Kahala Ireland Opco Designated Activity Company


(formerly Kahala Ireland Opco Limited)





Consolidated Financial Statements





As of December 31, 2016 and for the year then ended










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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)





CONTENTS


PageFinancial StatementsIndependent Auditors' Report1 - 2Consolidated Balance Sheet as of December 31, 20163 - 4Consolidated Statement of Operations for the year ended December 31, 20165Consolidated Statement of Changes in Members' Equity for the year ended December 31, 20166Consolidated Statement of Cash Flows for the year ended December 31, 20167 - 8Notes to Consolidated Financial Statements9 - 38














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Independent Auditors' Report














The Board of Directors





Kahala Ireland OpCo Designated Activity Company:








Report on the Financial Statements


We have audited the accompanying consolidated financial statements of Kahala Ireland OpCo Designated Activity Company and its subsidiaries, which comprise the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of operations, changes in members deficit, and cash flows for the year then ended, and the related notes to the consolidated financial statements.


Management’s Responsibility for the Financial Statements


Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.


Auditors’ Responsibility


Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.


An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.


We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.













































































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Independent Auditors' Report

















Opinion





In our opinion, the 2016 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kahala Ireland OpCo Designated Activity Company and its subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year then ended in accordance with U.S. generally accepted accounting principles.








Dublin, Ireland


March 15, 2017


In our opinion, the 2016 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kahala Ireland OpCo Designated Activity Company and its subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year then ended in accordance with U.S. generally accepted accounting principles.





/s/ KPMG LLP


Dublin, Ireland


March 15, 2017













































































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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Consolidated Balance Sheet
 As At December 31, 2016
 (stated in US Dollars)





Note2016US$2015US$AssetsCurrent assetsCash and cash equivalents323,120,00917,851,234Other receivables3,681,9482,175,907Due from related parties19161,806740,433Prepayments110,417104,573Assets held for sale91,700,000-28,774,18020,872,147Non‐current assetsProperty and equipment, net (including US$302 million as of December 31, 2016 andUS$100 million as of December 31, 2015 representing collateral of VIE entities)6400,572,446182,483,200Interest in Aircraft, net (including US$ Nil as of December 31, 2016 andUS$247 million as of December 31, 2015 representing collateral of VIE entities)7-247,028,422Restricted cash (including US$26 million as of December 31, 2016 andUS$29 million as of December 31, 2015 representing collateral of VIE entities)426,968,94328,941,513Loans to related parties191,000,0001,000,000Deferred financing costs, net1,047,748709,873Lessor contributions54,782,9867,561,532434,372,123467,724,540Total assets463,146,303488,596,687Liabilities and Members' EquityCurrent liabilitiesOther liabilities (US$2,325,810 as of December 31, 2016 (2015: US$Nil) is a related party liabilities)112,846,4331,450,752Accrued interest1026,350,44615,803,583Due to related parties19393,649477,895Deferred revenue2,516,3182,359,627Current maturing long-term debt (debt financing of VIE’s as of December 31, 2016 and 2015 that do not have recourse of the general credit of the Company)1035,671,99536,261,42067,778,84156,353,277Non‐current liabilitiesLease security deposits14,839,0005,058,000Aircraft maintenance reserve74,972,35062,992,355Loans from BDCA – related party10,19127,223,818153,923,818Loans from KLS – related party10,194,556,2724,556,272Lease intangible liabilities, net87,306,1345,232,122Long-term debt (including debt financing of VIE’s of US$148 million as of December 31, 2016and US$203 million as of December 31, 2015 that do not have recourse of the general creditof the Company)10164,152,898203,279,092Other liabilities – related party112,325,810-Deferred tax liabilities18631,484-396,007,766435,041,659Total liabilities463,786,607491,394,936





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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Consolidated Balance Sheet
 As At December 31, 2016
 (stated in US Dollars)





Note2016US$2015US$Commitments and contingencies20--Members' equityShare capitalCommon shares Eur1 par valueAuthorised: 1,000,000 sharesIssued and outstanding: 100 shares17137137Deficit(640,441)(2,798,386)Total members' Deficit(640,304)(2,798,249)Total liabilities and members' equity463,146,303488,596,687











The accompanying notes on pages 9 to 38 form an integral part of these financial statements.





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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Consolidated Statement of Operations
 For the year ended December 31, 2016
 (stated in US Dollars)





Note2016US$2015US$RevenuesLease rental income1356,796,68011,767,666Net return on interest in aircraft74,384,7069,726,215Maintenance reserve income30,255,3503,650,819Gain on sale of aircraft61,735,183-Loss on transfer of assets to held for sale9(200,000)-Interest income19176,992154,797Other income275,33512,648Total revenues93,424,24625,312,145ExpensesInterest expenseLoans from third parties109,817,9334,428,010Loans from BDCA – related party10, 1920,845,19213,499,616Loans from KLS – related party10, 19248,641172,174Depreciation and amortization6 ,847,403,1615,132,928Selling, general and administrative expenses (including US$1.2 million as of December 31, 2016and US$1 million as of December 31, 2015 which is related party)14, 1912,307,9494,485,277Total expenses90,622,87627,718,005Net profit/(loss) before taxes2,801,370(2,405,860)Income taxes18643,425-Net profit/(loss) after taxes and total comprehensive income/(loss)2,157,945(2,405,860)











The accompanying notes on pages 9 to 38 form an integral part of these financial statements.











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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Consolidated Statement of Changes in Members' Equity
 For the year ended December 31, 2016
 (stated in US Dollars)





Share CapitalNumber of sharesShare CapitalPar valueUS$DeficitUS$TotalUS$2015Balance at January 1, 2015100137(392,526)(392,389)Net loss and total comprehensive income for the year--(2,405,860)(2,405,860)Balance at December 31, 2015100137(2,798,386)(2,798,249)2016Balance at January 1, 2016100137(2,798,386)(2,798,249)Net profit and total comprehensive income for the year--2,157,9452,157,945Balance at December 31, 2016100137(640,441)(640,304)











The accompanying notes on pages 9 to 38 form an integral part of these financial statements.











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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Consolidated Statement of Cash Flows
 For the year ended December 31, 2016
 (stated in US Dollars)





2016US$2015US$CASH FLOWS FROM OPERATING ACTIVITIES:Net profit/(loss) for the year2,157,945(2,405,860)Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:Depreciation and amortization47,403,1615,132,928Amortization of interest in aircraft8,761,49523,002,633Amortization of deferred financing costs and discounts63,38612,336Net gain on sale of aircraft and assets held for sale(1,535,183)-Changes in operating assets and liabilities:Lessor contributions2,778,546(486,540)Other receivables(1,506,041)(1,234,018)Prepayments(5,844)(104,573)Due from related parties578,627(427,016)Other liabilities3,721,491601,412Accrued interest10,546,86314,101,834Due to related parties(84,246)(473,666)Deferred revenue156,6911,945,696Net deferred tax liabilities631,484-Net cash provided by operating activities73,668,37539,665,166Cash flows from investing activitiesPayments for purchase of aircraft(52,034,468)(28,764,493)Payments for purchase of interest in aircraft-(365,822,522)Proceeds from disposal of aircraft26,718,184-Net cash used in investing activities(25,316,284)(394,587,015)Cash flows from financing activitiesDecrease/(increase) in restricted cash1,972,570(28,941,513)Deferred financing costs incurred(401,261)(494,835)Receipts of maintenance reserve21,525,22948,939,359Repayments of maintenance reserve(9,545,234)(1,255,013)Receipts of lease security deposits9,781,0002,713,000Proceeds from third party debt financing18,000,000260,750,000Proceeds from BDCA loans – related party-108,975,000Proceeds from KLS loans – related party-1,625,000Repayment of BDCA loans – related party(26,700,000)-Repayment of third party debt financing(57,715,620)(21,209,488)








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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Consolidated Statement of Cash Flows (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)
 2016US$2015US$





Net cash (used in)/provided by financing activities(43,083,316)371,101,510Increase in cash and cash equivalents5,268,77516,179,661Cash and cash equivalents at beginning of year17,851,2341,671,573Cash and cash equivalents at end of year23,120,00917,851,234





Supplemental disclosures of non-cash investing and financing activities:Transfer of Interest in Aircraft to Aircraft270,556,650101,011,236Transfer of Interest in Aircraft to Intangibles(38,575,008)(5,219,769)Transfer of Aircraft to Assets Held for Sale(1,700,000)-Transfer of Aircraft to Intangibles(15,426,323)-











The accompanying notes on pages 9 to 38 form an integral part of these financial statements.











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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements
 For the year ended December 31, 2016
 (stated in US Dollars)





1.   Organization


Kahala Ireland OpCo Designated Activity Company (formerly Kahala Ireland Opco Limited) (the “Company”) was incorporated in Ireland on 9 April 2014 with a company registration number 542343. The Company is a special purpose company with limited liability having its registered office at Fitzwilliam Hall, Fitzwilliam Place, Dublin 2, Ireland. The Company is a wholly owned subsidiary of Kahala Luxco S.A.R.L (“KLS”) which is ultimately owned by Kahala Aviation Holdings, LLC (“KAH”), the ultimate parent. KAH is 89.5% owned by Business Development Corporation of America (“BDCA”) and 10.5% owned by Kahala Aviation Group Limited.


Due to commencement of the Companies Act in 2016, on 7 September 2016, the Company re-registered as a Designated Activity Company limited by shares under Part 2 of the Companies Act 2014 and the company name was changed to Kahala Ireland Opco Designated Activity Company.


The Group refers to the Company and its consolidated subsidiaries, Kahala Ireland Investments Designated Activity Company, Kahala Ireland Capital Designated Activity Company, Kahala 28574 28576 Designated Activity Company, Kahala Aviation Sweden AB and Diamond Head Aviation 2015 Limited.


The principal activity of the Group is the financing, purchasing and leasing of aircraft.


The Group is managed by Kahala Aviation Group Limited (the "Manager" or “KAGL”), a company organised under the laws of the Cayman Islands. The Manager assumed the managing responsibilities of the previous manager, Kahala Aviation Leasing Ltd on October 6, 2014. Additionally, certain corporate administration services have been outsourced to Maples Fiduciary Services (Ireland) Limited and PAFS Ireland Limited.


The Group did not have employees during the year ended December 31, 2016 (2015: none).


In 2016, the Group acquired three (3) aircraft held in trust structures. These were placed on lease to lessees worldwide. During 2016, the Group sold two aircraft to third parties and two aircraft were transferred within the Group. Also, in 2016, the Group acquired three (3) aircraft engines that are on lease.


On 2 July 2015, the Company acquired the shares of Kahala Ireland Investments Designated Activity Company (“KII”), a company registered in Ireland with company registration number 564256. Its registered office is Fitzwilliam Hall, Fitzwilliam Place, Dublin 2, Ireland. KII’s principal activity is to carry on the business of a holding company.


On 30 July 2015, KII purchased the entire E‐notes issued by Diamond Head Aviation 2015 Limited (“Diamond Head”), an exempted company incorporated with limited liability under the laws of Cayman Islands and resident in Ireland for tax purposes. This transaction was funded by a series of intercompany loans ultimately funded by a fixed rate loan from BDCA, the principal shareholder of the KAH group.





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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements
 For the year ended December 31, 2016
 (stated in US Dollars)








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|1. | Organization (continued)

Diamond Head purchased a portfolio of 30 aircraft funded from the proceeds of the Class A, Class B and Class E notes it issued. The returns generated from the leasing of the aircraft and their ultimate disposition are used to service, in the first instance the interest and principal on the A and B Notes among other items. Only when all required payments have been discharged under the priority of payments are the Class E Note holders entitled to all remaining amounts as to settle any accrued and unpaid interest and principal on the E Notes.


The Group considered the requirements under ASC 810-10 Consolidation in determining the treatment of Diamond Head as a Variable Interest Entity (“VIE”). Under the VIE model, the party that has the power to direct the entity’s most significant economic activities and has ability to participate in the entity’s economic benefits is deemed the primary beneficiary and consolidates the entity.


Management has concluded KII through its ownership of the entire E notes of Diamond Head is entitled to the distribution of economic benefits generated by Diamond Head that is not proportionate to its equity ownership and voting rights. The key decisions affecting the economic activities of Diamond Head are reserved for the Board of Directors, the majority of which are appointed by KII, therefore substantially all of the Diamond Head’s activities are conducted on behalf of KII. KII has the right to the full economic benefits of all net returns (i.e. those after all the obligations of Diamond Head have been met) generated by Diamond Head and through its ownership of the E notes will bear the majority of Diamond Head’s expected losses. On this basis, Diamond Head is deemed a VIE and is consolidated in the Group.


On 25 April 2016, the Company acquired the shares of Kahala Ireland Capital Designated Activity Company (“KIC”) and Kahala 28574 28576 Designated Activity Company (“Kahala 28474 28576”), both companies are registered in Ireland with company registration number 581417 and 581418, respectively. Their registered office is Fitzwilliam Hall, Fitzwilliam Place, Dublin 2, Ireland. KIC’s principal activity is to carry on the business of a holding company. Kahala 28474 28576’s principal activity is to purchase and lease aircraft.


On 18 April 2016, the Company acquired the shares of Kahala Aviation Sweden AB (“KAS”), a company registered in Sweden with company registration number 559060-9508. Its registered office is c/o Advokatfirman Vinge, Smalandsgatan 20, 111 87 Stockholm, Sweden. KAS’s principal activity is the lease in and lease out of aircraft.


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|2. | Summary of Significant Accounting Policies

The Group’s principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied, unless otherwise stated.


Basis of preparation


These consolidated financial statements have been prepared on a going concern basis in accordance with the accounting policies set out below and in conformity with accounting policies generally accepted in the United States of America ("US GAAP").


Basis of consolidation


The consolidated financial statements include the results of the Company and its subsidiaries, KII, KIC, Kahala 28474 28576, KAS and Diamond Head. All significant intercompany profits, transactions and account balances have been eliminated. The results of subsidiary undertakings added in the year are included in the consolidated statement of operations.














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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements
 For the year ended December 31, 2016
 (stated in US Dollars)





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|2. | Summary of Significant Accounting Policies (continued)

Basis of consolidation (continued)


The Company consolidates all companies in which the Company has direct or indirect legal or effective control and all variable interest entities (“VIE”) for which the Company is deemed the primary beneficiary and has control under Accounting Standards Codification (“ASC”) 810. All intercompany balances and transactions with consolidated subsidiaries have been eliminated. The results of consolidated entities are included from the effective date of control or, in the case of variable interest entities, from the date that the Company is or becomes the primary beneficiary. The results of subsidiaries sold or otherwise deconsolidated are excluded from the date that the Company ceases to control the subsidiary or, in the case of variable interest entities, when the Company ceases to be the primary beneficiary.


Variable interest entities


The Company consolidates financial statements of all entities in which the Company has a controlling financial interest including the accounts of any variable interest entity (VIE) in which the Company has a controlling interest and for which the Company is the primary beneficiary.


The Company uses judgment when deciding (a) whether an entity is subject to consolidation as a VIE, (b) who the variable interest holders are, (c) the potential expected losses and residual returns of the variable interest holders, and (d) which variable interest holder is the primary beneficiary.


When determining which enterprise is the primary beneficiary, we consider (1) the entity’s purpose and design, (2) which variable interest holder has the power to direct the activities that most significantly impact the entity’s economic performance, and (3) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE.


When changes in circumstances or events occur, the Group reconsider whether it remains the primary beneficiary of VIEs.





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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements
 For the year ended December 31, 2016
 (stated in US Dollars)





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|2. | Summary of Significant Accounting Policies (continued)

Use of estimates


The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the year reported. Significant items subject to such estimates include those related to useful lives and residual values of property and equipment, interest in aircraft and recoverability of deferred tax assets. While the Group believes the estimates and related assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates.


Functional currency


The consolidated financial statements are presented in United States Dollars ("US$"), which is the Company’s functional currency and that of each of its subsidiaries. Zero balances are represented with a “-”. Management believe that US$ most faithfully represents the economic effects of the underlying transactions, events and conditions.


Transactions in foreign currencies are translated to US$ at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into US$ at the rates of exchange prevailing at the balance sheet date with differences arising recognized as profit or loss in the consolidated statement of operations.


Cash and cash equivalents


Cash and cash equivalents include cash and all highly liquid investments with initial maturities of three months or less.


Restricted cash


Restricted cash represents cash held by the Group but which is ring-fenced or used as security for specific financing arrangements, and  to which the Group does not have unfettered access.





Loans and receivables


Loans and receivables are stated at amortized cost based on the Group's ability and intent to hold such loans and receivables to maturity and are stated net of allowances for uncollectible accounts, if any. Amortized cost represents acquisition cost, plus or minus origination and commitment costs paid or fees received, which together with acquisition premiums or discounts, are deferred and amortized as yield adjustments over the life of the loans and receivables. Allowances for uncollectible balances are provided when it is probable counterparties will be unable to pay all amounts due based on the contractual terms. Loans and receivables are generally written off against allowances after all reasonable collection efforts are exhausted.








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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





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|2. | Summary of Significant Accounting Policies (continued)

Fair value measurements


Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs used in determining fair value are characterized according to a hierarchy that prioritizes those inputs


Level 1 ‐ Quoted prices are available in active markets for identical assets or liabilities as of the reported date.


Level 2 ‐The fair values determined through Level 2 of the fair value hierarchy are derived principally from or corroborated by observable market data. Inputs include quoted prices for similar assets, liabilities (risk adjusted) and market corroborated inputs, such as market comparable, interest rates, yield curves and other items that allow value to be determined.


Level 3 ‐ The fair values pertaining to Level 3 of the fair value hierarchy are derived principally from unobservable inputs from our own assumptions about market risk developed based on the best information available, subject to cost benefit analysis, and may include our own data.


Property and equipment, net


Property and equipment, representing purchased aircraft, is stated at cost less accumulated depreciation and provisions for impairment, if any. Property and equipment is depreciated using the straight‐line method over their estimated useful lives. Residual values are determined based on historical trends, independent current and future forecast valuations and management's own experience and judgment.


Property and equipment are reviewed for impairment annually whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long‐lived asset or asset group be tested for possible impairment, the Group first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long‐lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including quoted market values, and third‐party independent appraisals, as considered necessary.


No events or changes in circumstances have occurred that indicate the carrying amount of an aircraft may not be recoverable. Accordingly, no impairment charges have been incurred as of December 31, 2016 (2015: US$ nil).


Interest in Aircraft, net


The Group recognises an Interest in Aircraft where a beneficial interest in an aircraft is obtained prior to transfer of legal ownership. On transfer of ownership to the Group, Interests in Aircraft are reclassified as Aircraft. Interests in Aircraft are recorded at cost less amortisation and provision for impairment, where necessary.


The net return on the Interest in Aircraft represents (i) the rental income due to the Group and (ii) an amortisation of the Interest in Aircraft to reflect an allocation of the cost of that asset on a basis consistent with the depreciation profile for each of Aircraft had they been acquired on the respective purchase agreement dates.














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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)
 2.   Summary of Significant Accounting Policies (continued)





Lease intangible assets/liabilities


Lease intangible assets/liabilities represent the value of an acquired non-short term lease where the contractual rent payments are above/below the market lease rate at the date of acquisition. This asset is recognized at cost based on discounted cash flows and is amortized on a straight-line basis over the remaining term of the related lease and recorded as a reduction in lease rental income.


Maintenance intangible assets/liabilities


Maintenance intangible assets/liabilities represent the value in the difference between the contractual right under the acquired non short term leases to receive the aircraft in a specified maintenance condition at the end of the lease and the actual physical condition of the aircraft at the date of acquisition. The amortization for maintenance intangible commences when the Group has reliable information about maintenance advances received under the same lease that are not expected to be reimbursed to customers or at the end of the lease. Maintenance intangible asset amortization is recorded as a component of depreciation and amortization.


Long-term debt


Debt represents loans payable to BDCA, KLS, PK Airfinance and Class A and B notes issued by Diamond Head and is classified as debt in accordance with ASC 470, 'Debt'. Loans payable are measured at amortized cost. Direct and incremental costs of the issuance of debt are capitalized and reported as assets. These costs are amortized over the life of the related debt using the effective interest rate method.


Interest income and expense


Interest income is recognized in the Consolidated Statement of Operations as it is accrues. Interest expense incurred in connection with long-term debt is expensed as it accrues as part of interest expense. All other operating costs are accounted for on an accruals basis.


Income taxes


Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is not "more likely than not" that some portion or all of the deferred tax assets will be realized. Deferred tax liabilities for accelerated depreciation of aircraft are substantially offset by deferred tax assets for loss carryforwards and accrued interest. All of our losses are available indefinitely. Tax benefits are initially recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the taxing authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the taxing authority. We have no unrecognized tax benefits.


Revenue recognition


The Group leases aircraft under operating leases and records rental income on a straight‐line basis over the term of the lease. Rentals received but unearned under the lease agreements is recorded in "Deferred revenue" on the Group's consolidated balance sheet until earned. The difference between the rental income recorded and the cash received under the provisions of the lease is included in "Deferred revenue". An allowance for doubtful accounts will be recognized for past‐due rentals based on management's assessment of collectability.














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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)
 2.   Summary of Significant Accounting Policies (continued)





Revenue recognition (continued)


Past due rentals are recognized on the basis of the Group's assessment of collectability. No revenues are recognized, and no receivable is recorded from a lease when collectability is not reasonably assured. Estimating whether collectability is reasonably assured requires some level of subjectivity and judgment. When collectability of rental payments is not certain, revenue is recognized when cash payments are received. Collectability is evaluated based on factors such as the lessee's credit rating, payment performance, financial condition and requests for modifications of lease terms and conditions as well as security received from the lessee.


Security deposits


Security deposits on leased aircraft are generally paid by the lessee on the execution of the lease and are non‐refundable during the term of the lease. The amounts are held as a security for the timely and faithful performance by the lessee of its obligations during the lease and are included on the balance sheet. The deposit may be applied against amounts owing from the lessee or returned to the lessee on the termination of the lease.


Lessor contributions


In certain lease agreements the Group makes contributions towards maintenance expenses, which represents a lease incentive. At lease commencement, the Group models expected maintenance to be incurred in the course of the lease. For all expected maintenance obligations that cover the period before the lease commencement, the payment obligation is set up as a Lessor Contribution asset with a corresponding liability in maintenance reserves. The lessor contribution is amortized on a straight line basis over the term of the lease and is included as a reduction to lease revenue.


Maintenance reserves


The aircraft lease agreements typically contain provisions which require the lessee to make additional contingent rental payments based on either the usage of the aircraft, measured on the basis of hours or cycles flown per month (a cycle is one take off and landing), or calendar based time. These payments represent contributions to the cost of major future maintenance events associated with the aircraft and typically cover major airframe structural checks, engine overhauls, the replacement of limited life parts contained in each engine, landing gear overhauls or the auxiliary power unit. These maintenance reserves are generally collected monthly based on reports of usage by the lessee or collected as fixed monthly rates.


In accordance with the lease agreements, maintenance reserves are subject to reimbursement to the lessee upon the occurrence of a qualifying event. The reimbursable amount is capped at the amount of maintenance reserves received by the Group, net of previous reimbursements. All amounts of maintenance reserves unclaimed by the lessee at the end of the lease term are retained by the Group, and included as contingent income within revenue. There are no provisions in our leases for the repayment of unused reserves at lease end.


Any maintenance reserve receipts that are not expected to be reimbursed to the lessee in the course of the lease either on the basis of the terms of the lease, the timing and cost of the maintenance event or where the maintenance event has been carried out and no further expectation of outflows exists, the maintenance receipts are recognized as Contingent income as part of Revenue in the Consolidated Statement of Operations.











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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





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|2. | Summary of Significant Accounting Policies (continued)

Segment information


The Group manages its business, analyses and reports its results of operations on the basis of one operating segment - leasing and selling of commercial aircraft. Management uses one measure of profitability and does not segment its business for internal reporting.


Recent accounting pronouncements





In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity also should disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective for the Company for annual periods in fiscal years beginning after December 15, 2018 (as amended in August 2015 by ASU 2015-14, Deferral of the Effective Date). The Group will implement the provisions of ASU 2014-09 as of January 1, 2019. The Group has not yet determined the effect of the new standard on its current policies for revenue recognition.





In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities , which makes targeted improvements to the accounting for, and presentation and disclosure of, financial instruments. ASU 2016-01 requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. ASU 2016-01 does not affect the accounting for investments that would otherwise be consolidated or accounted for under the equity method. The new standard also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The provisions of ASU 2016-01 are effective for the Group for annual periods in fiscal years beginning after December 15, 2018. The Group will adopt the new standard on January 1, 2019, and is currently evaluating the effect that ASU 2016-01 will have on its consolidated financial statements.





In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases , and makes other conforming amendments to U.S. GAAP. ASU 2016-02 requires, among other changes to the lease accounting guidance, lessees to recognize most leases on-balance sheet via a right of use asset and lease liability, and additional qualitative and quantitative disclosures. ASU 2016-02 is effective for the Group for annual periods in fiscal years beginning after December 15, 2019, permits early adoption, and mandates a modified retrospective transition method. The Group is required to adopt ASU 2016-02 on January 1, 2020, but is evaluating whether to early adopt the new standard. While the Group expects ASU 2016-02 to add significant right-of-use assets and lease liabilities to the consolidated balance sheets, it is evaluating other effects that the new standard will have on the consolidated financial statements.


Management is currently evaluating the impact, if any, that this update will have on its financial condition and financial position of the Group.





3.      Cash and cash equivalents


Cash and cash equivalents consist of cash balances that are in a credit position held with major financial institutions. As of December 31, 2016 cash and cash equivalent balance amounts to US$23,120,009 (2015: US$17,851,234).






































16


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





|   |                
|-- | ---------------
|4. | Restricted cash

Restricted cash consist of cash balances held for specific purpose under the terms of the Group’s lease and financing agreements. As of December 31, 2016, restricted cash balance amounts to US$26,968,943 (2015: US$28,941,513). Group’s restricted cash of US$26,088,984 (2015: US$28,941,513) is pledged as security for the Group obligations under the A and B notes issued. The use of this cash is restricted and held for payments of principal and interest of Class A and B notes. Group’s restricted cash of US$879,959 (2015: US$ Nil) is pledged as security for Kahala 28574 28576 obligations with PK Airfinance.


5.   Lessor contributions


As of December 31, 2016, the Group’s lessor contributions amount to US$4,782,986 (2015: US$7,561,532). During 2016, US$ Nil (2015: US$2,224,147) was set up as new lessor contributions. During the year, US$962,275 (2015: US$ Nil) were released due to sale of one aircraft to third party and amortization of US$1,816,271 (2015: US$1,737,607) was charged to the Consolidated Statement of Operations.


|   |                            
|-- | ---------------------------
|6. | Property and equipment, net

Property and equipment consisted of the following at December 31, 2016 and 2015:





Flight Equipment2016US$2015US$Cost454,306,656*188,282,710*Accumulated depreciation(53,734,210)(5,799,510)Total property and equipment400,572,446182,483,200


* Cost includes US$270,566,650 (2015: US$101,011,236) transferred from Interest in Aircraft and US$19,347,522 (2015: US$ Nil) transferred to Intangibles.


Depreciation expense for the year amounted to US$64,556,335 (2015: U$5,120,135).


In 2015, the Group purchased one Airbus A320-200 aircraft (MSN 986), three Boeing 737-300 freighter aircraft (MSN 28200, MSN 27459 and MSN 27460). As discussed in Note 1, KII purchased the entire E-note of Diamond Head. Diamond Head, a consolidated VIE, acquired 30 various aircraft, five of those aircraft are classified under property and equipment at December 31, 2015, the remainder are classified as Interest in Aircraft, see Note 7.


In 2016, the Group purchased two Airbus A340-300 aircraft (MSN 170 and 193) and one Boeing 737-448SF aircraft (MSN 25052) which are placed on lease with airlines in Argentina and Denmark, respectively. The Group also purchased three engines during the year ESN 875271, ESN 896246 and ESN 894975.


During the year, 24 aircraft were transferred to property and equipment from interest in aircraft. Seven aircraft were sold to third parties.


At December 31, 2016 the Group owned 34 aircraft held for operating lease (2015: 14) and 3 aircraft engines (2015: Nil).





The estimated useful lives of the aircraft ranges from 2 years to 7 years. The aircraft are depreciated on a straight line basis to an estimated residual value.














17


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





|   |                                        
|-- | ---------------------------------------
|6. | Property and equipment, net (continued)

No events or changes in circumstances have occurred that indicate the carrying amount of an aircraft may not be recoverable. Accordingly, no impairment charges have been incurred as of December 31, 2016 (2015: US$ nil).


The Company has defined a threshold of 10% for determining whether the undiscounted cash flows substantially exceed the carrying value of the aircraft. All of the aircraft held by the Company exceeded this 10% threshold on December 31, 2016. The aggregated carrying value of the aircraft on December 31, 2016 amounted to US$401 million (2015: US$182 million).


Aircraft held by Diamond Head are pledged as security for the Group’s obligations under the Class A and B notes.


|   |                          
|-- | -------------------------
|7. | Interest in aircraft, net

Interest in aircraft consisted of the following at December 31, 2016 and 2015:





2016US$2015US$Cost267,351,167365,822,522Accumulated amortization(29,084,240)(23,002,633)Transfer to aircraft and intangible (Note 6)(238,266,927)(95,791,467)-247,028,422





During the year ended 31 December 2015 the Group entered into a Purchase Agreement with another lessor to acquire a portfolio of 30 aircraft.  Under the terms of the purchase agreement, the Group was required to place US$354.12 million in an escrow account as consideration for the aircraft and from the economic closing date was entitled to a beneficial interest in the 30 aircraft. The other lessor is obligated to transfer the 30 aircraft to the Group on various dates to be agreed from the purchase agreement date onwards, but not later than April 25, 2016. The final payment for each aircraft is released from the escrow account to the other lessor on the respect closing date.





In the period from the purchase agreement date to each Closing Date, the beneficial interest in the Aircraft that the Group has acquired through the terms of the purchase agreement, entitles the Group to receive an amount equal to the rental income (base rent and additional rent) from the lease arrangements entered into in respect of the Aircraft, net of amortisation. The Interest in Aircraft is amortised to an estimated residual value over its expected useful economic life. The Group has also assumed a liability to pay all maintenance and other payments due under the lease arrangements. The effect of the purchase agreement is that as at the Closing Date of each aircraft the Group will be in the same position as they would have been had such aircraft been novated on the purchase agreement date.





In the period from the purchase agreement date to each of the closing dates the Group recognised an Interest in Aircraft (representing the amounts paid to the other Lessors to acquire the beneficial interest in the Aircraft), and a net return on that interest is included as part of Revenue of US$4.4 million (2015: US$9.7 million).





18


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)








|   |                                      
|-- | -------------------------------------
|7. | Interest in aircraft, net (continued)

Once the Group obtained full ownership of these aircraft (i.e. on novation) the Interest in Aircraft was transferred to property, plant and equipment and intangibles as part of the initial cost of each aircraft, the rental income was recognised gross as part of lease revenue, and the aircraft was depreciated in accordance with the Group’s existing policies in this regard.





24 (2015: 5) aircraft were novated during the year and consequently US$270.6 million and US$(38.6) million was transferred from interest in aircraft to aircraft and intangible liabilities, respectively. One aircraft from the initial portfolio did not novate to the Group and the interest in aircraft was unwound and the associated notes were repaid. This resulted in a net credit to the statement of operations of US$0.03 million.





Zero (2015: Twenty-five) aircraft were classified as interest in aircraft at 31 December 2016.


|   |                                  
|-- | ---------------------------------
|8. | Intangible assets and liabilities

Intangible assets and liabilities consisted of the following at December 31, 2016 and 2015:





2016US$2015US$Intangible assets54,288,19310,326,882Intangible liabilities(61,594,327)(15,559,004)Net intangible(7,306,134)(5,232,122)


The Group recognises maintenance and lease intangibles in relation to the acquisition of aircraft that were purchased on lease. These intangibles are accounted for in accordance with ASC 350, Intangibles – Goodwill and other .


Lease intangibles represent the value of an acquired lease rentals above or below the market rate for leases of a similar type of aircraft, which is adjusted by the relevant credit risk associated with that lessee. Lease intangibles are amortised on a straight line basis over the remaining life of the lease. Amortisation is included as a reduction in lease rental income.


Maintenance intangibles represent the value of the return condition of the aircraft on lease when compared to the current market value of that aircraft, adjusted for current maintenance condition. Maintenance intangibles are amortised from the period the Group begins to release maintenance advances to revenue to the end of the life of the lease, or at the end of lease, depending upon the maintenance arrangements per the underlying lease contract. Amortisation is included as a component of depreciation and amortization.








19


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)











|   |                                              
|-- | ---------------------------------------------
|8. | Intangible assets and liabilities (continued)

Movements during the year are as follows:


December 31, 2016


Lease intangible assetsUS$Maintenance intangible assetsUS$Lease intangible liabilitiesUS$Maintenance intangible liabilitiesUS$TotalUS$Cost53,754,26015,148,977(19,868,122)(61,507,898)(12,472,783)Accumulated amortization(11,884,084)(2,730,960)3,141,14916,640,5445,166,64941,870,17612,418,017(16,726,973)(44,867,354)(7,306,134)


December 31, 2015


Lease intangible assetsUS$Maintenance intangible assetsUS$Lease intangible liabilitiesUS$Maintenance intangible liabilitiesUS$TotalUS$Cost10,390,292-(9,555,238)(6,054,823)(5,219,769)Accumulated amortization(63,410)-29,63821,419(12,353)10,326,882-(9,525,600)(6,033,404)(5,232,122)


The amortization of lease intangibles and of maintenance intangibles is recognized in lease rental income, depreciation and amortization, respectively. During the year ended December 31, 2016, the amortization of lease intangibles amounted to US$(8,742,935) (2015: US$(33,772)) and the amortization of maintenance intangibles amounted to US$13,909,584 (2015: US$ 21,419).


|   |                     
|-- | --------------------
|9. | Assets held for sale




At 31 December 2016 the Group had agreements for the sale of two aircraft which met the requirement to be classified as held-for-sale (2015: Nil).


Assets classified as held-for-sale


20162015US$US$Aircraft1,700,000-Total assets held-for-sale1,700,000-











20


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





|   |                                 
|-- | --------------------------------
|9. | Assets held for sale (continued)




The sale is expected to complete within 12 months and as a result the aircraft has been classified as held-for-sale in accordance with ASC 205-20. A loss on transfer to held-for-sale of US$0.2 million was recognised in the loss on transfer of assets to held for sale in the statement of operations.





|    |               
|--- | --------------
|10. | Long-term debt

The Group’s long term debt consisted of the following at December 31, 2016:





MaturityInterest rateLoan balance 2016US$Accrued interest 2016US$Loans payable to BDCALong-term debtDec 23, 202813.00%127,223,81825,326,907Loans payable to KLSLong-term debtJun 27, 202113.00%1,306,272509,496PPNDec 23, 2028-3,250,000-Total loans payable to KLS4,556,272509,496Loans payable to PK AirfinanceMSN 28574Feb 20, 20204.27%7,933,121-MSN 28576Mar 21, 20204.28%7,933,507-Total loans payable to PK Airfinance15,866,628-Notes in issue – Diamond HeadClass AJuly 14, 20283.81%140,566,597325,347Class BJuly 14, 20285.92%43,391,668188,696Total debt in issue ‐ Diamond Head183,958,265514,043331,604,98326,350,446








21


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)











|    |                           
|--- | --------------------------
|10. | Long-term debt (continued)




The Group’s long-term debt consisted of the following at December 31, 2015:





MaturityInterest rateLoan balance 2015US$Accrued interest 2015US$Loans payable to BDCALong-term debtDec 23, 202813.00%153,923,81815,112,684Loans payable to KLSLong-term debtJun 27, 202113.00%1,306,272260,855PPNDec 23, 2028-3,250,000-Total loans payable to KLS4,556,272260,855Notes in issue – Diamond HeadClass AJuly 14, 20283.81%183,038,945290,648Class BJuly 14, 20285.92%56,501,567139,396Total debt in issue ‐ Diamond Head239,540,512430,044398,020,60215,803,583


Movements during the year are as follows:





2016US$2015US$Beginning of the year398,020,60247,880,090Draw downs18,000,000371,350,000Repayments(84,415,619)(21,209,488)End of the year331,604,983398,020,602


Loans payable to BDCA





On June 27, 2014, the Group executed a Loan & Security agreements (the "Agreements") with BDCA (the "Lender"), the majority investor in the ultimate parent company, KAH. The loan was provided to finance aircraft acquisitions. On the basis of these Agreements, the Company may borrow and the Lender may advance one or more loans but the Lender is under no obligation to advance the loan notwithstanding any request by the Company. The loans require monthly payments of interest with any unpaid interest being capitalized to the principal balance. The principal balance of the loans shall be payable monthly in an amount equal to the amount of the Excess Cash Flow of the Borrowers which shall be an amount specified by the Lender and notified to the Borrowers taking into account operating expenses and an agreed reserve amount. In any event, all principal and interest shall be due and payable on December 23, 2028.





The Agreement provides the Lender a continuing first priority security interest and lien upon certain assets of the Company.

















22


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





|    |                           
|--- | --------------------------
|10. | Long-term debt (continued)




Loans payable to BDCA (continued)





Interest expense of US$20,845,192 was charged during the year ended December 31, 2016 (2015: US$13,499,616). US$25,326,907 (2015: US$15,112,684) remains accrued and unpaid as at December 31, 2016.





Loans amounting to US$ Nil were received from BDCA during the year ended December 31, 2016 (2015: US$108,975,000). Repayments of US$26,700,000 were made during 2016 (2015: US$ nil).


Loans payable to KLS


On June 27, 2014, the Company entered into loan agreement with KLS in the amount of US$1,306,272. This loan has a 7 year term and bears a fixed interest rate of 13%. No repayments were made for 2016 or 2015. Principal will be repaid upon maturity on 2021. Early repayment is permitted at the discretion of the Company.


Interest expense of US$248,641 was charged during the year ended December 31, 2016 (2015: US$172,174). US$509,496 (2015: US$260,855) remains accrued and unpaid as at December 31, 2016.


Profit participating note - KLS


In 2014, KLS subscribed for a Profit Participating Notes (“PPN”) issued by the Company totaling US$1,625,000. The term of the PPN is 29 years. In 2015, KLS subscribed for additional PPN in the Company totaling US$1,625,000.


The PPN does not bear a fixed interest rate. Interest is dependent on the profit generated by the Company over the 29 years of the PPN, less an amount returned by the Company of US$1,000 per annum. No interest was accrued or paid in 2016 or 2015 due to the losses incurred by the Company.


The principal balance outstanding on the PPN as at December 31, 2016 was US$3,250,000 (2015: US$3,250,000).


Loans payable to PK Airfinance


In July 2016, the Group entered into a Facility Agreement (“the Facility Agreement”) with PK Airfinance SARL (“PK Airfinance”) totaling US$18,000,000. The loan was provided to re-finance certain aircraft. The loan requires monthly payments of interest and principal. The loan will mature in 2020.


The loans bear interest at a fixed rate of 4.27% and 4.28% for MSN 28574 and MSN 28576, respectively. Interest of US$326,628 was charged in 2016. No interest was accrued and unpaid as at December 31, 2016. The balance of the PK Airfinance loans as at 31 December 2016 is US$15,866,628.


Notes in issue – Diamond Head


In July 2015, Diamond Head, a consolidated VIE, issued Class A notes and Class B notes in the amounts of US$199.3 million and US$61.5 million, respectively. The notes are listed on the Global Exchange Market of the Irish Stock Exchange. Repayment of principal is dependent upon the cash available at each monthly determination date and is governed by the priority of payments as set out in the Trust Indenture. Class A and B notes bear interest at fixed rates as per the Agreement with 3.81% and 5.92%, respectively. The Notes are amortized on a monthly basis. The final maturity for each of the notes is July 14, 2028. Early repayment is permitted.











23


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





|    |                           
|--- | --------------------------
|10. | Long-term debt (continued)

Notes in issue – Diamond Head (continued)


Repayments of US$55,582,247 were made during 2016 (2015: US$21,209,488). Interest expense of US$9,432,833 (2015: US$4,415,674) was charged during the year, of which US$514,043 (2015: US$430,044) remains accrued and unpaid as at December 31, 2016.


The assets and shares of Diamond Head are pledged as collateral for its obligations under the Notes.


Credit facilities


On July 30, 2015 Diamond Head entered into a revolving liquidity facility agreement to provide additional funds for the payment of certain liabilities, of Diamond Head, if and to the extent that insufficient funds are available in the form of periodic revenues.


Under the terms of the Credit Facility Agreement, Royal Bank of Canada has provided a credit facility to Diamond Head of up to US$6.0 million (2015: US$8.4 million) which may be drawn upon, subject to certain conditions, to pay interest on the Class A and B Notes. Upon each drawing under the Credit Facility, Diamond Head will be required to reimburse the Credit Facility Provider for the amount of such drawing in accordance with the priority of payments specified in the Trust Indenture.


Loan maturity table


Below is the contractual maturity table of the loans for December 31, 2016.





PrincipalUS$InterestUS$TotalUS$Year ended 31 December201735,671,99524,531,38960,203,384201844,171,05422,705,06566,876,119201942,823,74920,413,37163,237,120202028,682,00018,776,89747,458,897Thereafter180,256,185133,436,095313,692,280Total331,604,983219,862,817551,467,800


At December 31, 2016 and 2015 the Company was in compliance with the covenants in its debt facilities. The Company’s debt facilities contain customary covenants and events of default; included within certain debt facilities are covenants that limit the ability of the Company to incur additional indebtedness and create liens, covenants that limit the ability of the Company to consolidate, merge or dispose of all or substantially all of its assets and enter into transactions with affiliates and covenants that limit the ability of the Company to pay dividends.








24


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)











|    |                           
|--- | --------------------------
|10. | Long-term debt (continued)

Credit facilities (continued)


Breakdown of interest expense for December 31, 2016 and 2015 are as follows:





2016US$2015US$Interest expense on:BDCA loans20,845,19213,499,616KLS loans248,641172,174PK Airfinance326,628-Class A and B Notes9,432,8334,415,674Amortization of deferred financing costs and discounts58,47212,33630,911,76618,099,800





|    |                  
|--- | -----------------
|11. | Other liabilities

Breakdown of other liabilities for December 31, 2016 and 2015 are as follows:





2016US$2015US$Accounts payable508,682664,328Accrued bonus – related party (Notes 14, 19)-Current2,325,810-Non-current2,325,810-Income tax payable (Note 18)11,941-Amounts payable to Ridgeline (i)-786,4245,172,2431,450,752


(i) The Company held an 85% interest in MSN 25372 Trust and the remaining 15% interest was held by Ridgeline Holdings LLC ("Ridgeline"). This trust held one aircraft, MSN 25372. Under the trust agreement, Ridgeline was entitled to a 15% share of all monies received by the trust estate. Therefore there was an obligation to provide a return to Ridgeline and thus, represented a liability to the Group.





The Group recognized the 15% as a liability payable to Ridgeline. The distributions to Ridgeline were treated as an expense in the Consolidated Statement of Operations. Due to the sale of MSN 25372 in the course of 2016, the full amounts due to Ridgeline were paid. As of December 31, 2016, the amount payable to Ridgeline was US$ Nil (2015: US$786,424). Payments of US$986,457 (2015: US$250,500) were made during the year.











25


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





12.  Variable interest entities





During the year ended December 31, 2015, the Company assisted in the incorporation and ongoing management of Diamond Head, see Note 1. Diamond Head is primarily engaged in the business of leasing aircraft on behalf of the Group.


The Group determined that the Company, through its wholly owned subsidiary KII, was the primary beneficiary of Diamond Head and consolidated the activities in the financial statements.





As of December 31, 2016, the assets of Diamond Head consisted of 24 aircraft (2015: 5) with a net book value of approximately US$302 million (2015: US$100 million). As of December 31, 2016 liabilities of Diamond Head related to long-term debt and current maturities of long-term debt to finance the aircraft purchases are approximately US$184 million (2015: US$240 million).


Total revenue from Diamond Head was US$70 million (2015: US$10 million) in 2016. Related expenses consisted primarily of depreciation expense of US$37.9 million (2015: US$535 thousand) and interest expense of US$19 million (2015: US$9 million).


The Group is required to consolidate its interests in these entities because it is are deemed to be the primary beneficiary and have the power to direct the activities of the entity that most significantly affect economic performance and the obligation to absorb losses and rights to receive benefits that could potentially be significant to the entity. The obligations of Diamond Head can be settled from the assets of Diamond Head. Contractually the cash flows from these aircraft must first be used to pay third-party debt holders as well as other expenses of Diamond Head. Excess cash flows are available to the Group.


The carrying value of assets as at December 31, 2016 that were not available to VIE entities were as follows:





TotalUS$Availableto VIEUS$Not available to VIEUS$Cash and cash equivalents23,120,009326,35122,793,658Restricted cash26,968,94326,088,984879,959Property and equipment, net400,572,446301,616,43298,956,014Assets held for sale1,700,0001,700,000-Other assets10,784,905502,83710,282,068463,146,303330,234,604132,911,699


December 31, 2015


TotalUS$Availableto VIEUS$Not available to VIEUS$Cash and cash equivalents17,851,234-17,851,234Restricted cash28,941,51328,941,513-Property and equipment, net182,483,200100,488,31881,994,882Interest in aircraft, net247,028,422247,028,422-Other assets12,292,3181,758,01910,534,299488,596,687378,216,272110,380,415


At December 31, 2016 and December 31, 2015, the Company’s maximum exposure to losses in its consolidated VIEs was US$67 million and US$89 million, respectively.





26


---




Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





|    |                              
|--- | -----------------------------
|13. | Contractual lease receivables

Minimum future rental income on non‐cancellable operating leases as of December 31, 2016 are shown below.





Year ended December 312016US$201770,628,976201867,043,976201942,171,585202020,950,580Thereafter23,680,895224,476,012





Minimum future rental income assumes no extension or termination options are exercised on any leases. Contingent rentals of US$30,255,350 were recognized during 2016 (2015: US$3,650,819).


|    |                
|--- | ---------------
|14. | Management fees

Pursuant to the Management Agreement entered into between the Group and KAGL, KAGL provides the Group with Management services as defined in the Management Agreement. As compensation for the services, KAGL earns management fee.


For the year ended December 31, 2016, the Group incurred US$ 1,187,500 of fixed management fees to KAGL (2015: US$1,000,000). Management fees expense is included within Selling, General and Administrative expenses in the consolidated statement of operations. US$104,167 of these management fees were prepaid during the year ended December 31, 2016 (2015: US$83,333).


Additionally, KAGL earn a performance-based management fee which is payable if certain rates of return are achieved. The performance-based management fee is calculated based on a percentage of excess above the required return. The accrued performance-based management fee in 2016 was US$4,651,620 (2015: US$ Nil). Half of the amount is payable within one year and the remaining to be paid in the following years. These amounts are included in Other liabilities (Note 11).












































27


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





|    |                        
|--- | -----------------------
|15. | Fair value measurements

The Group had no assets or liabilities that are measured at fair value at December 31, 2016 or December 31, 2015. The financial assets and liabilities of the Group that are not required to be measured at fair value are summarized below with fair values shown according to the fair value hierarchy.


The carrying values of cash and cash equivalents, other receivables, restricted cash, loans to related party, due from/to related parties, and lease security deposits are considered reasonable estimates of their fair values.





December 31, 2016Carrying ValueUS$Fair ValueUS$Quoted Prices(Level 1)US$Significant Other Observable Inputs(Level 2)US$Significant Unobservable Inputs(Level 3)US$AssetsCash and cash equivalents23,120,00923,120,00923,120,009--Other receivables3,004,3223,004,322-3,004,322-Restricted cash26,968,94326,968,94326,968,943--Due from related parties161,806161,806-161,806-Loans to related parties1,000,0001,000,000-1,000,000-LiabilitiesOther liabilities6,140,1146,140,114-6,140,114-Accrued interest26,350,44626,350,446-26,350,446-Lease security deposits14,839,00014,839,00014,839,000--Due to related parties393,649393,649-393,649-Loans from BDCA – related party127,223,818127,223,818-127,223,818-Loans from KLS – related party4,556,2724,556,272-4,556,272-Long-term debt199,824,893199,824,893-199,824,893-





28


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





December 31, 2015Carrying Value US$Fair ValueUS$Quoted prices(Level 1)US$Significant Other Observable Inputs (level 2)US$Significant unobservable Inputs (Level 3) US$AssetsCash and cash equivalents17,851,23417,851,23417,851,234--Other receivables2,175,9072,175,907-2,175,907-Restricted cash28,941,51328,941,51328,941,513--Due from related parties740,433740,433-740,433-Loans to related parties1,000,0001,000,000-1,000,000-15.   Fair value measurements (continued)December 31, 2015Carrying Value US$Fair ValueUS$Quoted prices(Level 1)US$Significant Other Observable Inputs (level 2)US$Significant unobservable Inputs (Level 3) US$LiabilitiesOther liabilities1,450,7521,450,752-1,450,752-Lease security deposits5,058,0005,058,0005,058,000--Due to related parties477,895477,895-477,895-Loans from BDCA – related party153,923,818153,923,818-153,923,818-Loans from KLS – related party4,556,2724,556,272-4,556,272-Long-term debt239,540,512239,540,512-239,540,512-16.   Concentration of riskInterest rate risk


The Group may be exposed to interest rate risk arising from its debt financing. Changes, both increases and decreases, in the cost of borrowing, directly impact the Group’s net income. Currently, the Group uses fixed rate debt to finance its investments. This mitigates the Group's exposure to changes to interest rate.




















29


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Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





|    |                                  
|--- | ---------------------------------
|16. | Concentration of risk (continued)

Currency riskThe Group attempts to minimize currency and exchange risks by entering into lease agreements and debt agreements with US Dollar as the designated payment currency. Most of the revenue and expenses are therefore denominated in US$ thus reducing currency risk.Counterparty credit risk





Counterparty Credit Risk





Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Group’s credit risk arises principally in relation to the collection of rental payments under its operating leases. The effective monitoring and controlling of customer credit risk is a competency of the Treasury and Risk team. Creditworthiness of each new customer is assessed and the Group seeks security deposits in the form of cash or letters of credit to mitigate overall financial exposure to its lessees. The assessment process takes into account qualitative and quantitative information about the customer such as business activities, senior management team, financial fitness, resources and performance, and business risks, to the extent that this information is publicly available or otherwise disclosed to the Group.





The Group holds significant cash balances which are invested on a short-term basis and are classified as cash and cash equivalents. These deposits and other financial instruments give rise to credit risk on amounts due from counterparties. Credit risk is managed by limiting the aggregate amount and duration of exposure to any one counterparty. The value of trade and other receivables are highly dependent upon the financial strength of the airline industry. Defaults by one or more of the Group's major customers could have a material adverse effect on the Group’s cash flow and earnings and its ability to meet its obligations.





Exposure to credit risk





Below is the exposure to credit risk for December 31, 2016 and 2015:





2016US$2015US$Cash and cash equivalents23,120,00917,851,234Other receivables3,004,3222,175,907Restricted cash26,968,94328,941,513Due from related parties161,806740,433Loans to related parties1,000,0001,000,00054,255,08050,709,087





The Group’s top 5 customers account for 53% (2015: 60%) of total revenue. The Group’s most significant customer is based in North America and accounts for 13% (2015: based in Asia accounts for 20%) of revenue.





Geographical and credit risks


As of December 31, 2016, all of the Group's lease rental income was generated by leasing aircraft and aircraft engines to foreign carriers and domestic US airlines.


The following table sets forth the regional concentration of the Group's aircraft and interest in aircraft portfolio based on net book value as of December 31, 2016 and 2015:








30


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





December 31, 2016December 31, 2015RegionNet Book ValueUS$% of TotalUS$Net BookValueUS$% of TotalUS$Europe142,621,54535.60%146,714,36234.16%South America37,819,9639.44%123,136,36828.67%North America116,799,51629.16%33,211,4647.73%Asia103,331,42225.80%126,449,42829.44%400,572,446100.00%429,511,622100.00%





At December 31, 2016, the Group leased aircraft to customers in the following regions:





December 31, 2016December 31, 2015RegionNumber of Customers% of TotalNumber of Customers% of TotalEurope940.91%1047.62%South America418.18%314.29%North America29.09%29.52%Asia731.82%628.57%22100.00%21100.00%





Geographical and credit risks (continued)





The following table sets forth the dollar amount and percentage of the Group's lease rental income and net return on interest in aircraft attributable to the indicated regions based on each airline's principal place of business:





December 31, 2016December 31, 2015RegionAmount of Lease Rental Income and Net return on Interest in AircraftUS$% of TotalAmount of Lease Rental Income and Net return on Interest in AircraftUS$% of TotalEurope19,252,36431.47%7,321,13634.06%South America8,626,82514.10%2,402,46111.18%North America11,558,49818.89%3,574,70916.63%Asia21,743,69935.54%8,195,57538.13%61,181,386100.00%21,493,881100.00%






































31


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





|    |              
|--- | -------------
|17. | Share capital




Number ofsharesPar value2016EURPar value2015EURAuthorised1,000,000 ordinary shares of EUR 1 each1,000,0001,000,0001,000,000Allotted and called up100 ordinary shares of EUR 1 each100100100Number ofsharesPar value2016USDPar value2015USDAllotted and called up100 ordinary shares of EUR 1 each100137137


All equity is attributable to the holder of the ordinary shares in the Company. The holder of the ordinary shares is entitled to receive dividends as declared from time to time. The sole shareholder has all powers and full voting rights as permitted under Company Law.





32


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)








|    |             
|--- | ------------
|18. | Income taxes

Income tax expense consists of the following:





2016US$2015US$(a) Income tax expenseCurrent tax expense/(credit)-Ireland500-Non Ireland11,441Deferred tax expense/(credit)Ireland631,484-Non Ireland--643,425-





2016US$2015US$(b) Reconciliation of effective tax rateNet profit/(loss) before income taxes2,801,370(2,405,860)Income tax expense/(benefit) at 25 percent700,343(601,465)Income taxed at different rates(248,155)-Prior period over/under provision(38,135)-Valuation allowance229,372601,465Reported amount of income tax expense/(benefit)643,425-





(c) Circumstances affecting current and future tax charges





The Parent Company and most of the Group companies are resident in Ireland for income tax purposes and subject to Section 110 of the Taxes Consolidation Act, 1997. Accordingly, most of the Group companies are subject to a 25 percent statutory income tax rate and this is used as the basis for reconciliation.





(d) Deferred tax





Deferred tax represents the amount of tax recoverable in respect of tax losses available in the current year which are available for carry forward against future taxable profits and temporary differences principally for an excess of capital allowances over accounting depreciation.


























33


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





|    |                         
|--- | ------------------------
|18. | Income taxes (continued)




(d) Deferred tax (continued)





The reconciliation of deferred tax assets and liabilities for the year is as follows:





2016US$2015US$Deferred tax assetsOperating loss carry-forwards6,146,3003,053,772Valuation allowance(928,970)(699,597)Total deferred tax assets5,217,3302,354,175








2016US$2015US$Deferred tax liabilitiesProperty and equipment and Interest in aircraft(2,598,332)(2,354,175)Intercompany financing arrangements(3,250,482)-Total deferred tax liabilities(5,848,814)(2,354,175)








When deferred tax assets and deferred tax liabilities relate to the same taxable entity, all current amounts are offset and presented as a single current amount and all noncurrent amounts are offset and presented as a single noncurrent amount on the consolidated balance sheet.





When determining the amount of valuation allowance recorded, management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. Certain Irish entities have a history of losses and have a limited ability to generate future profits, and as a result deferred tax assets of such entities have been offset with a valuation allowance, to the extent not supported by reversing taxable temporary differences. The movement in valuation allowance during 2016 was US$229,372.





A deferred tax liability of US$3,250,482 exists at 31 December 2016 due to differences in US GAAP accounting treatment and local statutory tax returns treatment of certain intercompany financing transactions between KIO and Diamond Head. These amounts will reverse over the life of the intercompany financing transactions.





Deferred tax benefits of Irish operating losses carry forwards amounting to US$2,863,155 (2015: US$2,354,175) were recognized during the year. At the end of the year, the Group had unrecognized deferred tax assets of US$928,970 (2015: US$699,597). These deferred tax assets are not recognized by the Group on the basis that it is not more likely than not that there will be sufficient taxable profits going forward to obtain the benefit of these tax losses. To the extent losses are incurred in the future, these can be carried forward.





At December 31, 2016, the Group had approximately US$25,513,235 of Irish net operating loss (NOLs) carry forwards (2015: US$12,255,431). The Company is allowed to carry-forward its Irish NOLs for an indefinite period to be offset against income of the same trade under current tax rules in Ireland.














34


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





|    |                         
|--- | ------------------------
|18. | Income taxes (continued)




(d) Deferred tax (continued)





The Group files income tax returns in Ireland, Sweden, United Kingdom and Labuan. The Group is not under examination in any jurisdiction as of December 31, 2016. The periods from 2014 onwards remain open to examination by all the relevant tax authorities. The Group has not recorded an unrecognized tax benefit in any of the reporting periods presented.





19.    Related party transactions


Related parties relationships are determined with reference to ASC 850, Related Party Disclosures . Balances as at December 31, 2016 and 2015 and transactions for the year ended December 31, 2016 and 2015 with related parties of the Group are as follows:


Loans and receivables


In 2014, the Company advanced a loan of US$8,800,000 to Kahala Aviation US Inc. (“KAU”) in 2014. KAU is a related party as it is a subsidiary of the Companies ultimate parent, KAH. KAU repaid US$7,800,000 of the loan to the Company in 2014. The principal amount outstanding on the loan as at December 31, 2016 and 2015 is US$1,000,000. All principal and accrued interest shall be due and payable on December 23, 2028. This bears a fixed interest rate of 13%.


Interest income of US$176,992 was recognized during the year ended December 31, 2016 (2015: US$154,797). US$436,955 (2015: US$259,963) remains accrued and receivable as at December 31, 2016.


Profit participating note


In 2014, KLS subscribed for a Profit Participating Notes (“PPN”) issued by the Company totaling US$1,625,000. The term of the PPN is 29 years.


In 2015, KLS subscribed for additional PPN in the Company totaling US$1,625,000.


The PPN does not bear a fixed interest rate. Interest is dependent on the profit generated by the Company over the 29 years of the PPN, less an amount returned by the Company of US$1,000 per annum. No interest was accrued or paid in 2016 or 2015 due to the losses incurred by the Company.


The principal balance outstanding on the PPN as at December 31, 2016 was US$3,250,000 (2015: US$3,250,000).


Long-term debt


As outlined in Note 10, the Company received debt financing from BDCA, the majority investor in its ultimate parent company, KAH, to fund the purchase of aircraft.


The principal amount outstanding under this agreement was US$127,223,818 (2015: US$153,923,818) as at December 31, 2016. Interest expense of US$20,845,192 was charged during the year ended December 31, 2016 (2015: US$13,499,616). US$25,326,907 (2015: US$15,112,684) remains accrued and unpaid as at December 31, 2016.














35


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)








|    |                                       
|--- | --------------------------------------
|19. | Related party transactions (continued)

Long-term debt (continued)


Loans amounting to US$ Nil were received from BDCA during the year ended December 31, 2016 (2015: US$108,975,000). Repayments of US$26,700,000 were made for 2016 (2015: US$ nil). The loan will mature on December 23, 2028 and bears a fixed interest rate of 13%.


Also as discussed in Note 10, the Company entered to a Loan Agreement with KLS. The principal amount outstanding under this agreement was US$1,306,272 (2015: US$1,306,272).The loan will mature June 27, 2021 and bears a fixed interest rate of 13%.


Interest expense of US$248,641 was charged during the year ended December 31, 2016 (2015: US$172,174). US$509,496 (2015: US$260,855) remains accrued and unpaid as at December 31, 2016.


Intercompany write-offsDuring the year, the Group wrote off its receivables from Kahala US 28200 LLC and Kahala US 25372 LLC as these entities were dissolved.Consequently, all assets and liabilities of the two entities were recovered, settled and outstanding amounts written off. Outstanding receivable were fully written off amounting to US$630,659.Nature of Relationship2016US$2015US$Related party balancesAssetsDue from related parties:KAHUltimate parent5,9033,035Kahala US 28200 LLCGroup company-317,241KLSImmediate parent150,000100,000Kahala US 25372 LLCGroup company-313,417KAUGroup company5,9033,035KAGLManager-3,705161,806740,433Loans to related partyGroup company1,000,0001,000,000












































36


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)





|    |                                       
|--- | --------------------------------------
|19. | Related party transactions (continued)




Related party balances (continued)





Nature of Relationship2016US$2015US$LiabilitiesDue to related parties:Kahala US Opco LLCGroup company329,490477,895KAGLManager64,159-393,649477,895Other liabilities – KAGL (Note 11)Manager4,651,620-PPNImmediate parent3,250,0003,250,000Loans payable to KLSImmediate parent1,306,2721,306,272Loans payable to BDCAUltimate shareholder127,223,818153,923,818





AccountRelated Party2016US$2015US$Related party transactionsLoan interest expenseInterest expenseBDCA20,845,19213,499,616Loan interest incomeInterest incomeKAU176,992154,797Management fees – fixed (Note 14)Administrative expensesKAGL1,187,5001,000,000Management fees – performance-based (Note 14)Administrative expensesManager5,651,620400,000Directors' feesAdministrative expensesDirectors131,375118,21920.  Commitments and contingenciesClaims, suits and complaints may arise in the ordinary course of our business. Currently, we are not aware of any such claims or contingent liabilities which should be disclosed or for which a provision should be established in the accompanying consolidated financial statements.Obligations for contingencies are recognized where such items are probable and amounts are reasonably estimable.











37


---

Kahala Ireland Opco Designated Activity Company (formerly Kahala Ireland Opco Limited)
 Notes to Consolidated Financial Statements (continued)
 For the year ended December 31, 2016
 (stated in US Dollars)








21.  Subsequent events


The Group has evaluated all events or transactions that occurred from the balance sheet date through March 15, 2017, the date the consolidated financial statements were available to be issued, and determined on March 10, 2017, the Group sold an aircraft (MSN 1422) to a third party. Apart from this, there are no items requiring disclosure or adjustment.





38