statements.

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Balance Sheet
As on December 31, 2009
(Amounts in Thousand)

2009 2008

Rupees
ASSETS

Non-Current Assets

Property, Plant & Equipment 69,517,512 33,552,912

Intangible Assets 122,704 122,858
Long term Investments 12,988,657 11,091,857
Deferred Employee Compensation Expense 2,787 96,078
Derivative Financial Instruments - 39,993
Long term Loan and Advances 328,907 218,820
82,960,567 45,122,518

Current Assets

Stores, spares and loose tools 961, 117 800,091

Stock-in-trade 422,607 4,680,896
Trade debts 2,514,425 261,508
Deferred employee compensation expense 87,278 93,213
Loans, advances, deposits and prepayments 1,469,155 1,899,124
Other receivables 275,714 452,168
Derivative financial instruments 76,209 1,481,626
Taxes recoverable 536,167 618,746
Short term investments 450,857 67,811
Cash and bank balances ______3,955,342 ______1,687,038
10,748,871 12,042,221

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TOTAL ASSETS 93,709,438 57,164,739

EQUITY & LIABILITIES

Equity

Share Capital 2,979,426 2,128,161

Share premium 10,550,061 7,152,722
Employee share option compensation reserve 288,258 305,052
Hedging reserve (609,719) 127,307
General reserve 4,429,240 4,429,240
Unappropriated profit 9,250,972 6,911,124
TOTAL EQUITY 26,888,238 21,053,606

Liabilities

Non-Current Liabilities
Borrowings 58,565,354 27,756,714
Derivative financial instruments 612,842 918,050
Deferred liabilities 988,169 1,319,432
Employee housing subsidy 211,785 73,319
Retirement and other service benefits obligations 47,581 44,265
60,425,731 30,111,780

Current Liabilities
Trade and other payables 3,160,852 2,915,274
Accrued interest / mark-up 1,366,022 804,390
Current portion of:
- borrowings 810,100 76,600
- other service benefits obligations 20,600 18,334
Short term borrowings 195,753 1,711,275
Derivative financial instruments 740,043 155,160
Unclaimed dividends 102,099 318,320

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6,395,469 5,999,353
Total Liabilities 66,821,200 36,111,133
TOTAL LIABILITIES & EQUITY 93,709,438 57,164,739

Profit and Loss Account

For the Year Ended December 31, 2009
(Amounts in thousand except for Earning per Share)

2009 2008

Rupees

Net Sales 30,171,520 23,317,198

Cost of Sales (23,240,176) (17,120,635)

Gross Profit 6,931,344 6,196,563

Selling and Distribution Expenses (1,945,176) (1,657,815)

4,986,168 4,538,748

Other Operating Income 1,973,467 2,754,330

Other Operating Expenses (424,110) (579,556)

Finance Cost (1,320,579) (1,508,948)

(1,744,689) (2,088,504)

Profit Before Taxation 5,214,946 5,204,574

Taxation (1,257,696) (964,144)

Profit for the Year 3,957,250 4,240,430

Earnings per Share (Basic and Diluted) Rs. 14.08 Rs. 16.81

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Statement of Comprehensive Income

For the Year Ended on December 31, 2009
(Amounts in Thousand)

2009 2008

Rupees

Profit for the Year 3,957,250 4,240,430

Other Comprehensive Income

Hedging reserve - cash flow hedges

(226,520) 1,819,395
Gains/(losses) arising during the year
(907,366) (3,219,517)
Adjustment for amounts transferred to initial carrying
amount of hedged items (capital work in progress)
(1,133,886) (1,400,122)

Income tax relating to hedging reserve 396, 860 490,043

Other comprehensive income for the year, net of tax (737,026) (910,079)

Total Comprehensive Income for the year 3,220,224 3,330,351

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Cash Flow Statement

For the Year Ended on December 31, 2009
(Amounts in Thousand)

2009 2008

Rupees

Cash flows from operating activities

Cash generated from operations 8,775,252 2,412,558

Retirement and other service benefits paid (140,636) (72,940)

Financial charges paid (758,947) (1,090,518)

Taxes paid (1,226,858) (574,977)

Payment to Engro Foods Limited for acquisition of tax losses (450,000) (622,103)

Long term loans and advances – net (110,087) (169,399)

Net cash generated from/(used in) operating activities 6,088,724 (117,379)

Cash flows from investing activities

Purchases of property, plant and equipment (PPE) (36,352,361) (20,214,342)

Sale proceeds on disposal of PPE 58,366 87,727

Deferred income received 96,305 -

Long term investments (1,896,800) (3,327,375)

Income on deposits/other financial assets 14,370 52,807

Dividends received 1,862,500 2,604,075

Net cash used in investing activities (36,217,620) (20,797,108)

Cash flows from financing activities

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Proceeds from issue of shares – net 4,248,604 3,382,214

Proceeds from borrowings 31,957,387 12,412,394

Repayments of borrowings (76,600) (1,301,600)

Dividends paid (1,833,623) (1,306,419)

Net cash generated from financing activities 34,295,768 13,186,589

Net increase/(decrease) in cash and cash equivalents 4,166,872 (7,727,898)

Cash and cash equivalents at beginning of the year 43,574 7,771,472

Cash and cash equivalents at end of the year 4,210,446 43,574

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Statement of Changes in Owners’ Equity

For the Year Ended on December 31, 2009
(Amounts in Thousand)

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Accounting Policies
 Financial Statements have been prepared in accordance with the requirements of the
Companies Ordinance, 1984 (the Ordinance).
 Approved financial reporting standards comprise of such International Financial Reporting
Standards (IFRS) issued by the International.
 Accounting Standards Board is notified under the provisions of the Ordinance.
 Wherever, the requirements of the Ordinance or directives issued by the SECP differ with the
requirements of these standards, the requirements of the Ordinance and of the said directives
have been followed.

Property Plant and Equipment

Owned Assets

 They are stated at historical cost less accumulated depreciation and impairment losses, if any.
 Except free-hold land and capital work in progress which are stated at cost.
 Historical cost includes expenditure that is directly attributable to the acquisition of the items
including borrowing costs.
 The cost of self constructed assets includes
o Cost of materials and direct labor
o Any other costs directly attributable to bringing the asset to a working condition for its intended
use
o Costs of dismantling and removing the items and restoring the site on which they are located.
o Purchased software that is integral to the functionality of the related equipment is capitalised as
part of that equipment.
 Subsequent costs are included in the asset’s carrying amount
 Or recognized as a separate asset, as appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Company and the cost of the item can be
measured reliably.
 The carrying amount of the replaced part is derecognized.

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 Other repairs and maintenance are charged to the profit and loss account during the financial
period in which they are incurred.
 Disposal of asset is recognized when significant risk and rewards incidental to ownership have
been transferred to buyers.
 Gains and losses on disposals are determined by comparing the proceeds with the carrying
amount and are recognized within ‘Other operating expenses/income’ in the profit and loss
account.
 Depreciation is charged to the profit and loss account using the straight line method whereby
the cost of an operating asset less its estimated residual value is written off over its estimated
useful life. Depreciation on addition is charged from the month following the month in which
the asset is available for use and on disposals upto the preceding month of disposal.

Leased Assets

 Leases in terms of which the Company assumes substantially all the risks and rewards of
ownership, are classified as finance lease.
 Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is
reasonably certain that the Company will obtain ownership by the end of the lease term.

Intangible Assets

Computer software and licenses

 Costs associated with maintaining computer software programmes are recognized as an

expense when incurred.
 Costs that are directly attributable to identifiable software and have probable economic benefits
exceeding the cost beyond one year, are recognized as an intangible asset.
 Computer software and license cost treated as intangible assets are amortized from the date the
software is put to use on a straight-line basis over a period of 3 to 5 years.

Rights for future gas utilization

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

Impairment of non-financial assets

 Assets that are subject to depreciation/amortization are reviewed at each balance sheet date to
identify circumstances indicating occurrence of impairment loss or reversal of previous
impairment losses.
 An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds
its recoverable amount.

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

 Non-current assets (or disposal groups) are classified as assets held for sale when their carrying
amount is to be recovered principally through a sale transaction and a sale is considered highly
probable.
 They are stated at the lower of carrying amount and fair value less costs to sell if their carrying
amount is to be recovered principally through a sale transaction rather than through continuing
use.

Investments

 Investment in subsidiary and joint venture companies are initially recognized at cost.
 At subsequent reporting dates, the recoverable amounts are estimated to determine the extent
of impairment losses, if any, and carrying amounts of investments are adjusted accordingly.
Impairment losses are recognized as an expense.

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 Where impairment losses subsequently reverse, the carrying amounts of the investments are
increased to the revised recoverable amounts but limited to the extent of initial cost of
investments.
 A reversal of impairment loss is recognized in the profit and loss account.

Financial Assets

Classification

The Company classifies its financial assets in the following categories:

 Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is
classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives
are also categorized as held for trading unless they are designated as hedges. Assets in this category are
classified as current assets.
 Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are
not quoted in an active market. They are included in current assets, except for maturities greater than 12
months after the end of the reporting period. These are classified as non-current assets. The Company’s
loans and receivables comprise 'loans and deposits', ‘trade debts and other receivables’ and 'cash and
cash equivalents' in the balance sheet.
 Held to maturity financial assets
Held to maturity financial assets are non derivative financial assets with fixed or determinable payments
and fixed maturity with a positive intention and ability to hold to maturity. There were no held to maturity
financial assets at the balance sheet date.
 Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or not
classified in any of the other categories. They are included in non-current assets unless the investment
matures or management intends to dispose off it within 12 months of the end of the reporting date.

Recognition and Measurement

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 Regular purchases and sales of financial assets are recognized on the trade date – the date on
which the Company commits to purchase or sell the asset.
 Financial assets carried at fair value through profit or loss are initially recognized at fair value,
and transaction costs are expensed in the profit and loss account.
 Investments are initially recognized at fair value plus transaction costs for all financial assets not
carried at fair value through profit or loss.
 Financial assets are derecognized when the rights to receive cash flows from the investments
have expired or have been transferred and the Company has transferred substantially all risks
and rewards of ownership.
 Available-for-sale financial assets and financial assets at fair value through profit or loss are
subsequently carried at fair value.
 Loans and receivables are subsequently carried at amortized cost using the effective interest
method.

Offsetting financial instruments

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

Derivative financial instruments and hedging activities

Derivatives are measured at fair values, and changes therein are accounted for as described below:

 Changes in fair value of derivative hedging instruments designated as a cash flow hedge are
recognized directly in equity to the extent that the hedge is effective.
 When a derivative financial instrument is not held for trading, and is not designated in a
qualifying hedge relationship, all changes in its fair value are recognized immediately in
profit or loss.

Stores, spares and loose tools

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These are valued at weighted average cost except for items in transit which are stated at invoice value
plus other charges paid thereon till the balance sheet date.

Stock-in-trade

These are valued at the lower of cost and net realizable value. Cost is determined using weighted
average method except for raw materials in transit which are stated at cost (invoice value) plus other
charges incurred thereon till the balance sheet date.

Trade Debts and other Receivables

These are recognized initially at fair value plus directly attributable transaction costs, if any and
subsequently measured at amortized cost using effective interest rate method less provision for
impairment, if any.

Cash and Cash Equivalents

Cash and cash equivalents in the statement of cash flows includes cash in hand, balance with banks,
other short-term highly liquid investments with original maturities of three months or less, and bank
overdrafts / short term borrowings.

Share Capital

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

Employees Share Option Scheme

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

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

Borrowings

Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are
subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs)
and the redemption value is recognized in the profit and loss account over the period of the borrowings
using the effective interest method. Borrowings are classified as current liabilities unless the Company
has an unconditional right to defer settlement of the liability for at least 12 months after the balance
sheet date.

Trade and Other Payables

Trade and other payables are recognized initially at fair value and subsequently measured at amortized
cost using the effective interest method. These 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.

Provisions

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

Taxation

The tax expense for the period comprises current and deferred tax.

Current

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

Deferred

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

Revenue Recognition

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

 Sales revenue is recognized when product is dispatched to customers.

 Income on deposits and other financial assets is recognized on accrual basis.
 Dividend income from investments is recognized when the Company’s right to receive payment
has been established.

Borrowing Costs

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

Research and Development Costs

Research and development costs are charged to income as and when incurred.

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Government Grant

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

Earnings per Share

The company presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS
is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the
weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined
by adjusting the profit or loss attributable to ordinary share holders and the weighted average number
of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.

Transactions with related parties

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

Dividend and Appropriation to reserve

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

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