UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549











FORM 10-K/A


Amendment No. 1





(Mark One)





xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2018





ORoTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from                to


Commission File Number 001-16017








BELMOND LTD.


(Exact name of registrant as specified in its charter)





Bermuda98-0223493(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)





22 Victoria Street,


Hamilton HM 12, Bermuda


(Address of principal executive offices)


Registrant’s telephone number, including area code: (441) 295-2244








SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:





Title of each className of each exchange on which registeredClass A Common Shares, $0.01 par value eachNew York Stock ExchangePreferred Share Purchase RightsNew York Stock Exchange


SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None .








Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x No o


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No x


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o







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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (Not applicable. See third paragraph under Item 1—Business.)


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Act. (Check one):





Large Accelerated FilerxAccelerated FileroNon-Accelerated FileroSmaller reporting companyoEmerging growth companyo(Do not check if a smaller reporting company)





If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x


The aggregate market value of the class A common shares held by non-affiliates of the registrant computed by reference to the closing price on June 30, 2018 (the last business day of the registrant’s second fiscal quarter in 2018 ) was approximately $1,121,000,000 .


As of April 16, 2019 , 103,308,631 class A common shares and 18,044,478 class B common shares of the registrant were outstanding.  All of the class B shares are owned by a subsidiary of the registrant (see Note 18(c) to the Financial Statements (Item 8) in Form 10-K filed February 28, 2019 ).





DOCUMENTS INCORPORATED BY REFERENCE: None



















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EXPLANATORY NOTE





Belmond Ltd. (the “Registrant” or “Belmond”) is filing this Amendment No. 1 (the “Amendment”) to its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 , filed with the U.S. Securities and Exchange Commission (“SEC”) on February 28, 2019 (the “Original 2018 Form 10-K”).





This Amendment is being filed because, pursuant to Rule 3-09 of SEC Regulation S-X (“Rule 3-09”), the Registrant is required to file the financial statements of Perurail S.A. (“Perurail”) and Ferrocarril Transandino S.A. (“Ferrocarril Transandino”), each a 50% Belmond-owned unconsolidated company. The financial statements for Perurail and Ferrocarril Transandino for fiscal 2018 and 2017 were prepared by their respective company’s management in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”), and have been audited by PWC - Gaveglio, Aparicio y Asociados S. Civil de R. L. pursuant to applicable standards of the United States Public Company Accounting Oversight Board (“PCAOB”).





The financial statements for Perurail for fiscal year 2016, presented in accordance with U.S. GAAP, have been audited by BDO - Pierrend, Gómez & Asociados S. Civil de R.L. pursuant to applicable standards of the PCAOB.





We are also including the unaudited financial statements for Ferrocarril Transandino for fiscal year 2016, also prepared in accordance with U.S. GAAP.  Pursuant to Rule 3-09, these results are not required to be, and therefore have not been, audited in accordance with the applicable standards of the PCAOB.





The above-described financial statements of Perurail and Ferrocarril Transandino are filed herewith pursuant to this Amendment under Item 15 of Form 10-K - Exhibits and Financial Statement Schedules.





Except as described above, no other changes have been made to the Original 2018 Form 10-K Filing, and this Form 10-K/A does not amend, update or change any other items or disclosures in the Original 2018 Form 10-K Filing. This Form 10-K/A does not reflect events occurring after the date of the Original 2018 Form 10-K Filing and, other than providing the financial statements of the unconsolidated companies named above under Item 15, does not modify or update the disclosures in the Original 2018 Form 10-K Filing in any way.





































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PART IV











ITEM 15.  Exhibits and Financial Statement Schedules








1. Financial Statements





(a) Perurail S.A.


Page NumberReportsof independent registered public accounting firms2Financial statements – years ended December 31, 2018, 2017 and 2016:Balance sheets (December 31, 2018 and 2017)4Statements of operations and comprehensive income5Statements of shareholders’ equity6Statements of cash flows7Notes to financial statements8





(b) Ferrocarril Transandino S.A.


Page NumberReportof independent registered public accounting firm23Financial statements – years ended December 31, 2018 and 2017:Balance sheets (December 31, 2018 and 2017)24Statements of operations and comprehensive income/(loss)25Statements of shareholders’ equity26Statements of cash flows27Notes to financial statements28





Also presented are the unaudited statements of operations and comprehensive (loss)/income, cash flows and shareholders' equity for the year ended December 31, 2016 .





2. Financial Statement Schedule





Incorporated by reference to the financial statement schedule filed with the Original Filing. No additional financial statement schedule is filed with this report on Form 10-K/A.





3. Exhibits














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PERURAIL S.A.





Report of Independent Registered Public Accounting Firm





Board of Directors and Shareholders


Perurail S.A.


Lima, Peru





Opinion on the Financial Statements





We have audited the accompanying balance sheets of Perurail S.A. as of December 31, 2018 and 2017, and the related statements of operations and comprehensive income, of changes in shareholders’ equity and of cash flows for each of the two years in the period ended December 31, 2018, including the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Perurail S.A. as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.





Basis for Opinion





These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.





We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.





Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.











/s/ Gaveglio, Aparicio y Asociados S. Civil de R. L.Lima, PeruApril 24, 2019Countersigned by:/s/ Francisco PatiñoFrancisco PatiñoPeruvian Certified Public AccountantRegister No. 01-25611





We have served as the Company’s auditor since 2017





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PERURAIL S.A.





Report of Independent Registered Public Accounting Firm





Board of Directors and Shareholders


Perurail S.A.


Lima, Peru





We have audited the balance sheets of Perurail S.A. as of December 31, 2016 and the related accompanying statements of operations, cash flows and shareholders’ equity for the year ended December 31, 2016. These financial statements are the responsibility of the Company ́s management. Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Perurail S.A. at December 31, 2016, and the results of its operations and its cash flows for the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.








/s/ Pierrend, Gómez & Asociados S. Civil de R.L.Lima, PerúJune 21, 2017, except for the statement of cash flows and notes 1(s) and 13 which are as of April 24, 2019, and notes 2 and 7 which are as of June 26, 2018.Countersigned by:/s/ Liliana Córdova MejíaLiliana Córdova MejíaCertified Chartered Public AccountantRegister No. 01-17661











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Perurail S.A.


Balance Sheets


20182017December 31,$’000$’000AssetsCash21,37125,551Restricted cash13,76316,475Accounts receivable, net of allowances of $1,767 and $1,7918,63110,947Due from related parties16,80518,359Prepaid expenses2,806644Inventories6,9606,329Total current assets70,33678,305Property, plant and equipment, net of accumulated depreciation of $52,645 and $46,099158,032171,249Intangible assets, net of accumulated amortization of $134 and $6443,9702,314Total non-current assets162,002173,563Total assets232,338251,868Liabilities and Shareholders’ EquityAccounts payable3,74411,045Accrued liabilities18,84617,586Due to related parties2,1464,098Current portion of long-term debt and obligations under capital lease18,69223,618Total current liabilities43,42856,347Long-term debt and obligations under capital lease118,064129,785Deferred income tax liability, net2,3233,302Total long-term liabilities120,387133,087Total liabilities163,815189,434Commitments and contingencies (Note 11)Shareholders’ equity:Common shares S/1.00 par value (50,000,000 shares authorized):Issued - 50,000,000 (2017 - 50,000,000)16,93416,934Legal reserve3,2523,252Retained earnings48,33742,248Total shareholders’ equity68,52362,434Total liabilities and shareholders’ equity232,338251,868


The accompanying notes are an integral part of these financial statements.











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Perurail S.A.


Statements of Operations and Comprehensive Income


201820172016Year ended December 31,$’000$’000$’000Revenue, net of discounts163,911157,080146,571Expenses:Cost of services(81,263)(75,331)(64,008)Selling, general and administrative(31,929)(32,702)(27,438)Depreciation and amortization(20,612)(21,721)(20,280)Total operating costs and expenses(133,804)(129,754)(111,726)(Loss)/gain on insurance settlement—(217)277Gain/(loss) on disposal of property, plant and equipment106174(1,191)Earnings from operations30,21327,28333,931Interest expense, net(8,881)(9,364)(9,565)Foreign currency, net(69)(449)(273)Earnings before income tax21,26317,47024,093Provision for income taxes(6,594)(5,372)(8,845)Net earnings and comprehensive income14,66912,09815,248





The accompanying notes are an integral part of these financial statements.














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Perurail S.A.


Statements of Shareholders’ Equity


Common shares at par valueLegal reserveRetained  earningsTotal shareholders' equity$’000$’000$’000$’000Balance at January 1, 201616,9342,33632,34651,616Dividends——(7,648)(7,648)Net earnings——15,24815,248Legal reserve—916(916)—Balance at December 31, 201616,9343,25239,03059,216Dividends——(8,880)(8,880)Net earnings——12,09812,098Balance at December 31, 201716,9343,25242,24862,434Dividends——(8,580)(8,580)Net earnings——14,66914,669Balance at December 31, 201816,9343,25248,33768,523





The accompanying notes are an integral part of these financial statements.











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Perurail S.A.


Statements of Cash Flows


201820172016Year ended December 31,$’000$’000$’000Cash flows from operating activities:Net earnings14,66912,09815,248Adjustment to reconcile net earnings to net cash provided by operating activities:Depreciation20,48821,68920,115Amortization12432165Gain/(loss) on disposal of property, plant and equipment(106)(174)1,191Change in deferred tax(979)(2,656)(413)Change in assets and liabilities:Decrease/(increase) in accounts receivable2,3163,328(5,617)(Increase)/decrease in prepaid expenses(2,162)899(544)(Increase)/decrease in inventories(631)680331Decrease in due to related parties(1,952)(1,597)(1,573)(Decrease)/increase in accounts payable(6,730)647(1,725)Increase in accrued liabilities1,2602,4993,164Total adjustments11,62825,34715,094Net cash provided by operating activities26,29737,44530,342Cash flows from investing activities:Decrease/(increase) in due from related parties1,5543,349(774)Proceeds from sale of property, plant and equipment633——Capital expenditures(5,014)(26,525)(106,882)Net cash used in investing activities(2,827)(23,176)(107,656)Cash flows from financing activities:Payment of dividends(8,580)(8,880)(7,648)Payments on working capital facilities—(2,029)(9,726)Proceeds from working capital facilities—10,9981,436Principal payments under long-term debt(21,154)(18,458)(41,614)Principal payments under capital lease(3,741)(999)(873)Proceeds from long-term debt3,1133,432158,034Proceeds from capital lease——6,798Net cash (used in)/provided by financing activities(30,362)(15,936)106,407Net (decrease) /increase in cash(6,892)(1,667)29,093Cash and restricted cash at beginning of year42,02643,69314,600Cash and restricted cash at end of year35,13442,02643,693





The accompanying notes are an integral part of these financial statements.








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Perurail S.A.


Notes to Financial Statements








1.    Summary of significant accounting policies and basis of presentation





(a)  Business





Perurail S.A. (hereinafter the “Company”) was incorporated in the city of Lima, Peru in 1999.





The Company is 50% owned by Belmond Ltd., which is incorporated in Bermuda, and 50% owned by Peruvian Trains & Railways S.A., which is incorporated in Peru.





Its headquarters and registered address are located at Av. Armendariz 480 office 402, District of Miraflores, Department of Lima.





The purpose of the Company is the operation of passenger and freight transport by rail, as well as ground cargo transport services.





In order to perform its corporate purpose, in August 2000, the Company entered into a contract with Ferrocarril Transandino S.A. ("Ferrocarril Transandino") an affiliate, under which the Company was granted access to and use of the tracks, locomotives, coaches, wagons, machine shops and parts of the train stations of the South and South-East Railways operated by Ferrocarril Transandino. Under this contract, various rates are established and payable for the use of locomotives, coaches and wagons based on traveled kilometers, which are settled on a monthly basis.





(b)  Basis of presentation





The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the results of operations, financial position and cash flows of the Company. The financial statements have been prepared using the historical cost basis in the assets and liabilities and the historical results of operations directly attributable to the Company in the normal course of business.





“FASB” means Financial Accounting Standards Board. “ASC” means the Accounting Standards Codification of the FASB and “ASU” means an Accounting Standards Update of the FASB.





(c)  Estimates





The Company bases its estimates on historical experience and also on assumptions the Company believes are reasonable based on the relevant facts and circumstances of the estimate. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.





Estimates include, among others, the allowance for doubtful accounts, allowance on devaluation of inventories, long-lived asset impairment, depreciation and amortization, taxes and contingencies. Actual results could differ from those estimates.





(d)  Foreign currency





The functional currency of the Company is the U.S. Dollar, which is also the reporting currency of the Company. The local currency is the Peruvian Sol.





Foreign currency transaction gains and losses are recognized in earnings as they occur. Transactions in currencies other than the Company’s functional currency (“foreign currencies”) are recorded at the exchange rates prevailing on the dates of the transactions. All monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate prevailing at the reporting date. Non-monetary items carried at historical cost are translated at the exchange rate prevailing on the date of transaction. Exchange differences arising from changes in exchange rates are recognized in earnings as they occur.








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(e)  Cash





Cash includes all cash balances. The Company keeps its bank accounts in functional currency and local currency. Cash balances are freely disposable and accrue no interest.





(f)  Restricted cash





Restricted cash is the carrying amount of cash and cash equivalents which are restricted under contract or otherwise as to withdrawal or usage. These include deposits held as compensating balances against borrowing arrangements or under agreements entered into with others, but exclude compensating balance arrangements that do not legally restrict the use of cash amounts shown on the balance sheet.





(g)  Accounts receivable and allowance for doubtful accounts





The Company states its accounts receivable at their outstanding fair value adjusted for any write off and allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for specifically identified estimated losses resulting from the inability of its customers to make required payments.





(h)  Inventories





Inventories include supplies for minor maintenance of fixed assets. Inventories are valued at the lower of cost or net realizable value under the weighted average method.





(i)  Income taxes





Current portion of income tax





The amount of income taxes paid or payable is determined by applying the provisions of the enacted tax law to the taxable income or excess deductions over revenues for the year. The rates used and regulations applied to compute the amount are those enacted as of the balance sheet date.





Deferred portion of income taxes





The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of transactions and events that have been recognized in the financial statements but have not yet been reflected in the Company’s income tax returns, or vice versa.





Deferred income taxes result from temporary differences between the carrying value of assets and liabilities recognized for financial reporting purposes and their respective tax bases. Deferred taxes are measured at enacted statutory rates and are adjusted as enacted rates change. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized based on available evidence.





In evaluating the Company’s ability to recover deferred tax assets, management considers all available evidence, both positive and negative, which includes reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. Management reassesses the need for valuation allowances at each reporting date. Any increase or decrease in a valuation allowance will increase or reduce, respectively, the income tax expense in the period in which there has been a change in judgment.





Income tax positions must meet a more-likely-than-not threshold to be recognized in the financial statements. Management recognizes tax liabilities in accordance with ASC 740 guidance applicable to uncertain tax positions, and adjusts these liabilities when a judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which the actual tax liabilities are determined or the statute of limitations has expired. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the statements of operations. Liabilities for uncertain tax benefits are included in the balance sheets and classified as current or non-current liabilities depending on the expected timing of payment. At December 31, 2018 and 2017 the Company did not record any liabilities for uncertain tax positions.








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(j)  Property, plant and equipment





Property, plant and equipment is stated at cost less accumulated depreciation. The cost of significant renewals and improvements is capitalized and depreciated, while expenditures for normal maintenance and repairs are expensed as incurred.





Depreciation expense is computed using the straight-line method over the following estimated useful lives:


DescriptionUseful livesInstallationsUp to 32 yearsMachinery and equipmentUp to 22 yearsTransport unitsUp to 15 yearsImprovements to locomotive and rolling stock assets under leaseUp to 30 yearsOwned locomotives and rolling stockUp to 30 yearsFurniture and fixturesUp to 10 years





(k)  Intangible assets





Software costs are recorded under assets and classified as intangibles if such costs are not part of the related hardware. Software is amortized using the straight-line method.





Amortization expense is computed using the straight-line method over the following estimated useful lives:





DescriptionUseful livesCopyrights and trademarks30 yearsSoftware and licenses4 years





(l)  Impairment of long-lived assets





The Company’s management evaluates the carrying value of long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets if certain trigger events occur. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, sales of similar assets, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. The Company evaluates the carrying value of its long-lived assets based on its plans at the time for such assets and such qualitative factors as future development in the surrounding area, status of expected local competition and projected incremental income from renovations. Changes to the Company's plans, including a decision to dispose of or change the intended use of an asset, can have a material impact on the carrying value of the asset.





There were no impairments of long-lived assets in the years ended December 31, 2018, 2017 and 2016.





(m)  Capital leasing





For capital leasing transactions, the method used consists of showing the total cost of the contract under fixed assets and its corresponding liability. Financial expenses are charged to operations in the period in which they become due, and depreciation of assets is charged to operations based on their useful life.





(n)  Employees’ length of service compensation





The provision for employees’ length of service compensation included under taxes and other accounts payable is charged to operations as the compensation becomes due.








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(o)  Revenue recognition





Passenger transport revenue includes ticket revenue that is recognized when the related services are provided. Rail freight and cargo revenues are recognized when the freight and cargo reach their destination. Ground cargo transport services revenues are recognized on a fixed fee basis per month, plus variable fees per ton transported when the services are provided. Revenues are presented net of taxes collected from customers and remitted to governmental authorities.





Revenues in providing these services are recognized, as appropriate, when:





1.    The amount of revenues can be reliably quantified; and





2.    The transaction-related economic benefits are likely to flow to the Company.





Deferred revenue includes all ticket revenue where tickets have been sold, but the related services have not yet been provided.





(p)  Debt issuance costs





Debt issuance costs incurred in connection with the placement of long-term debt are capitalized and presented as a direct deduction from the associated debt liability and amortized to interest expense over the term of the related debt.





(q)  Risks and uncertainties





The Company’s activities expose it to a variety of financial risks: market risks (including interest rate risk and exchange rate risk), credit risk, and liquidity risk. The Company’s risk management program tries to minimize the potential adverse effects on its financial performance. Management, based on its knowledge and experience, seeks to mitigate the exchange rate, interest rate, credit and liquidity risks by following the policies approved by the Board of Directors. The most important aspects of these risks are:





Liquidity risk





Liquidity risk is the risk that cash may not be available to pay obligations at their maturity at a fair value. The Company mitigates this risk through its procedures to monitor and manage asset and liability maturity dates, so that the Company can be best prepared for the flow of cash to match future payments.





Credit risk





The Company’s financial assets that are potentially exposed to concentration of credit risk are mainly trade accounts receivable, accounts receivable from related parties and from shareholders, and various accounts receivable.





Credit risk with respect to trade accounts receivables is limited due to the number of companies comprising the Company’s customer base. Although the Company is directly affected by the financial condition of its customers, management does not believe significant credit risks exist at December 31, 2018. Minera Las Bambas S.A. is a major customer to the Company, and in the year ended December 31, 2018 represented 24% (2017 - 25%; 2016 - 20%) of total revenue. The Company’s second largest customer is Sociedad Minera Cerro Verde, and in the year ended December 31, 2018 represented 13% (2017 - 14%; 2016 - 15%) of total revenue.


See Note 10.





Interest rate risk





The Company ́s exposure to this risk arises from changes in the interest rates in its financial assets and liabilities. All of the Company's long-term debt is subject to a fixed interest rate with a weighted average interest rate of 5.42% in 2018 (2017 - 5.4%; 2016 - 5.1%).





Exchange rate risk





The Company carries out some its transactions in foreign currency, but management estimates that due to their short-term nature, any fluctuation will not materially adversely affect the results of the Company’s operations.








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(r)  Employee profit sharing





In accordance with Peruvian law, employee profit sharing is limited to 18 times an employee’s monthly average salary. The excess of calculated statutory employee profit sharing is paid to the Peruvian government and is treated as an additional tax. The Company’s practice is to recognize the employee profit sharing as part of operating cost and any excess profit sharing is recognized as part of current income tax. The Company has a 5% rate for calculating employee profit sharing.  To date, no excess profit sharing has been recognized.





(s)    Accounting pronouncements adopted during the year





In October 2016, the FASB issued new guidance which is intended to simplify the tax consequences of certain types of intra-entity asset transfers. The Company adopted ASU 2016-18 on a modified retrospective basis as of January 1, 2018. The adoption of this standard did not have an impact on the current period or prior period financial statements.





In November 2016, FASB issued ASU No. 2016-18 (“ASU 2016-18”), “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18 requires entities to present the aggregate changes in cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. In addition, when cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, ASU 2016-18 requires a reconciliation of the totals in the statement of cash flows to the related captions on the balance sheet. The Company adopted ASU 2016-18 retrospectively as of January 1, 2018. The adoption of this standard did not have a material impact on the current period or prior period financial statements.





(t)    Accounting pronouncements to be adopted





In May 2014, the FASB issued new guidance which is intended to improve the comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The guidance supersedes existing revenue recognition guidance and 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. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the new guidance. In March 2016, the FASB issued additional guidance which amends the principal-versus-agent implementation guidance and illustrations in the original accounting pronouncement. In May 2016, the FASB issued an update that clarified guidance in certain narrow aspects of the topic. The guidance was originally effective for annual and interim periods beginning after December 15, 2016, however in July 2015 the FASB confirmed that the effective date would be deferred by one year, to annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption was permitted as of the original effective date in ASU 2014-09 (i.e., annual reporting periods beginning after December 15, 2016, including interim reporting periods within the annual periods). In July 2017, the SEC announced that certain public business entities, for which PeruRail meets the definition, were able to defer the adoption of the new standard for one year. The Company intends to adopt the standard in the annual period beginning January 1, 2019 under the modified retrospective approach with a cumulative effect recognized in equity and no prior period restatement.





The analysis of the standard for the Company resulted that adopting this standard will not have a material impact to our financial statements and related disclosures. Under ASU 2014-09, a performance obligation is satisfied, and the related revenue recognized when control of the underlying goods or services related to the performance obligation is transferred to the customer. The Company's performance obligations associated with (i) the operation of passenger transport by rail, and (ii) freight transport by rail are satisfied over time. This is because each rail-user simultaneously receives and consumes the benefits provided by the Company as the transportation services are performed and therefore the Company recognizes revenue over time. Since there would not be a net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings would not be necessary.





In February 2016, the FASB issued its new standard on accounting for leases, which introduces a lessee model that brings most leases on the balance sheet. Under the new standard, a lessee will recognize on its balance sheet a right-of-use asset and lease liability for most leases, including operating leases. The new standard will also distinguish leases as either finance leases or operating leases.








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In January 2018, the FASB issued an update that clarified the application of the new leases standard to land easements. Additionally, in July 2018, the FASB issued two updates to make targeted improvements to the new lease standard. The first update makes 16 separate narrow-scope amendments to the new leasing standard. The second update provides entities with relief from the costs of implementing certain aspects of the new leasing standard and with an additional (and optional) transition method on adoption. It also allows lessors to not separate non-lease components from the associated lease component if certain conditions are met. An entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB issued an update which clarified the accounting by lessors when applying the new leases standard. The update addressed the following issues lessors encounter: 1) sales taxes and other similar taxes collected from lessees 2) certain lessor costs paid directly by lessees, and 3) recognition of variable payments for contracts with lease and non lease components. In July 2017, the SEC announced that certain public business entities, for which PeruRail meets the definition, were able to defer the adoption of the new standard for one year. The Company intends to adopt the standard in the annual period beginning January 1, 2020, as permitted by the SEC, using the transition method that permits the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the impact of the adoption of this guidance in its financial statements.





In June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”), “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss methodology to an expected loss methodology. ASU 2016-13 affects trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses”. This ASU clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. The effective date of ASU No. 2016-13 is the first quarter of fiscal year 2021, with early adoption permitted beginning in fiscal year 2020. The Company is evaluating the potential effects on the financial statements.





In February 2017, the FASB issued new guidance to clarify the scope of the FASB's guidance on nonfinancial asset derecognition (ASU 610-20), as well as the accounting for partial sales of nonfinancial assets. The guidance is effective on the same date the new revenue guidance is adopted, with early adoption permitted. The Company intends to adopt the standard in the annual period beginning January 1, 2019 and does not expect the adoption of this guidance to have a material effect on its financial statements.





In July 2018, the FASB issued amendments to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. Some of the amendments were effective upon issuance and others have transition guidance with effective dates for annual periods beginning after December 15, 2018. The Company is currently evaluating the potential impact of those amendments that are not yet effective but it does not expect they will have a material impact on its financial statements.





In August 2018, the FASB issued two new standards to improve the effectiveness of disclosures in notes to the financial statements. The first standard removes, modifies and adds certain disclosure requirements related to fair value measurements in ASC 820 and is effective for fiscal years beginning after December 15, 2019, including interim periods therein, with early adoption permitted. The Company intends to adopt the standard in the annual period beginning January 1, 2020. The second standard modifies ASC 715-20 to improve disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans and is effective for fiscal years beginning after December 15, 2020, including interim periods therein, with early adoption permitted. The Company intends to adopt the standard in the annual period beginning January 1, 2021. The Company is currently assessing what impact the adoption of this guidance will have on its financial statements.











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2.    Property, plant and equipment





The major classes of property, plant and equipment are as follows:


20182017December 31,$’000$’000Land1,3531,353Installations41,40338,761Machinery and equipment35,31030,961Transport units5,25718,670Improvements to locomotive and rolling stock assets under lease47,78744,457Owned locomotives and rolling stock78,30566,000Furniture and fixtures437295Works in progress82516,851210,677217,348Less: Accumulated depreciation(52,645)(46,099)Total property, plant and equipment, net of accumulated depreciation158,032171,249





The major classes of assets under capital leases included above are as follows:





20182017December 31,$’000$’000Locomotives and rolling stock32,60426,689Less: Accumulated depreciation(5,524)(5,944)Total property, plant and equipment under capital leases, net of accumulated depreciation27,08020,745





The depreciation charge on property, plant and equipment for the year ended December 31, 2018 was $20,488,000 ( 2017 - $21,689,000 ; 2016 - $20,115,000 ).





In 2018, the Company acquired assets in the amount of $8,363,000 (2017 - $16,362,000; 2016 - $73,593,000) to provide transportation services to Minera Las Bambas S.A., which include transporting copper concentrate from the Company's transfer station  to the delivery port under a contract between the parties signed in June 2015. The assets acquired during 2018 related to railway sidings built at the Islay transfer station, while in 2017 the assets acquired were related to a new transfer station which was built to facilitate the transfer of loaded containers from trucks to the trains.





No property, plant and equipment impairments were recorded in the years ended December 31, 2018 , 2017 and 2016 .








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3.    Intangible assets





Intangible assets consist of the following as of December 31, 2018 and 2017 :


Logo and trademarksSoftware and licensesTotal$’000$’000$’000Carrying amount:Balance at January 1, 20171229401,062Additions—1,8961,896Balance at December 31, 20171222,8362,958Additions—1,4691,469Disposals(122)(523)(645)Transfers—322322Balance at December 31, 2018—4,1044,104Accumulated amortization:Balance at January 1, 2017122490612Charge for the period—3232Balance at December 31, 2017122522644Charge for the period—124124Disposals(122)(512)(634)Balance at December 31, 2018—134134Net book value:December 31, 2016—450450December 31, 2017—2,3142,314December 31, 2018—3,9703,970





Amortization expense for the year ended December 31, 2018 was $124,000 ( 2017 - $32,000 ; 2016 - $165,000 ).





Estimated amortization expense for each of the years ended December 31, 2019 to 2023 is $351,000. The estimated amount includes the amortization of a passenger sales and reservation system that is in the development phase (Accumulated cost of $3,595,000 at December 2018) and it is expected to be completed in 2020.








4.  Working capital facilities





In 2017, the working capital facilities were paid in full.





At December 31, 2018, the Company had approved lines of credit of approximately $20,000,000 ( 2017 - $19,550,000), which can be used as working capital. This includes guarantee letters issued by various financial institutions with various expiration dates, of which $18,190,000 was undrawn as at December 31, 2018 (2017 - $ 17,790,000). The remaining amount of $1,810,000 as at December 31, 2018 (2017 - $1,760,000) relates to non-executed guarantee letters issued to cover operational needs.








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5.  Accrued liabilities





A breakdown of accrued liabilities and deferred revenue is as follows:





20182017December 31,$’000$’000Deferred revenue7,9057,841Remuneration and profit sharing payable4,8263,998Provision for purchases and services1,4771,921Advance payments received from passengers1,7341,204Vacation payable735748Employees’ length of service compensation205175Other tax payable285284Other accounts payable1,6791,41518,84617,586








6.  Long-term debt, obligations under capital lease and fair value disclosures





(a)  Long-term debt





Long-term debt consists of the following:


20182017December 31,$’000$’000Loans from banks collateralized by property, plant and equipment payable over a period of 6 to 10 years (2017 - 6 to 10 years), with a weighted average interest rate of 5.56% (2017 - 5.4%)117,525135,589Obligations under capital leases (see Note 6(b))21,67720,620Total long-term debt and obligations under capital leases139,202156,209Less: Current portion18,69223,618Less: Debt issuance costs2,4462,806Non-current portion of long-term debt and obligations under capital leases118,064129,785





The Company is in compliance with all financial covenants in its long-term debt obligations at December 31, 2018 and 2017 .





The bank loans are associated with the transportation of copper concentrate for two mining projects. Debt service is taken from the revenue generated by the transportation of the concentrate and the Lenders have security over the revenue streams and the specific assets (locomotives, wagons, containers and other infrastructure) used in those contracts. The estimated annual revenue streams amount to $57,000,000 (excluding VAT), and the carrying value of the assets as of December 31, 2018 , is $69,667,000.  The Lenders have no recourse to any other assets of Perurail.





During 2016, the Company entered into a non-recourse loan agreement with Banco de Crédito del Perú S.A., Scotiabank del Perú S.A.A., Banco Internacional del Perú S.A.A. and Banco Sabadell for a total of $126,956,000. This loan was obtained to fund the freight services the Company provides to the Las Bambas mining project. The loan has three tranches, and the drawdowns occurred between February and May 2016. The loan is payable in quarterly installments with a maturity date in February 2026 and each tranche bears interest at annual effective interest rates of 3.10%, 5.20% and 5.85%.








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During 2016, the Company entered into a second non-recourse loan agreement with Banco de Crédito del Perú S.A. and Scotiabank del Perú S.A.A. for a total of $ 34,100,466. This loan was obtained to fund the freight services the Company provides to the Cerro Verde mining project. The loan was fully drawdown in June 2016. The loan is payable in monthly installments with a maturity date in September 2023 and bears interest at an annual effective interest rate of 6.23% per annum.





The balance of debt issuance costs related to the above outstanding long-term debt of the Company was $2,446,000 at December 31, 2018 ( 2017 - $2,806,000 ) and is amortized to interest expense over the term of the corresponding long-term debt.





Perurail guarantees the long-term debt obligations of Ferrocarril Transandino for the period of its lease with the Company as described in Note 1(a). The guarantee applies to payment defaults of amounts equal to or greater than the $1,000,000. Ferrocarril Transandino had no long-term debt outstanding as of December 31, 2018 and 2017. See Note 13.





The following is a summary of the aggregate maturities of long-term debt of the Company excluding obligations under capital leases at December 31, 2018 :





Year ending December 31,$’000201914,041202014,038202114,845202215,6902023 and thereafter58,911Total long-term debt excluding obligations under capital leases117,525





(b)  Obligations under capital leases





At December 31, 2018, the Company had five leasing contracts. The amounts of the obligations under capital leases are  $3,311,000, $3,669,000, $3,318,000, $6,810,000 and $4,569,000, with two capital leases (amounting to $7,887,000 at December 31, 2017) entered into during 2018. With this addition during the year, the total amount of the obligations under capital leases as at December 31, 2018 is $21,677,000.





The following is a summary of future minimum lease payments under capital leases together with the present value of the minimum lease payments at December 31, 2018 :





Year ending December 31,$’00020195,71820205,86920216,03020224,8332023 and thereafter—22,450Minimum lease paymentsLess: amount of interest contained in above payments(773)Present value of minimum lease payments21,677Less: current portion(5,320)16,357





The amount of interest deducted from minimum lease payments to arrive at the present value is the interest contained in each of the leases.








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(c)  Fair value of financial instruments





Certain methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value. The carrying amount of cash and cash equivalents, accounts receivable, working capital facilities, accounts payable and accrued liabilities approximates fair value because of the short maturity of those instruments. The fair value of debt is calculated by discounting back future interest and principal payments using a discount factor which reflects the Company’s current credit metrics. This factor is derived from a credit analysis using inputs such as profit, cash generation, and level of debt.





The estimated fair values of the Company’s debt as of December 31, 2018 and 2017 are as follows:


December 31, 2018December 31, 2017Carrying amountFair valueCarrying amountFair value$’000$’000$’000$’000Long-term debt, including current portion, before deduction of debt issuance costs, excluding obligations under capital leases117,525115,799135,589134,059





(d)    Non-financial assets measured at fair value on a non-recurring basis





There were no non-financial assets measured at fair value on a non-recurring basis for the years ended December 31, 2018 , 2017 and 2016 .








7.  Income taxes





The provision for income taxes consists of the following:


201820172016Year ended December 31,$’000$’000$’000Earnings before income tax21,26317,47024,093Current income tax charge(7,573)(8,028)(9,257)Deferred income tax credit9792,656412Total(6,594)(5,372)(8,845)





The reconciliations of the Peruvian income tax rate to the Company’s effective income tax rate for the three years ended December 31, 2018 , 2017 and 2016 are as follows:


201820172016Year ended December 31,%%%Peruvian income tax rate29.529.528Permanent differences1.44.09Change of rate——2Other0.1(2.8)(2)Effective tax rate3130.737





Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following represents the Company’s net deferred tax liabilities:








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201820172016December 31,$’000$’000$’000Provisions included in books158133228Other deferred income tax assets4671,326779Deferred income tax assets6251,4591,007Fixed assets and intangibles(2,788)(3,879)(8,516)Exchange rate related to fixed assets(282)(61)1,731Other deferred tax liabilities122(821)(180)Deferred income tax liabilities(2,948)(4,761)(6,965)Net deferred income tax liabilities(2,323)(3,302)(5,958)





By means of Legislative Decree No. 1261, enacted on December 10, 2016, the Peruvian income tax law was amended to be effective as of fiscal 2017. This amendment sets forth a corporate income tax rate of 29.5%. It also sets forth an income tax rate on dividends of 5% applicable to non-domiciled legal entities and individuals effective as of fiscal 2017. Profits accumulated up to December 31, 2017 continued to be taxed at 6.8% income tax rate regardless of whether the distribution was agreed or occurs in subsequent periods.








8.  Shareholders’ equity





(a)  Share capital and additional-paid in capital





The shareholders of the Company are as follows:


Number ofsharesPercentageownershipBelmond Ltd.25,000,00050Peruvian Trains & Railways S.A.25,000,0005050,000,000100





(b)  Legal reserve





In accordance with Peruvian law, a minimum 10% of the annual profits that can be distributed are required to be transferred to a legal reserve until it equals 20% of the paid-in capital. The legal reserve can be used only to offset losses, but must be replenished and cannot be distributed as dividends, except in case of liquidation. The Company may capitalize the legal reserve but must replenish it in the year immediately after profits are obtained.





For the year ended December 31, 2016, the Company increased its legal reserve by the amount of $916,000, which was set aside from earnings corresponding to the 2016 period. Calculations of the legal reserve are based on locally prepared financial statements in accordance with International Financial Reporting Standards as required by “Ley General de Sociedades” in Peru.





(c)  Retained earnings





Retained earnings may be capitalized or distributed as dividends by resolution of the shareholders. The Company ́s distributable profits are limited to the amount of retained earnings available under local statutory provisions. Dividends to be distributed to shareholders other than legally resident entities are subject to an income tax of 6.8% (based on the profit in 2016) and 5.00% (on the profits for 2017 and thereafter) by the shareholders; the Company is required to withhold and settle these taxes.








9.  Employees’ profit sharing





Pursuant to Peruvian law, employees have a share of 5% of the Company profits before income tax. Employees’ profit sharing is computed on the taxable net income balance of the year subject to tax, as assessed for local purposes. See Note 1(r).





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10.     Revenue, net of discount





Financial information regarding the breakdown of revenues by type of product is as follows:


201820172016Year ended December 31,$’000$’000$’000Passenger transport95,53887,64886,004Freight and cargo transport65,81866,78757,108Other2,5552,6453,459Revenue163,911157,080146,571








11.  Commitments and contingencies





As of December 31, 2018, there were four pending labor-related legal proceedings against the Company with damages alleged in the aggregate amount of $2,228,000. The Company does not believe that these claims have any merit and expects to prevail in the proceedings.





The Company has approximately $26,071,000 of bank guarantees and letters of credit at December 31, 2018 (2017 - $28,661,000) issued by various financial institutions to third parties as security under various contractual arrangements and with a range of  expiration dates from January 2019 to December 2019 with the largest single commitment being the fifteen million dollar ($15,000,000) bank guarantee provided in connection with the Las Bambas contract. See Note 4.





Rental expense for the year ended December 31, 2018 amounted to $2,627,000 ( 2017 - $3,733,000; 2016 - $3,006,000). The following is a summary of future minimum lease payments under operating leases at December 31, 2018:





Year ending December 31,$’00020192,09220202,17220212,19820222,23520232,27010,967











12.  Supplemental cash flow information


201820172016Year ended December 31,$’000$’000$’000Cash paid during the period for:Interest7,1166,0266,116Income taxes8,5999,7215,522





The Company entered into capital leases during the year ended December 31, 2018 .  See Note 6(b).





During 2018, the Company acquired property, plant and equipment and intangible assets totaling $9,832,000 with $5,014,000 paid in cash. The remaining amount was acquired through capital leases.





As of December 31, 2018, there are provisions for unpaid interest which amount to $734,000, which reflects an increase in long-term debt of $734,000.








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13.  Cash and restricted cash





The major balances in cash, cash equivalents and restricted cash are as follows:





201820172016December 31,$’000$’000$’000Cash21,37125,55130,918Trust for freight mining projects13,76316,47512,775Total cash and restricted cash35,13442,02643,693














14.  Related party transactions





Accounts receivable include non-interest bearing loans extended to the Company’s shareholders. The amount due from shareholders to the Company at December 31, 2018 was $7,113 (2017 - $2,643).





Accounts receivable from Ferrocarril Transandino, an affiliate, for working capital requirements at December 31, 2018 were $16,805,000 (2017 - $18,359,000). These receivables fluctuate as the Company utilizes the railway, locomotives and rolling stock, and stations and yards of Ferrocarril Transandino.





The amount due to Ferrocarril Transandino at December 31, 2018 was $407,000 (2017 - $279,000) and relates to the invoicing for the access and use of the railway, locomotives and rolling stock, stations and yards, and loans. These accounts are short-term and accrue no interest. In 2018, the Company received services from Ferrocarril Transandino in the amount of $29,261,000 (2017 - $26,593,000; 2016 - $26,181,000), including a value added tax of 18% (2017 and 2016 - 18%).





The amount due to Belmond Peru S.A. for expense reimbursements at December 31, 2018 was $Nil (2017 - $6,000).





The amount due to Belmond Peru Management S.A. at December 31, 2018 was $1,088,000 (2017 - $3,675,000) relating to the invoice of management fees and expense reimbursements established in the current management agreement.





The amount due to Belmond Ltd. at December 31, 2018 was $214,000 (2017 - $Nil) relating to the invoice of licence fees and marketing expenses.





The amount due to Peru Experiences Belmond S.A. at December 31, 2018 was $52,000 (2017 - $14,000) relating to the invoice of working capital facilities.





The amount due to Peru Belmond Hotels S.A. at December 31, 2018 was $385,000 (2017 - $256,000) relating to the invoice of on-board catering services, which accrues no interest.





On April 19, 2016, the Company completed the purchase of carriages to be used as the Belmond Andean Explorer service from Belmond Ltd., which were formerly operated as the Great South Pacific Express in Queensland, Australia. The amount paid for this equipment was $2,362,000.








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15.  Subsequent events





On April 17, 2019, LVMH Möet Hennessy - Louis Vuitton SE ("LVMH") completed its acquisition of Belmond Ltd., a 50% shareholder in the Company, pursuant to the terms of an Agreement and Plan of Merger, dated December 13, 2018, by and among Belmond Ltd., LVMH, Palladio Overseas Holding Limited, and Fenice Ltd. Pursuant to the Agreement and Plan of Merger, Fenice Ltd. was merged with and into Belmond Ltd., with Belmond Ltd. surviving the merger as a subsidiary of Palladio Overseas Holding Limited and an indirect subsidiary of LVMH.





The Technical Secretary of “Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual” (INDECOPI) in Cusco initiated an ex officio proceeding against the Company for the alleged infringement of articles 19 and 25 of the Consumer Defense Code, as a result of the train collision that took place on July 31, 2018, in which one of the Company’s trains was involved. On September 24, 2018, the Company submitted its answer to the infringement notification. On October 3, 2018, INCARAIL S.A. submitted a writ refuting the arguments and evidence filed by the Company.





On March 22, 2019, the Company was served with a decision issued by the Commission of the INDECOPI’ Regional Office of Cusco (First Administrative Instance) pursuant to which INDECOPI imposed a fine of 450 UIT (S/1,890,000, US$573,000, Ex Rate S/3.3=US$1) per infringement of article 25 of the Consumer Defense Code. On April 12, 2019, the Company appealed this decision to the Regional Office of Cusco (Second Administrative Instance). The Company expects it is probable that it will need to pay the fine since it believes that the decision of INDECOPI' will be upheld upon appeal and the fine imposed; however, the Company would have the right to appeal to the Judicial Court of the First Instance in Lima.














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FERROCARRIL TRANSANDINO S.A.





Report of Independent Registered Public Accounting Firm





Board of Directors and Shareholders


Ferrocarril Transandino S.A.


Lima, Peru





Opinion on the Financial Statements





We have audited the accompanying balance sheets of Ferrocarril Transandino S.A. as of December 31, 2018 and 2017, and the related statements of operations and comprehensive income/(loss), of changes in shareholders’ equity and of cash flows for each of the two years in the period ended December 31, 2018, including the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Ferrocarril Transandino S.A. as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.





The accompanying statements of operations and comprehensive income/(loss), of changes in shareholders’ equity and cash flows of Ferrocarril Transandino S.A. for the year ended December 31, 2016 are presented for purposes of complying with Rule 3-09 of SEC Regulation S-X; however, Rule 3-09 does not require the 2016 financial statements to be audited and they are therefore not covered by this report.





Basis for Opinion





These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.





We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.





Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.








/s/ Gaveglio, Aparicio y Asociados S. Civil de R. L.Lima, PeruApril 24, 2019Countersigned by:/s/ Francisco PatiñoFrancisco PatiñoPeruvian Certified Public AccountantRegister No. 01-25611





We have served as the Company’s auditor since 2017





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Ferrocarril Transandino S.A.


Balance Sheets


20182017December 31,$’000$’000AssetsCash821997Restricted cash11,6299,921Accounts receivable, net of allowances of $Nil and $Nil841772Due from related parties407279Inventories5,9534,474Prepaid expenses and other1592,706Total current assets19,81019,149Property, plant and equipment, net of accumulated depreciation of $360 and $1,224857443Deferred costs, net of accumulated amortization of $21,974 and $27,134 and impairment loss of $58,33132,58627,604Intangible assets, net of accumulated amortization of $422 and $835492Deferred income tax asset, net2,7564,354Total non-current assets36,20332,493Total assets56,01351,642Liabilities and Shareholders’ EquityAccounts payable1,1061,658Accrued liabilities19,52820,025Due to related parties16,85518,444Total current liabilities37,48940,127Deferred revenue7,1017,544Total long-term liabilities7,1017,544Total liabilities44,59047,671Commitments and contingencies (Note 10)Shareholders’ equity:Common shares S/1.00 par value (25,000,000 shares authorized):Issued - 25,000,000 (2017 - 25,000,000)7,8577,857Legal reserve546546Retained earnings/(deficit)3,020(4,432)Total shareholders’ equity11,4233,971Total liabilities and shareholders’ equity56,01351,642


The accompanying notes are an integral part of these financial statements.








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Ferrocarril Transandino S.A.


Statements of Operations and Comprehensive Income/(Loss)


201820172016Year ended December 31,$’000$’000$’000(unaudited)Revenue, net of discounts34,51331,06426,125Expenses:Cost of services(16,290)(13,174)(11,271)Selling, general and administrative(4,588)(6,281)(4,010)Depreciation and amortization(2,233)(3,738)(4,798)Impairment of assets—(58,531)—Total operating costs and expenses(23,111)(81,724)(20,079)Earnings/(losses) from operations11,402(50,660)6,046Interest expense, net(310)(204)(361)Foreign currency, net117(100)(78)Earnings/(losses) before income tax11,209(50,964)5,607(Provision for)/benefit from income taxes(3,757)13,437(1,014)Net earnings/(losses) and comprehensive income/(losses)7,452(37,527)4,593





The accompanying notes are an integral part of these financial statements.








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Ferrocarril Transandino S.A.


Statements of Shareholders’ Equity


Common shares at par valueLegal reserveRetained  earnings/(deficit)Total shareholders' equity$’000$’000$’000$’000Balance at January 1, 2016 (unaudited)7,85754628,50236,905Net earnings (unaudited)——4,5934,593Balance at December 31, 2016 (unaudited)7,85754633,09541,498Net losses——(37,527)(37,527)Balance at December 31, 20177,857546(4,432)3,971Net earnings——7,4527,452Balance at December 31, 20187,8575463,02011,423





The accompanying notes are an integral part of these financial statements.








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Ferrocarril Transandino S.A.


Statements of Cash Flows


201820172016Year ended December 31,$’000$’000$’000(unaudited)Cash flows from operating activities:Net earnings/(losses)7,452(37,527)4,593Adjustment to reconcile net earnings/(losses) to net cash provided by operating activities:Depreciation1153423Amortization2,1183,7044,775Impairment of assets—58,531—Change in deferred tax1,598(16,835)(1,474)Change in assets and liabilities:(Increase)/decrease in accounts receivable(69)562(1,104)Decrease in prepaid expenses and other2,5479262,039(Increase)/decrease in inventories(1,479)(664)49(Decrease)/increase in accounts payable(552)403(1,927)(Decrease)/increase in due from related parties(128)17(78)(Decrease)/increase in accrued liabilities(496)6,4818,237Decrease in deferred revenue(443)(442)(2,248)Total adjustments3,21152,7178,292Net cash provided by operating activities10,66315,19012,885Cash flows from investing activities:Capital expenditures(7,542)(6,984)(6,603)Net cash used in investing activities(7,542)(6,984)(6,603)Cash flows from financing activities:Payments on working capital facilities—(2,125)(6,496)(Decrease)/increase in due from related parties(1,589)(3,361)747Net cash used in financing activities(1,589)(5,486)(5,749)Net increase in cash and restricted cash1,5322,720533Cash and restricted cash at beginning of year10,9188,1987,665Cash and restricted cash at end of year12,45010,9188,198





The accompanying notes are an integral part of these financial statements.








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Ferrocarril Transandino S.A.


Notes to Financial Statements








1.  Summary of significant accounting policies and basis of presentation





(a)  Business





Ferrocarril Transandino S.A. (hereinafter the “Company”) was incorporated in the city of Lima, Peru in 1999.





The Company is 50% owned by Belmond Ltd., which is incorporated in Bermuda, and 50% owned by Peruval Corp. S.A., which is incorporated in Panama.





Its headquarters and registered address are located at Av. Armendariz 480 office 402, District of Miraflores, Department of Lima.





The purpose of the Company is to act as the concessionaire under its concession from the Government of Peru to operate the track network in southern and southeastern Peru, for which it receives payment by operators on the track network of track access fees, a portion of which it pays to the Government. As the concessionaire, it is responsible for maintenance of the track network and certain other assets that are part of the concession, such as locomotives and rolling stock and for the development of the track network.





In September 1999, the Company was awarded the South and South-East Railways operation pursuant to a public bidding process through the Ministry of Transport and Communications ("MTC") in Peru. The concession under the Concession Contract entered into between the Company and MTC in 1999 (the "Concession Contract") had an initial term of 30 years with an option to apply for six 5-year extensions. In 2003, the MTC granted the Company the initial five-year extension. The MTC has denied the Company's second, third and fourth requests for extensions in 2009, 2017 and 2018, respectively. As a result, since December 2017, the Company can no longer conclude that the remaining three extensions are probable and has therefore reduced its expectation of the total expected life of the concession to the contracted term of 35 years of which 16 years are remaining as of December 31, 2018. The life of the concession is now expected to expire in September 2034. Based on the shorter time period over which to recover the carrying value an impairment charge of US$58,531,000 was recorded in the year ended December 31, 2017. See Note 3.





(b)  Basis of presentation





The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the results of operations, financial position and cash flows of the Company. The financial statements have been prepared using the historical cost basis in the assets and liabilities and the historical results of operations directly attributable to the Company in the normal course of business.





“FASB” means Financial Accounting Standards Board. “ASC” means the Accounting Standards Codification of the FASB and “ASU” means an Accounting Standards Update of the FASB.





(c)  Estimates





The Company bases its estimates on historical experience and also on assumptions the Company believes are reasonable based on the relevant facts and circumstances of the estimate. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.





Estimates include, among others, the allowance for doubtful accounts, allowance on devaluation of inventories, long-lived asset impairment, depreciation and amortization, taxes and contingencies. Actual results could differ from those estimates.





(d)  Foreign currency





The functional currency of the Company is the U.S. Dollar, which is also the reporting currency of the Company. The local currency is the Peruvian Sol.








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Foreign currency transaction gains and losses are recognized in earnings as they occur. Transactions in currencies other than the Company’s functional currency (“foreign currencies”) are recorded at the exchange rates prevailing on the dates of the transactions. All monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate prevailing at the reporting date. Non-monetary items carried at historical cost are translated at the exchange rate prevailing on the date of transaction. Exchange differences arising from changes in exchange rates are recognized in earnings as they occur.





(e)  Cash





Cash includes all cash balances. The Company keeps its bank accounts in functional currency and local currency. Cash balances are freely disposable and accrue no interest.





(f)  Restricted cash





Restricted cash is the carrying amount of cash and cash equivalents which are restricted under contract or otherwise as to withdrawal or usage. The restricted cash is mainly composed of funds held in a trust account of a local bank. The collected cash from operations of the Company is deposited into a reserve account as restricted fund to be used to pay the remuneration to the Peruvian State. See Note 1(p).





(g)  Accounts receivable and allowance for doubtful accounts





The Company states its accounts receivable at their outstanding fair value adjusted for any write off and allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for specifically identified estimated losses resulting from the inability of its customers to make required payments.





(h)  Inventories





Inventories include supplies for minor maintenance of railway track. Inventories are valued at the lower of cost or net realizable value under the weighted average method.





(i)  Income taxes





Current portion of income tax





The amount of income taxes paid or payable is determined by applying the provisions of the enacted tax law to the taxable income or excess deductions over revenues for the year. The rates used and regulations applied to compute the amount are those enacted as of the balance sheet date.





Deferred portion of income taxes





The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of transactions and events that have been recognized in the financial statements but have not yet been reflected in the Company’s income tax returns, or vice versa.





Deferred income taxes result from temporary differences between the carrying value of assets and liabilities recognized for financial reporting purposes and their respective tax bases. Deferred taxes are measured at enacted statutory rates and are adjusted as enacted rates change. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized based on available evidence.





In evaluating the Company’s ability to recover deferred tax assets, management considers all available evidence, both positive and negative, which includes reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. Management reassesses the need for valuation allowances at each reporting date. Any increase or decrease in a valuation allowance will increase or reduce, respectively, the income tax expense in the period in which there has been a change in judgment.





Income tax positions must meet a more-likely-than-not threshold to be recognized in the financial statements. Management recognizes tax liabilities in accordance with ASC 740 guidance applicable to uncertain tax positions, and adjusts these liabilities when a judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different





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from the Company’s current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which the actual tax liabilities are determined or the statute of limitations has expired. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the statements of operations. Liabilities for uncertain tax benefits are included in the balance sheets and classified as current or non-current liabilities depending on the expected timing of payment. At December 31, 2018 and 2017 the Company did not record any liabilities for uncertain tax positions.





(j)  Property, plant and equipment





Property, plant and equipment is stated at cost less accumulated depreciation. The cost of significant renewals and improvements is capitalized and depreciated, while expenditures for normal maintenance and repairs are expensed as incurred.





Depreciation expense is computed using the straight-line method over the following estimated useful lives:


DescriptionUseful livesInstallations10 to 35 yearsMachinery and equipmentUp to 10 yearsTransport unitsUp to 10 yearsOwned locomotives and rolling stockUp to 10 yearsFurniture and fixtures and computer equipmentUp to 5 years





Land is not depreciated.





(k)  Deferred costs





In 1999, the Company was awarded a concession from the Government of Peru to operate the track network, including the use of rail track, rail stations and other ancillary rail-related services and businesses of the South and South-East Railways in Peru. Through this concession, the Company maintains and develops rail tracks, stations and other rail services where it has been granted rights to perform such services. In accordance with ASC 853 Service Concession Arrangements, the Company defers construction costs related to the investment in infrastructure to the extent that these costs meet the definition of an asset and are probable of recovery through the operation of the infrastructure.





These deferred costs are amortized over the estimated useful life of the concession.





The Concession Contract had an initial term of 30 years with an option to apply for six 5-year extensions. In 2003, the MTC granted the Company the initial five-year extension. The MTC has denied the Company's second, third and fourth, requests for extensions in 2009, 2017 and 2018, respectively. As a result, the Company can no longer conclude that the remaining three extensions are probable and has therefore reduced its expectation of the total expected life of the concession to the contracted term of 35 years of which 16 years are remaining as of December 31, 2018. The life of the concession is now expected to expire in September 2034.





(l)  Intangible assets





Software costs are recorded under assets and classified as intangibles if such costs are not part of the related hardware. Software is amortized using the straight-line method.





Amortization expense is computed using the straight-line method over the following estimated useful lives:


DescriptionUseful livesSoftware and licenses4 years








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(m)  Impairment of long-lived assets





The Company’s management evaluates the carrying value of long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets if certain trigger events occur. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, sales of similar assets, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. The Company evaluates the carrying value of its long-lived assets based on its plans at the time for such assets and such qualitative factors as future development in the surrounding area, status of expected local competition and projected incremental income from renovations. Changes to the Company's plans, including a decision to dispose of or change the intended use of an asset, can have a material impact on the carrying value of the asset.





An impairment charge of $58,531,000 was recorded in the year ended December 31, 2017.​ See Note 3.





(n)  Employees’ length of service compensation





The provision for employees’ length of service compensation included under taxes and other accounts payable is charged to operations as the compensation becomes due.





(o)  Recognition of income from the exploitation of goods under concession





Income from the operation of goods under the concession is recognized, as appropriate when:





1.    The amount of revenues can be reliably quantified; and





2.    The transaction-related economic benefits are likely to flow to the Company.





Income from use of railway





The income from the use of the railway is recognized at the time an operator using the track makes effective use of the railway network based on the kilometers traveled; the rate charged per kilometer traveled is subject to the annual automatic adjustment mechanism as set forth in the Concession Contract.





Income from rental of wagons, cars and locomotives





The rental income for wagons, cars and locomotives is recognized based on the kilometers traveled.





Income from rental of real estate (usufruct contract)





Revenues from the rental of real estate are recognized monthly on a straight-line basis in the periods in which the rents are accrued.





Deferred revenue includes revenue related to the above income streams which has been collected, but the related services have not yet been provided.





(p)  Remuneration to the State





Under the Concession Contract, the Company is committed to pay the following amounts, net of any credits:





|  |                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|- | Main consideration, which is to be paid annually, amounting to 37.25% of gross revenues (as defined in the Concession Contract), excluding any revenues from the lease of locomotives and rolling stock.




|  |                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------
|- | Special consideration, which is to be paid monthly, amounting to 50% of the revenues obtained from the lease of locomotives and rolling stock.




The Company has generated valid credits against the main consideration and will apply the remaining balance of the credit ($2,512,000) to the calculated amounts during 2018. Under the Concession Contract, the Company is not entitled to generate additional credits.





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(q)  Risks and uncertainties





The Company’s activities expose it to a variety of financial risks: market risks (including interest rate risk and exchange rate risk), credit risk, and liquidity risk. The Company’s risk management program tries to minimize the potential adverse effects on its financial performance. Management, based on its knowledge and experience, seeks to mitigate the exchange rate, interest rate, credit and liquidity risks by following the policies approved by the Board of Directors. The most important aspects of these risks are:





Liquidity risk





Liquidity risk is the risk that cash may not be available to pay obligations at their maturity at a fair value. The Company mitigates liquidity risk through its procedures to monitor and manage asset and liability maturity dates, and  using its available lines of credit. According to the projected cash flow and under current conditions, the Company expects to pay in full the liability with its related affiliate, Perurail S.A. ("Perurail") (see Note 13), each year.





Credit risk





The Company’s financial assets that are potentially exposed to concentration of credit risk are mainly trade accounts receivable, accounts receivable from related parties and from shareholders, and various accounts receivable.





Interest rate risk





The Company ́s exposure to this risk arises from changes in the interest rates in its financial assets and liabilities.





Exchange rate risk





The Company carries out some of its transactions in foreign currency, but management estimates that due to their short-term nature, any fluctuation will not materially adversely affect the results of the Company’s operations.





(r)  Employee profit sharing





In accordance with Peruvian law, employee profit sharing is limited to 18 times an employee’s monthly average salary. The excess of calculated statutory employee profit sharing is paid to the Peruvian government and is treated as an additional tax. The Company’s practice is to recognize the employee profit sharing as part of operating cost and any excess profit sharing is recognized as part of current income tax. The Company has a 5% rate for calculating employee profit sharing.  To date, no excess profit sharing has been recognized.





(s)    Accounting pronouncements adopted during the year





In October 2016, the FASB issued new guidance which is intended to simplify the tax consequences of certain types of intra-entity asset transfers. The Company adopted ASU 2016-18 on a modified retrospective basis as of January 1, 2018. The adoption of this standard did not have an impact on the current period or prior period financial statements.





In November 2016, the FASB issued new guidance which clarifies the classification and presentation of restricted cash in the statement of cash flows, including disclosing the nature of restricted cash and restricted cash equivalent balances. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods therein, with early adoption permitted. Belmond adopted the new guidance on January 1, 2018, using a retrospective transition method to each period presented. As a result of adopting this guidance the Company has included in its cash and cash equivalents balances in the statement of cash flows those amounts that are deemed to be restricted cash. In addition, as cash, cash equivalents and restricted cash are presented in more than one line item on the balance sheet, Belmond has, for each period that a statement of financial position is presented, provided a reconciliation of the totals in the statement of cash flows to the related captions in the statement of financial position together with disclosure on the nature of restricted cash balances (see Note 12).





(t)    Accounting pronouncements to be adopted





In May 2014, the FASB issued new guidance which is intended to improve the comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The guidance supersedes existing revenue





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recognition guidance and 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. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the new guidance. In March 2016, the FASB issued additional guidance which amends the principal-versus-agent implementation guidance and illustrations in the original accounting pronouncement. In May 2016, the FASB issued an update that clarified guidance in certain narrow aspects of the topic. The guidance was originally effective for annual and interim periods beginning after December 15, 2016, however in July 2015 the FASB confirmed that the effective date would be deferred by one year, to annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption was permitted as of the original effective date in ASU 2014-09 (i.e., annual reporting periods beginning after December 15, 2016, including interim reporting periods within the annual periods). In July 2017, the SEC announced that certain public business entities, which under the announcement would include a company such as Ferrocarril Transandino, were able to defer the adoption of the new standard for one year. The Company intends to adopt the standard in the annual period beginning January 1, 2019 under the modified retrospective approach with a cumulative effect recognized in equity and no prior period restatement.





The Company does not expect the adoption of this standard will have a material impact to its financial statements. Under ASU 2014-09, a performance obligation is satisfied, and the related revenue recognized, when control of the underlying goods or services related to the performance obligation is transferred to the customer. We have concluded that there is one performance obligation associated with the operation of the railway network and related infrastructure in proper condition and in compliance with required safety standards. Each customer simultaneously receives and benefits from the railway services provided by the Company as they are performed. The revenue will therefore be recognized over time as the performance obligation is satisfied. This is in line with how revenue is currently recognized. No cumulative effect adjustment to retained earnings is expected upon adoption of the standard.





In February 2016, the FASB issued its new standard on accounting for leases, which introduces a lessee model that brings most leases on the balance sheet. Under the new standard, a lessee will recognize on its balance sheet a right-of-use asset and lease liability for most leases, including operating leases. The new standard will also distinguish leases as either finance leases or operating leases.





In January 2018, the FASB issued an update that clarified the application of the new leases standard to land easements. Additionally, in July 2018, the FASB issued two updates to make targeted improvements to the new lease standard. The first update makes 16 separate narrow-scope amendments to the new leases standard. The second update provides entities with relief from the costs of implementing certain aspects of the new leasing standard and with an additional (and optional) transition method on adoption. It also allows lessors not to separate non-lease components from the associated lease component if certain conditions are met. An entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB issued an update which clarified the accounting by lessors when applying the new leases standard. The update addressed the following issues lessors encounter: 1) sales taxes and other similar taxes collected from lessees 2) certain lessor costs paid directly by lessees, and 3) recognition of variable payments for contracts with lease and non lease components. In July 2017, the SEC announced that certain public business entities, for which Ferrocarril Transandino meets the definition, were able to defer the adoption of the new standard for one year. The Company intends to adopt the standard in the annual period beginning January 1, 2020, as permitted by the SEC, using the transition method that permits the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the impact of the adoption of this guidance in its financial statements.





In June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”), “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss methodology to an expected loss methodology. ASU 2016-13 affects trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses”. This ASU clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. The effective date is the first quarter of fiscal year 2021, with early adoption permitted beginning in fiscal year 2020. The Company is evaluating the potential effects on its financial statements.





In February 2017, the FASB issued new guidance to clarify the scope of the FASB's guidance on nonfinancial asset derecognition (ASU 610-20), as well as the accounting for partial sales of nonfinancial assets. The guidance is effective on the same date the new revenue guidance is adopted, with early adoption permitted. The Company intends to adopt the





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standard in the annual period beginning January 1, 2019 and does not expect the adoption of this guidance to have a material effect on its financial statements.





In July 2018, the FASB issued amendments to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. Some of the amendments were effective upon issuance and others have transition guidance with effective dates for annual periods beginning after December 15, 2018. The Company is currently evaluating the potential impact of those amendments that are not yet effective but it does not expect they will have a material impact on its financial statements.





In August 2018, the FASB issued two new standards to improve the effectiveness of disclosures in notes to the financial statements. The first standard removes, modifies and adds certain disclosure requirements related to fair value measurements in ASC 820 and is effective for fiscal years beginning after December 15, 2019, including interim periods therein, with early adoption permitted. The Company intends to adopt the standard in the annual period beginning January 1, 2020. The second standard modifies ASC 715-20 to improve disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans and is effective for fiscal years beginning after December 15, 2020, including interim periods therein, with early adoption permitted. The Company intends to adopt the standard in the annual period beginning January 1, 2021. The Company is currently assessing what impact the adoption of this guidance will have on its financial statements.





In May 2017, the FASB issued new guidance on service concession arrangements. The guidance is effective on the same date the new revenue guidance is adopted, with early adoption permitted. The Company intends to adopt the standard in the annual period beginning January 1, 2019. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements.











2.    Property, plant and equipment





The major classes of property, plant and equipment are as follows:


20182017December 31,$’000$’000Installations275—Machinery and equipment939879Transport units—717Furniture and fixtures3711,2171,667Less: Accumulated depreciation(360)(1,224)Total property, plant and equipment, net of accumulated depreciation857443





The depreciation charge on property, plant and equipment for the year ended December 31, 2018 was $115,000 ( 2017 - $34,000; 2016 - $23,000).





In 2018, the Company acquired assets in the amount of $666,000 (2017 - $230,000; 2016 - $17,000). Also during 2018, assets in the amount of $126,000 (net of depreciation) were reclassified from property, plant and equipment to deferred costs.





No property, plant and equipment impairments were recorded in the years ended December 31, 2018 , 2017 and 2016 .








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3.    Deferred costs





Deferred costs consist of the following as of December 31, 2018 and 2017 :


Carrying amountAccumulated amortizationNet book value$’000$’000$’000Balance at January 1, 2017 (unaudited)106,011(23,447)82,564Additions7,258(3,687)3,571Impairment(58,531)—(58,531)Balance at December 31, 201754,738(27,134)27,604Additions6,876(2,111)4,765Disposals(7,579)7,579—Reclassifications525(308)217Balance at December 31, 201854,560(21,974)32,586





Amortization expense for the year ended December 31, 2018 was $2,111,000 (2017 - $3,687,000; 2016 - $4,761,000).





The Company invests in and develops rail tracks, stations and other rail services where it has been granted rights to perform such services. The Company defers construction costs related to the investment in infrastructure to the extent that these costs meet the definition of an asset and are probable of recovery through the operation of the infrastructure.





Additions for the year ended December 31, 2018 were $6,876,000 (2017 - $7,258,000; 2016 - $8,014,000). These deferred costs are amortized over the estimated useful life of the concession.





During the year ended December 31, 2017, the Company considered whether the change in the useful life of the concession, described below, indicated that the carrying amount of the related deferred costs may not be recoverable.





The Concession Contract had an initial term of 30 years with an option to apply for six 5-year extensions. In 2003, the MTC granted the Company the initial five-year extension. The MTC has denied the Company’s second, third and fourth requests for extensions in 2009, 2017 and 2018, respectively. As a result, the Company can no longer conclude that the remaining two extensions are probable and has therefore reduced its expectation of the total expected life of the concession to the contracted term of 35 years of which 16 years are remaining as of December 31, 2018. The life of the concession is now expected to expire in September 2034.





No deferred costs impairments were recorded in the years ended December 31, 2018 and 2016. However, in the year ended December 31, 2017, based on the shorter time period over which to recover the carrying value of the asset, Ferrocarril Transandino concluded that an impairment trigger existed and an impairment test was required in 2017. The carrying value of assets was written down to management’s best estimate of the fair value based on internally developed discounted cash flow analysis. As a result, an impairment charge of $58,531,000 was recorded in the year ended December 31, 2017, included within impairment of assets in the statements of operations and comprehensive income/loss.














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4.    Intangible assets





Intangible assets consist of the following as of December 31, 2018 and 2017 :


ConcessionsSoftware and licensesTotal$’000$’000$’000Carrying amount:Balance at January 1, 2017 (unaudited)228699927Additions———Balance at December 31, 2017228699927Disposals—(289)(289)Reclassifications(228)16(212)Balance at December 31, 2018—426426Accumulated amortization:Balance at January 1, 2017 (unaudited)131687818Charge for the period8917Balance at December 31, 2017139696835Charge for the period—77Disposals—(289)(289)Reclassifications(139)8(131)Balance at December 31, 2018—422422Net book value:December 31, 201789392December 31, 2018—44





Amortization expense for the year ended December 31, 2018 was $7,000 (2017 - $17,000; 2016 - $14,000).





Estimated amortization expense for the year ended December 31, 2019 is $4,000.








5.  Working capital facilities





In 2017, the working capital facilities were paid in full.





At December 31, 2018, the Company had approved lines of credit of approximately $6,210,000 (2017 - $5,150,000), which can be used as working capital. This includes guarantee letters issued by various financial institutions with various expiration dates, of which $6,130,000 was undrawn as at December 31, 2018 (2017 - $ 5,070,000). The remaining amount of $80,000 as at December 31, 2018 (2017 - $80,000), relates to non-executed guarantee letters issued to cover operational needs.








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6.  Accrued liabilities





A breakdown of accrued liabilities and deferred revenue is as follows:





20182017December 31,$’000$’000Concession fee to the State (see Note 1(p))9,9839,018Accrual for tax contingencies3,8453,497Current tax payable2,8421,968Remuneration and profit sharing payable700732Other tax payable606101Provision for purchases and services517731Deferred revenue4432,955Vacation payable96110Employees’ length of service compensation2824Other accounts payable46888919,52820,025








7.  Income taxes





The provision for income taxes consists of the following:


201820172016Year ended December 31,$’000$’000$’000(unaudited)(Losses)/earnings before income tax11,209(50,964)5,607Current income tax charge(2,159)(3,398)(2,488)Deferred income tax credit/(charge)(1,598)16,8351,474Total(3,757)13,437(1,014)





The reconciliations of the Peruvian income tax rate to the Company’s effective income tax rate for the three years ended December 31, 2018 , 2017 and 2016 are as follows:


201820172016Year ended December 31,%%%(unaudited)Peruvian income tax rate29.529.528Permanent differences1.1—6Change of rate——(2)Other2.9(3.5)(14)Effective tax rate33.526.018





Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following represents the Company’s net deferred tax liabilities:








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201820172016Year ended December 31,$’000$’000$’000(unaudited)Provisions included in books(130)10636Other deferred income tax assets(97)—858Deferred income tax assets(227)106894Fixed assets and intangibles(3,183)(4,538)11,524Other deferred tax liabilities6547863Deferred income tax liabilities(2,529)(4,460)11,587Net deferred income tax (assets)/liabilities(2,756)(4,354)12,481





By means of Legislative Decree No. 1261, enacted on December 10, 2016, the Peruvian income tax law was amended to be effective as of fiscal 2017. This amendment sets forth a corporate income tax rate of 29.5%. It also sets forth an income tax rate on dividends of 5% applicable to non-domiciled legal entities and individuals effective as of fiscal 2017. Profits accumulated up to December 31, 2017 continued to be taxed at 6.8% income tax rate regardless of whether the distribution was agreed or occurs in subsequent periods.








8.  Shareholders’ equity





(a)  Share capital and additional-paid in capital





The shareholders of the Company are as follows:


Number ofsharesPercentageownershipBelmond Ltd.12,500,00050Peruval Corp S.A.12,500,0005025,000,000100





(b)  Legal reserve





In accordance with Peruvian law, a minimum 10% of the annual profits that can be distributed are required to be transferred to a legal reserve until it equals 20% of the paid-in capital. The legal reserve can be used only to offset losses, but must be replenished and cannot be distributed as dividends, except in case of liquidation. The Company may capitalize the legal reserve but must replenish it in the year immediately after profits are obtained.





(c)  Retained earnings





Retained earnings may be capitalized or distributed as dividends by resolution of the shareholders. The Company ́s distributable profits are limited to the amount of retained earnings available under local statutory provisions. Dividends to be distributed to shareholders other than legally resident entities are subject to an income tax of 6.8% (based on the profit in 2016) and 5.00% (on the profits for 2017 and thereafter) by the shareholders; the Company is required to withhold and settle these taxes.








9.  Employees’ profit sharing





Pursuant to Peruvian law, employees have a share of 5% of the Company profits before income tax. Employees’ profit sharing is computed on the taxable net income balance of the year subject to tax, as assessed for local purposes. See Note 1(r).








10.  Commitments and contingencies








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As of December 31, 2018, the Company had administrative proceedings pending with various local governments with an aggregate claimed exposure of approximately $2,500,000. The Company does not believe that these claims have merit and expects to prevail in the proceedings.





In 2018, the Company issued a $11,585,738 third party bank guarantee in favor of MTC to guarantee the compliance of the Concession Contract (2017: $9,899,000).








11.  Supplemental cash flow information


201820172016Year ended December 31,$’000$’000$’000(unaudited)Cash paid during the period for:Interest——192Income taxes1,156140165





To reflect the actual cash paid for capital expenditure to acquire deferred costs and property, plant and equipment, increases in accounts payable for capital expenditure are non-cash and excluded from capital expenditure, while decreases are cash payments and included. The changes in accounts payable were a decrease of $Nil and $504,000 for the years ended December 31, 2018 and 2017, respectively.








12.  Cash and restricted cash





The major balances in cash, cash equivalents and restricted cash are as follows:





20182017December 31,$’000$’000Cash821997Guarantee for concession fees11,6299,921Total cash and restricted cash12,45010,918











13.  Related party transactions





Accounts receivable to Perurail at December 31, 2018 was $407,000 (2017 - $279,000) and relates to the invoicing for the access and use of the railway, locomotives and rolling stock, stations and yards, and loans. These accounts accrue no interest. In 2018, the Company provided services to Perurail in the amount of $29,261,000 (2017 - $26,593,000; 2016 - $26,181,000), including a value added tax of 18% (2017 and 2016 - 18%).





The amount due to Perurail for working capital requirements at December 31, 2018 was $16,805,000 (2017 - $18,359,000). These accounts fluctuate as the Company provides services by the railway, locomotives and rolling stock, and stations and yards.





The amount due to Belmond Peru Management S.A. at December 31, 2018 was $42,000 (2017 - $76,000) relating to the invoicing of management fees and expense reimbursements established in the current management agreement.





The amount due to Belmond Hotels UK Ltd. at December 31, 2018 was $8,000 (2017 - $8,000) relating to external expenses reimbursements.





The amount due to Belmond Peru S.A. at December 31, 2018 was $Nil (2017 - $1,000) relating to expense reimbursements established in the current management agreement.








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14.  Subsequent events





On April 17, 2019, LVMH Möet Hennessy - Louis Vuitton SE ("LVMH") completed its acquisition of Belmond Ltd., a 50% shareholder in the Company, pursuant to the terms of an Agreement and Plan of Merger, dated December 13, 2018, by and among Belmond Ltd., LVMH, Palladio Overseas Holding Limited, and Fenice Ltd. Pursuant to the Agreement and Plan of Merger, Fenice Ltd. was merged with and into Belmond Ltd., with Belmond Ltd. surviving the merger as a subsidiary of Palladio Overseas Holding Limited and an indirect subsidiary of LVMH.











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EXHIBIT INDEX Exhibit No.Incorporated by Reference toDescription2.1Exhibit 2.1 to the Current Report on Form 8-K filed December 14, 2018Agreement and Plan of Merger dated December 13, 2018 among Belmond Ltd., LVMH Moët Hennessy-Louis Vuitton SE, Palladio Overseas Holding Limited and Fenice Ltd.3.1Exhibit 3.1 to the Current Report on Form 8-K filed July 2, 2014Memorandum of Association and Certificate of Incorporation of Belmond Ltd.3.2Exhibit 3.2 to the Current Report on Form 8-K filed June 21, 2007Bye-Laws of Belmond Ltd.3.3Exhibit 1 to Amendment No. 1 to the Registration Statement on Form 8-A filed April 23, 2007Rights Agreement dated June 1, 2000, and amended and restated April 12, 2007, between Orient-Express Hotels Ltd. and Computershare Trust Company N.A., as Rights Agent3.4Exhibit 4.2 to the Current Report on Form 8-K filed December 10, 2007Amendment No. 1 dated December 10, 2007 to Amended and Restated Rights Agreement3.5Exhibit 4.3 to the Current Report on Form 8-K filed May 27, 2010Amendment No. 2 dated May 27, 2010 to Amended and Restated Rights Agreement3.6Exhibit 4.1 to the Current Report on Form 8-K filed December 14, 2018Amendment No. 3 dated December 13, 2018 to Amended and Restated Rights Agreement4.1Exhibit 10.1 to the Current Report on Form 8-K filed March 27, 2014Credit Agreement dated March 21, 2014 among Orient-Express Hotels Ltd., Belmond Interfin Ltd, Barclays Bank PLC, JPMorgan Chase Bank, N.A., and Credit Agricole Corporate and Investment Bank4.2Exhibit 10.1 to the Current Report on Form 8-K filed June 8, 2015First Amendment to Credit Agreement dated June 2, 2015 among Belmond Ltd., Belmond Interfin Ltd., Barclays Bank PLC, JPMorgan Chase Bank, N.A., and Credit Agricole Corporate and Investment Bank4.3Exhibit 10.1 to the Current Report on Form 8-K dated July 6, 2017Amended and Restated Credit Agreement dated July 3, 2017, among Belmond Ltd., Belmond Interfin Ltd., Barclays Bank PLC, Credit Agricole Corporate and Investment Bank, HSBC Bank USA, National Association, Fifth Third Bank and JP Morgan Chase Bank, N.A.10.1Exhibit 10.2 to the Annual Report on Form 10-K for the year ended December 31, 2012 (the "2012 Form 10-K")Orient-Express Hotels Ltd. 2004 Stock Option Plan, as amended10.2Exhibit 10.3 to the Annual Report on Form 10-K for the year ended December 31, 2008Orient-Express Hotels Ltd. 2007 Performance Share Plan, as amended10.3Exhibit 10.4 to the Annual Report on Form 10-K for the year ended December 31, 2009Orient-Express Hotels Ltd. 2007 Stock Appreciation Rights Plan, as amended10.4Exhibit 10.5 to the 2012 Form 10-KOrient-Express Hotels Ltd. 2009 Share Award and Incentive Plan, as amended10.5Exhibit 10.3 to the Annual Report on Form 10-K for the year ended December 31, 2004 (the "2004 Form 10-K")Amended and Restated Agreement Regarding Hotel Cipriani Interests dated February 8, 2005 between James B. Sherwood, Hotel Cipriani S.r.l. and Orient-Express Hotels Ltd.10.6Exhibit 10.4 to the 2004 Form 10-KAmended and Restated Right of First Refusal and Option Agreement Regarding Indirectly Held Hotel Cipriani Interests dated February 8, 2005 between James B. Sherwood and Orient-Express Hotels Ltd.10.7Exhibit 10.1 to the Current Report on Form 8-K  filed July 10, 2018Transaction Agreement dated July 6, 2018 between Belmond Ltd. and James B. Sherwood10.8Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (the "September 30, 2015 Form 10-Q)Employment Agreement between Belmond (UK) Limited and H. Roeland Vos dated September 20, 201510.9Exhibit 10.3 to the September 30, 2015 Form 10-QLetter Agreement between Belmond (UK) Ltd and H. Roeland Vos dated September 20, 201510.10Restated and Amended Employment Agreement between Belmond (UK) Limited and H. Roeland Vos dated October 11, 2018*10.11Exhibit 10.11 to the 2012 Form 10-KForm of Severance Agreement between Belmond Ltd. and certain of its officers, as amended





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Exhibit No.Incorporated by Reference toDescription10.12Amendment to Severance Agreement between Belmond Ltd. and H. Roeland Vos dated October 11, 2018*10.13Form of Amended Severance Agreement between Belmond Ltd. and certain of its officers, as amended October 2018*10.14Exhibit 10.12 to the 2012 Form 10-KForm of Indemnification Agreement between Belmond Ltd. and its non-executive directors and certain of its officers10.15Exhibit 10.1 to the Current Report on Form 8-K filed December 14, 2018Support Agreement dated December 13, 2018 between LVMH Moët Hennessy - Louis Vuitton SE and Belmond Holdings 1 Ltd.21Subsidiaries of Belmond Ltd.*23Consent of Deloitte LLP*23.1Consent of Pierrend, Gómez & Asociados S. Civil de R.L.23.2Consent of Gaveglio, Aparicio y Asociados S. Civil de R. L.23.3Consent of Gaveglio, Aparicio y Asociados S. Civil de R. L.31Rule 13a-14(a)/15d-14(a) Certifications32Section 1350 Certification99.1Exhibit 99.1 to the Current Report on Form 8-K dated June 1, 2010Judgment of Bermuda Supreme Court dated June 1, 2010 in D.E. Shaw Oculus Portfolios LLC et al. vs. Orient-Express Hotels Ltd. et al.101Interactive data file *





* Previously filed as exhibits to the Annual Report on Form 10-K for the year ended December 31, 2018 .





The Company hereby agrees to furnish to the Securities and Exchange Commission at its request copies of long-term debt instruments defining the rights of holders of outstanding long-term debt that are not required to be filed herewith.








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SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Dated: April 24, 2019








BELMOND LTD.By:/s/ Martin O'GradyMartin O’GradyExecutive Vice President, Chief Financial Officer














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