Elco : Immidiate Report

ELCO LIMITED

ELCO LIMITED

CONSOLIDATED FINANCIAL INFORMATION

AS OF DECEMBER 31, 2023

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To: Elco LTD.

Re: Convenience Translation of Financial Information

Per your request, we have audited the accompanying consolidated financial information of Elco Ltd. ("the Company") as of December 31, 2023 and 2022 and for each of the three years in the period ended on December 31, 2023 ("the Financial Information"). The Financial Information is the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on the Financial Information based on our audits.

We did not audit the financial information of certain subsidiaries, whose assets constitute approximately 0.95% and 1.43% of the total consolidated assets as of December 31, 2023 and 2022, respectively, and whose revenues constitute approximately 0.26%, 1.33% and 1.2% of the total consolidated revenue for the years ended December 31, 2023, 2022 and 2021, respectively. Furthermore, we did not audit the financial information of certain companies accounted for at equity, the investment in which amounted to approximately 112,987 thousand dollars and 146,167 thousand dollars as of December 31, 2023 and 2022, respectively, and the Company's share of their profits (loss) amounted to approximately (33,941) thousand dollars, 39,632 thousand dollars and 12,922 thousand dollars for the years ended December 31, 2023, 2022 and 2021, respectively. The financial information for those companies were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for those companies, is based on the reports of the other auditors.

We conducted our audit in accordance with generally accepted auditing standards in Israel, including those prescribed by the Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Information are free of material misstatement. An audit includes examining, on the test basis, evidence supporting the amounts in the Financial Information. An audit also includes assessing the accounting principles used and the significant estimates made by the Company's Board of Directors and management, as well as evaluating the overall Financial Information presentation. We believe that our audit and the reports of the other auditors provide a reasonable basis for our opinion

The accompanying Financial Information in US Dollars are a convenience translation of the consolidated financial statements as prepared in New Israeli Shekels as the rate of exchange of the Shekel into US Dollars prevailing on December 31, 2023 as described in Note 3 of the Financial Information.

The accompanying Financial Information, which are derived from the Company's consolidated financial statements, are condensed financial information and do not include the disclosures required by International Financial Reporting Standards (IFRS). If the omitted disclosures were included in the accompanying Financial Information, it might influence the user's conclusions about the consolidated financial position, changes in equity, results of operations and cash flows of the Company. Accordingly, the accompanying Financial Information is not designed for those who are not informed about such matters.

Based on our audits and the reports of other auditors, we expressed an unqualified opinion on the consolidated financial statements in our report dated March 27, 2024.

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Key audit matters

Key audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the board of directors and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and

1. involved our especially challenging, subjective, or complex judgments. We addressed these matters in performing our audit and in formulating our opinion on the consolidated financial statements as a whole. The communication of key audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the key audit matters below, providing separate opinions on the key audit matters or on the accounts or disclosures to which they relate.

The following are the key audit matters in the Company's consolidated financial statements for the year ended December 31, 2023:

Determination of the fair value of investment property in investments that are accounted for at equity and the implementation of the hypothetical liquidation at book value (HLBV) method

The subsidiary company, Electra Real Estate Ltd., operating through its investee companies, directly and indirectly, serves as a limited partner (LP) in funds that invest in multifamily housing complexes in the United States, as a limited partner (LP) in activity in the field of single family residences for rental (SFR), as a shareholder in the general partner of the investment funds (GP) and as the managing partner of the SFR activity (GP). The subsidiary company's holdings in funds that invest in multifamily housing complexes and the SFR activity in the United States are accounted for at equity in its financial statements. The subsidiary company, operating through its investee companies, is a shareholder in the partner that manages the funds and the SFR activity (GP), which, subject to the achievement of a target internal yield rate (IRR) in the abovementioned activities for the generality of the investors, entitles it to success (promote) fees at rates that vary between the various funds for the housing complexes in the United States and the SFR field of activity.

Within the framework of the implementation of the equity method, the subsidiary company has adopted the hypothetical liquidation at book value (HLBV) method for the purpose of determining the subsidiary company's share of the profits that are allocated from the affiliated companies. Pursuant to the HLBV approach, the subsidiary company's share of the success (promote) fees from the funds that invest in multifamily housing complexes and in the SFR activity is calculated on the assumption that the investee company will realize its assets immediately in accordance with their carrying value in the accounting records at that time, based on their carrying values and taking other liabilities and investments that have been made, net, into account. The subsidiary company is entitled to success fees, which are distributed out of the investee company's profits, as the general partner (GP), where the overall profit from the disposal of the asset pursuant to the HLBV approach exceeds the yield rate for the limited partners (LP). Since the affiliated companies measure their investment property at fair value, so as part of the implementation of the HLBV method, the subsidiary company's share of the profits of the investee companies is affected by the fair value of the income-generating real estate properties.

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Audit procedures that we have performed, which are connected to the determination of the fair value of investment property in investments that are accounted for at equity and the implementation of the HLBV method

1. The examination and analysis of evaluation in relation to the investment property assets in the housing complexes funds, which were prepared by external appraiser on a sample basis, taking qualitative and quantitative considerations into account in relation to the sample that was identified;
2. the examination of the assumptions that served as the basis for the evaluations, including examination of the NOI on the various investment property assets, the examination of the discount rate that has been used in the appraisal work, comparative transactions, which have been taken into account in the basis of the evaluation and the methodology that has been implemented in the evaluation; (3) the review of the appraisals of the investment property, on a sample basis, by an expert department operating on our behalf, with an emphasis on the testing of the discount rates for the investment property assets; (4) referring questionnaires to the appraisers and receiving responses and clarifications, where necessary; (5) examination and reconciliation opposite the subsidiary company's documentation covering the mechanisms for the calculation of the success (promote) fees on the various real estate assets on a sample basis; (6) checking the arithmetical calculation and the various components that are included in the calculation of the success (promote) fees; and (7) the testing of the fairness of the recording and the format of the disclosure in the Company's consolidated financial statements.

Recognition of revenues from performance and entrepreneurial projects

The recognition of revenues from projects and the balance of the revenues receivable and receivables are significant matters in the Company's financial statements, through the subsidiary company Electra Ltd., based on the materiality and on the exercise of judgment by the management that is responsible for corporate governance, which is involved in these matters. The complexity and the exercise of judgment, which are connected to the assessment of the expected costs for the completion of the project and the expected revenues, which are based on management's estimates or on expert opinions and on the rate of completion, which are used by the Company, through the subsidiary company, for the recognition of the revenue.

We have identified this matter as a key audit matter, because of the complexity of the estimates that are used in the calculation.

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The audit procedures that we have performed, which are connected to the recognition of revenue from entrepreneurial projects

We obtained understanding and we assessed the central internal controls and the information systems (IT), which were used in order to perform the calculations that are connected to the project. These controls include controls relating to policies and procedures in the determination of the rate of completion, the assessment of the balance of the revenues from the project, which are based on management's estimates or on expert opinions and the assessment of the expected costs to completion for the project including the testing of the existence of a loss-making contract. In addition, we checked the operational effectiveness of these controls.

We performed detailed procedures in significant projects and in projects in which the management's estimates are very significant. These procedures included the examination of the assumptions and the assessments that were used by the management and the verification of the transactions by means of audit evidence, which included contracts, changes in contracts and the features of the work, documents that are connected to exceptions, lawsuits and disputes, legal opinions and agreements with sub-contractors. In addition, we discussed the completion rates of the projects with the project managers and the managements of the performing and entrepreneurial companies. In addition, we examined the fairness of the disclosures in the Group's consolidated financial statements.

Testing for impairment in value in relation to goodwill arising on a business combination of consolidated companies and the investment in a company accounted for at equity

The balance of the goodwill stands at an amount of US$ 990 million, constituting approximately 15% of the generality of the Group's assets. In addition, the investment in the affiliated Company in Discount Investments amounts to approximately US$ 113 million, (hereinafter: the "Affiliated company" and DIC"). The Company's management and its consolidated companies test for impairment in the value of the cash-generating units to which the goodwill has been allocated at least once a year, or at a higher frequency were signs of impairment in value exist. In addition, International Accounting Standard 28 and the provisions of International Accounting Standard 36 Impairment of assets are implemented in relation to the affiliated company. Pursuant to the Standards, if signs of impairment in value exist, the Company performs an appraisal in order to test the recoverable amount of the investment in the affiliate. The testing in relation to goodwill in respect of affiliated companies requires the various managements to make an estimate of the future cash flows, which are expected to derive from the cash-generating units to which the goodwill has been allocated and to examine whether the carrying value in the accounting records exceeds the recoverable amount of the cash- generating unit. This assessment is based on significant estimates, which involve uncertainty and on subjective assessments, such as: (1) cash flow forecasts and forecast growth rates, which ware based on budgets and forecasts, which have been approved by the management; and (2) the determination of the discount rate that is implemented, which reflects the market risks and the specific risks of the cash-generating units; (3) the use of economic models for testing scenarios for issues that are relevant to the usage. A change in these estimates or in these assessments, may have a significant impact on the balance of the goodwill and the intangible assets in the consolidated financial statements.

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The testing of the recoverable amount of the investment in the affiliate is based on the determination of the value of the affiliated company's investment in its investee companies and the use of various assumptions for the purpose of determining the value, as aforesaid.

The audit of the testing for impairment in the value of goodwill and impairment in value in respect of the investment in an affiliated company requires the exercise of judgment by the auditor as well as knowledge and experience in order to examine the reasonability of the assumptions and the data that have been used by the management in the determination of the recoverable amount, and accordingly these estimates have been determined to be a key audit matter.

The audit procedures that we have performed, which are connected to testing for impairment in value in relation to goodwill created on business combinations of consolidated companies and impairment in value of an investment in a company treated at equity

The examination and assessments of the skills and the objective capabilities of the appraisers. Checking of the assumptions, the methods and the information that were used by the appraisers in relation to testing for the need to record impairment in the value of goodwill for the consolidated company and for the investment in the affiliate, including: checking various economic data, which were included in the appraisal, the testing of the cash flow forecasts, we have prepared sensitivity analyses in order to assess the sensitivity to changes in the key assumptions and the impact of changes in those assumptions on possible impairment in value, checking the completeness and the accuracy of the base data used in the model, the receipt of an indicative calculation from an independent, external appraiser in relation to the need for testing for impairment in value in respect of the investment in the affiliate, including checking the completes of the data. In the checking, we obtained assistance from economic experts from our office and we performed an analysis of the recoverable amount, as arises from the appraisals by external appraisers opposite the carrying value of the cash- generating units in the consolidated financial statements, where neccessary. Furthermore, we have tested the disclosures that are included in the financial statements.

We examined the effectiveness of the Group's internal control in connection with the appraisal of the goodwill and of the investment in the affiliate and the fairness of the disclosure that is provided in the financial statements.

In our opinion, based on our audit and the reports of other auditors, the abovementioned Financial Information presents fairly, in all material respects, the information contained therein.

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