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, 2017





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, 2017 (the last business day of the registrant’s second fiscal quarter in 2017 ) was approximately $1,335,000,000 .


As of June 18, 2018 , 102,746,499 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 March 1, 2018 ).





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, 2017 , filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2018 (the “Original 2017 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 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 years 2016 and 2015, presented in accordance with U.S. GAAP, have been audited by BDO - Pazos, Lopez de Romana, Rodriguez 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 years 2016 and 2015, 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 under 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 2017 Form 10-K Filing, and this Form 10-K/A does not amend, update or change any other items or disclosures in the Original 2017 Form 10-K Filing. This Form 10-K/A does not reflect events occurring after the date of the Original 2017 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 2017 Form 10-K Filing in any way.





As described in Note 1(b) in the 2017 financial statements of Perurail, its prior period financial statements have been revised to reflect the correction of historic depreciation expense due to the misallocation of assets between Perurail and another equity method investment of Belmond. Since Belmond accounts for both entities under the equity method and there was an equal and opposite adjustment in the other entity, there was no impact on Belmond's consolidated balance sheet or statements of consolidated operations, comprehensive income and cash flows.































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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, 2017, 2016 and 2015:Balance sheets (December 31, 2017 and 2016)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 – year ended December 31, 2017:Balance sheets24Statements of operations and comprehensive (loss)/income25Statements of shareholders’ equity26Statements of cash flows27Notes to financial statements28





Also presented are the unaudited balance sheet as at December 31, 2016 and the unaudited statements of operations and comprehensive (loss)/income, cash flows and shareholders' equity for the years ended December 31, 2016 and 2015 .





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 sheet of Perurail S.A.  as of December 31, 2017, and the related statements of operations and comprehensive income, of changes in shareholders’ equity and of cash flows for the year then ended, 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, 2017, and the results of its operations and its cash flows for the year then ended  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 audit.  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 Securities and Exchange Commission and the PCAOB.





We conducted our audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.











/s/ Gaveglio, Aparicio y Asociados S. Civil de R. L.Lima, PeruJune 26, 2018Countersigned 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 accompanying balance sheets of Perurail S.A. as of December 31, 2016 and the related statements of operations, cash flows and shareholders’ equity for each of the two years in the period 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 each of the two years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.











/s/ Pazos, López de Romaña, Rodriguez S. Civil de R.L.Lima, PeruJune 21, 2017, except for Notes 1(b), 2 and 7 which are as of June 26, 2018Countersigned by:/s/ Liliana Córdova MejíaLiliana Córdova MejíaCertified Chartered Public AccountantRegister No. 01-17661











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Perurail S.A.


Balance Sheets


20172016December 31,$’000$’000AssetsCash25,55130,918Restricted cash16,47512,775Accounts receivable, net of allowances of $1,791 and $1,78710,94714,275Due from related parties18,35921,708Prepaid expenses6441,543Inventories6,3297,009Total current assets78,30588,228Property, plant and equipment, net of accumulated depreciation of $46,099 and $36,600171,249158,960Intangible assets, net of accumulated amortization of $644 and $6122,314450Total non-current assets173,563159,410Total assets251,868247,638Liabilities and Shareholders’ EquityWorking capital facilities—2,029Accounts payable11,0455,592Accrued liabilities17,58611,782Due to related parties4,0985,695Current portion of long-term debt and obligations under capital lease23,61818,617Total current liabilities56,34743,715Long-term debt and obligations under capital lease129,785138,749Deferred income tax liability, net3,3025,958Total long-term liabilities133,087144,707Total liabilities189,434188,422Commitments and contingencies (Note 11)Shareholders’ equity:Common shares S/1.00 par value (50,000,000 shares authorized):Issued - 50,000,000 (2016 - 50,000,000)16,93416,934Legal reserve3,2523,252Retained earnings42,24839,030Total shareholders’ equity62,43459,216Total liabilities and shareholders’ equity251,868247,638


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











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Perurail S.A.


Statements of Operations and Comprehensive Income


201720162015Year ended December 31,$’000$’000$’000Revenue, net of discounts157,080146,571104,582Expenses:Cost of services(75,331)(64,008)(49,371)Selling, general and administrative(32,702)(27,438)(27,314)Depreciation and amortization(21,721)(20,280)(8,998)Total operating costs and expenses(129,754)(111,726)(85,683)(Loss)/gain on insurance settlement(217)277945Gain/ (loss) on disposal of property, plant and equipment174(1,191)(284)Earnings from operations27,28333,93119,560Interest expense, net(9,364)(9,565)(1,466)Foreign currency, net(449)(273)(844)Earnings before income tax17,47024,09317,250Provision for income taxes(5,372)(8,845)(4,922)Net earnings and comprehensive income12,09815,24812,328





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, 201516,9341,44827,98646,368Dividends——(7,080)(7,080)Net earnings——12,32812,328Stock split—888(888)—Balance at December 31, 201516,9342,33632,34651,616Dividends——(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——12,09812,098Legal reserve————Balance at December 31, 201716,9343,25242,24862,434





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











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Perurail S.A.


Statements of Cash Flows


201720162015Year ended December 31,$’000$’000$’000Cash flows from operating activities:Net earnings12,09815,24812,328Adjustment to reconcile net earnings to net cash provided by operating activities:Depreciation21,68920,1158,941Amortization3216557Gain/ (loss) on disposal of property, plant and equipment(174)1,191284Change in deferred tax(2,656)(413)(1,126)Change in assets and liabilities:Decrease/(increase) in accounts receivable3,328(5,617)(5,196)Decrease/(increase) in prepaid expenses899(544)1,836Decrease in inventories6803311,954(Decrease)/increase in due to related parties(1,597)(1,573)3,304Increase/(decrease) in accounts payable647(1,725)1,952Increase in accrued liabilities2,4993,164178Total adjustments25,34715,09412,184Net cash provided by operating activities37,44530,34224,512Cash flows from investing activities:(Increase)/decrease in restricted cash(3,700)(12,045)473Increase/(decrease) in due from related parties3,349(774)(2,105)Capital expenditures(26,525)(106,882)(23,406)Net cash used in investing activities(26,876)(119,701)(25,038)Cash flows from financing activities:Payment of dividends(8,880)(7,648)(7,080)Payments on working capital facilities(2,029)(9,726)(7,635)Proceeds from working capital facilities10,9981,43613,189Principal payments under long-term debt(18,458)(41,614)(21,323)Principal payments under capital lease(999)(873)(1,747)Proceeds from long-term debt3,432158,03435,000Proceeds from capital lease—6,798—Net cash (used in)/provided by financing activities(15,936)106,40710,404Net (decrease) /increase in cash(5,367)17,0489,878Cash at beginning of year30,91813,8703,992Cash at end of year25,55130,91813,870





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 501, 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 lease 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)  Revision of the financial statements as of December 31, 2016 and 2015





The financial statements of 2016 and 2015 in this filing  have been revised to adjust accumulated depreciation and retained earnings by $4,700,000, and deferred income tax liabilities and retained earnings by $1,387,000. The adjustment was related to an error in determining depreciation expense that occurred prior to January 1, 2015 and has no impact on depreciation expense in any of the years presented. The Company has determined that the impact of the adjustment is not material to any prior period and therefore has recorded the adjustment as of January 1, 2015.





Below is the reconciliation of the accumulated results before adjustments and the revised balance as of January 1, 2015, January 1, 2016 and December 31, 2016:





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Deferred incometax liabilitiesAccumulateddepreciationRetainedearnings$’000$’000$’000Balance before adjustments as of January 1, 20156,110(30,013)24,673Adjustment for excess depreciation-4,7004,700Adjustment for deferred income tax liabilities1,387-(1,387)Revised Balance as of January 1, 20157,497(25,313)27,986Balance before adjustments as of January 1, 20164,984(30,921)29,033Adjustment for excess depreciation-4,7004,700Adjustment for deferred income tax liabilities1,387-(1,387)Revised Balance as of January 1, 20166,371(26,221)32,346Balance before adjustments as of December 31, 20164,571(41,300)35,717Adjustment for excess depreciation-4,7004,700Adjustment for deferred income tax liabilities1,387-(1,387)Revised Balance as of December 31, 20165,958(36,600)39,030


The misstatement is not considered to be material to previously-issued financial statements for any of the years ended December 31, 2008 to December 31, 2016 having assessed both quantitative and qualitative factors under SEC guidelines. The Company believes that these financial statements can continue to be relied upon and as a result, has not been amended and refiled financial statements for these years. Instead, the misstatement is required to be corrected prospectively.





The Company determined that correcting the misstatement in the current period financial statements would have been material to the statement of operations and comprehensive income in the year ended December 31, 2017, therefore the misstatement has been corrected by revising the comparative periods in this filing in accordance with Accounting Standards Codification ("ASC") 250.





In addition, during the year ended December 31, 2017, the Company evaluated that the trust funds, described below, are not an equivalent of cash, since they are restricted only for the payment of the remuneration to the grantor and so are not available for the use of the Company. The Company has debt obligations that are secured on the cash flows of certain projects via a trust scheme. These cash flows from cargo and passenger operations are pledged to the trust scheme that could use the funds to service the debt in case of a payment default. As a result, the Company does not have access to these funds until they are released from the trust scheme and are therefore reported in the restricted cash balance. Consequently, the Company reclassified an amount of $12,775,000 from cash to restricted cash in the 2016 balance sheet and the 2016 and 2015 statements of cash flows have been revised accordingly. There was no impact on total assets, net earnings or earnings per share in any period presented.





(c)  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.








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(d)  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.





(e)  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.





(f)  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.





(g)  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.





(h)  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.





(i)  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.





(j)  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.








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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, 2017 and 2016 the Company did not record any liabilities for uncertain tax positions.





(k)  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 livesInstallations33 yearsMachinery and equipment10 yearsTransport units5 yearsImprovements to locomotive and rolling stock assets under lease5 yearsOwned locomotives and rolling stock10 yearsFurniture and fixtures and Computer equipment4 to 10 years





(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 livesCopyrights and trademarks30 yearsSoftware 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.





There were no impairments of long-lived assets in the years ended December 31, 2017, 2016 and 2015.





(n)  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.





(o)  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.





(p)  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.





(q)  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.





(r)  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:








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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, 2017. Las Bambas is a major customer to the Company, and in the year ended December 31, 2017 represented 25% (2016 - 20%; 2015 - Nil%) of total revenue included within freight and cargo transport. The Company’s second largest customer is Sociedad Minera Cerro Verde, and in the year ended December 31, 2017 represented 14% (2016 - 15%; 2015 - 11%) of total revenue included within freight and cargo transport. 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 5.4% in 2017​  (2016 - 5.1%; 2015 - 6.3%).





Exchange rate risk





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





(s)  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.





(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.





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 lease liability





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and a right-of use asset for most leases, including operating leases. The new standard will also distinguish leases as either finance leases or operating leases. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein, with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. 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. PeruRail is currently evaluating the impact of the adoption of this guidance on its financial statements, but expects that this standard may have a material effect on its balance sheet.





In August 2016, the FASB issued new guidance which clarifies the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The new guidance will be applied on a retrospective basis where applicable. The Company intends to adopt the standard in the annual period beginning January 1, 2018. The Company is assessing the impact of the classification rules under the eight types of cash flow identified by the new guidance, in particular, those related to debt prepayments or extinguishment, proceeds from insurance settlements, distributions from equity method investees and separately identifiable cash flows. Perurail does not expect the adoption of this guidance to have a material effect on its financial statements.





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 guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. The new guidance will be applied on a modified retrospective basis, recognizing the effects in retained earnings as of the beginning of the year of adoption. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements. The Company intends to adopt the standard in the annual period beginning January 1, 2018 and does not expect the adoption of this guidance to have a material effect on its 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. The Company intends to adopt the standard in the annual period beginning January 1, 2018. PeruRail is currently assessing the impact of this guidance on its financial statements. As cash, cash equivalents and restricted cash are presented in more than one line item on the balance sheet, a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet will be required. The Company does not expect the adoption of this guidance to have a material effect 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 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.








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2.    Property, plant and equipment





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


20172016December 31,$’000$’000Land1,3531,353Installations38,76122,144Machinery and equipment30,96129,916Transport units18,67018,670Improvements to locomotive and rolling stock assets under lease44,45736,035Owned locomotives and rolling stock66,00063,309Furniture and fixtures295294Works in progress16,85123,839217,348195,560Less: Accumulated depreciation (see Note 1(b))(46,099)(36,600)Total property, plant and equipment, net of accumulated depreciation171,249158,960





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





20172016December 31,$’000$’000Locomotives and rolling stock26,68910,301Less: Accumulated depreciation(5,944)(1,473)Total property, plant and equipment under capital leases, net of accumulated depreciation20,7458,828





The depreciation charge on property, plant and equipment for the year ended December 31, 2017 was $21,689,000 ( 2016 - $20,115,000 ; 2015 - $8,941,000 ).





In 2017, the Company acquired assets in the amount of $16,362,000 (2016 - $73,593,000; 2015 - $Nil) to provide transportation services to Minera Las Bambas S.A., which include moving copper concentrate from the Company's transfer station  to the delivery port according to the contract which was signed in June 2015. The assets acquired during 2017 related to a new transfer station which was built to facilitate the transfer of loaded containers from trucks to the trains, while in 2016 the assets acquired were related to locomotives, freight wagons and containers.





No property, plant and equipment impairments were recorded in the years ended December 31, 2017 , 2016 and 2015 .








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3.    Intangible assets





Intangible assets consist of the following as of December 31, 2017 and 2016 :


Logo and trademarksSoftware and licensesTotal$’000$’000$’000Carrying amount:Balance at January 1, 2016122747869Additions—193193Balance at December 31, 20161229401,062Additions—1,8961,896Balance at December 31, 20171222,8362,958Accumulated amortization:Balance at January 1, 201667380447Charge for the period55110165Balance at December 31, 2016122490612Charge for the period—3232Balance at December 31, 2017122522644Net book value:December 31, 201555367422December 31, 2016—450450December 31, 2017—2,3142,314





Amortization expense for the year ended December 31, 2017 was $32,000 ( 2016 - $165,000 ; 2015 - $57,000 ).





Estimated amortization expense for each of the years ended December 31, 2018 to 2022 is $90,000.








4.  Working capital facilities





Working capital facilities are composed of the following, all repayable within one year:


20172016December 31,$’000$’000Working capital facilities—2,029





In 2017, the working capital facilities were paid in full. In 2016, the working capital facilities accrued interest at a weighted average rate of 3.73% and included a short term facility to finance insurance policies.





At December 31, 2017, the Company had approved lines of credit of approximately $19,550,000 ( 2016 - $15,918,000), which can be used as working capital. This includes guarantee letters issued by various financial institutions with various expiration dates, of which $17,790,000 was undrawn as at December 31, 2017 (2016 - $ 11,250,000). The remaining amount of $1,760,000 as at December 31, 2017 (2016 - $2,639,000) relates to non-executed guarantee letters issued to cover operational needs.








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In 2016, the Company issued a $15,000,000 third party bank guarantee in favor of the lenders of Las Bambas project, with an annual fee payment of 2%, as security for the pending registration of the surface rights over the land on which infrastructure for the Las Bambas project is being built. The bank guarantee will be released by the lenders upon the registration in the local land office of the surface rights over the land.








5.  Accrued liabilities





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





20172016December 31,$’000$’000Remuneration and profit sharing payable3,9983,434Deferred revenue7,8413,163Current tax payable-1,606Provision for purchases and services1,921982Advance payments received from passengers1,204756Vacation payable748739Employees’ length of service compensation175150Other tax payable284131Other accounts payable1,41582117,58611,782








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





(a)  Long-term debt





Long-term debt consists of the following:


20172016December 31,$’000$’000Loans from banks collateralized by property, plant and equipment payable over a period of 6 to 10 years (2016 - ten years), with a weighted average interest rate of 5.4% (2016 - 5.1%)135,589153,217Obligations under capital lease (see Note 6(b))20,6207,170Total long-term debt and obligations under capital lease156,209160,387Less: Current portion23,61818,617Less: Debt issuance costs2,8063,021Non-current portion of long-term debt and obligations under capital lease129,785138,749





The Company is in compliance with all financial covenants in its long-term debt obligations at December 31, 2017 and 2016 .





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, 2017 , is $95,316,000.  The Lenders have no recourse to any other assets of Perurail.








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During 2016, the Company entered into two non-recourse loans in connection with the Las Bambas project. The first one was for a total $126,956,000 with drawdowns between February and May 2016 in three tranches; each tranche was subject to different annual effective interest rates (5.2%, 5.85% and 3.1%). This loan is paid in quarterly installments with a maturity date on February 2026. The second loan was for $34,100,000 and was fully drawn down on June 2016 at an annual effective interest rate of 6.23 %. This second loan is paid in monthly installments with a maturity date in September 2023.





The balance of debt issuance costs related to the above outstanding long-term debt of the Company was $2,806,000 at December 31, 2017 ( 2016 - $3,021,000 ) 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 $ 1,000,000. Ferrocarril Transandino had no long-term debt outstanding as of December 31, 2017 (2016 - $1,000,000). See Note 13.





The following is a summary of the aggregate maturities of long-term debt of the Company excluding obligations under capital lease at December 31, 2017 :





Year ending December 31,$’000201820,097201914,750202013,664202114,4472022 and thereafter72,631Total long-term debt excluding obligations under capital leases135,589





(b)  Obligations under capital lease





At December 31, 2017, the Company had four leasing contracts. The amounts of the obligations under capital leases are  $4,147,000, $4,564,000, $8,423,000 and $3,486,000, with one capital lease (amounting to $8,423,000 at December 31, 2017) entered into during 2017. With this addition during the year, the total amount of the obligations under capital leases as at December 31, 2017 is $20,620,000.





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, 2017 :





Year ending December 31,$’00020184,79720194,47520204,55320214,6392021 and thereafter3,60722,071Minimum lease paymentsLess: amount of interest contained in above payments1,451Present value of minimum lease payments20,620Less: current portion3,52117,099





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 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, 2017 and 2016 are as follows:


December 31, 2017December 31, 2016Carrying amountFair valueCarrying amountFair value$’000$’000$’000$’000Long-term debt, including current portion, before deduction of debt issuance costs, excluding obligations under capital leases135,589134,059153,217154,207





(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, 2017 , 2016 and 2015 .








7.  Income taxes





The provision for income taxes consists of the following:


201720162015Year ended December 31,$’000$’000$’000Earnings before income tax17,47024,09317,250Current income tax charge(8,028)(9,257)(6,048)Deferred income tax credit2,6564121,126Total(5,372)(8,845)(4,922)





The reconciliations of the Peruvian income tax rate to the Company’s effective income tax rate for the three years ended December 31, 2017 , 2016 and 2015 are as follows:


201720162015Year ended December 31,%%%Peruvian income tax rate29.52828Permanent differences4.097Change of rate—2—Other(2.8)(2)(6)Effective tax rate30.73729





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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201720162015December 31,$’000$’000$’000Provisions included in books133228369Other deferred income tax assets1,326779128Deferred income tax assets1,4591,007497Fixed assets and intangibles(3,879)(8,516)(8,800)Exchange rate related to fixed assets(61)1,7312,041Other deferred tax liabilities(821)(180)(109)Deferred income tax liabilities(4,761)(6,965)(6,868)Net deferred income tax liabilities(3,302)(5,958)(6,371)





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 will continue to be taxed at 6.8% income tax rate regardless of whether the distribution is 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  profits in 2015 and 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(s).





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10.     Revenue, net of discount





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


201720162015Year ended December 31,$’000$’000$’000Passenger transport87,64886,00484,223Freight and cargo transport66,78757,10817,078Other2,6453,4593,281Revenue157,080146,571104,582








11.  Commitments and contingencies





As of December 31, 2017, the Company has five pending labor-related legal proceedings with claimed damages of $2,855,000. The Company does not believe that these claims have merit and expects to prevail.





The Company has approximately $28,661,000 of bank guarantees and letters of credit at December 31, 2017 (2016 - $19,744,000) issued by various financial institutions to third parties as security under various contractual arrangements and with a range of  expiration dates from March 2018 to December 2018, 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, 2017 amounted to $517,000 ( 2016 - $502,000; 2015 - $641,000).








12.  Supplemental cash flow information


201720162015Year ended December 31,$’000$’000$’000Cash paid during the period for:Interest6,0266,116459Income taxes9,7215,5225,230





The Company entered into capital leases during the year ended December 31, 2017 .  See Note 6(b).





To reflect the actual cash paid for capital expenditure to acquire property, plant and equipment, increases in accounts payable for capital expenditure are non-cash and excluded from capital expenditure. The change in accounts payable was a decrease of $9,349,000 for the year ended December 31, 2017.





As of December 31, 2017, there are provisions for unpaid interest which amount to $1,064,000, which has reflected an increase in accounts payable of $1,064,000.








13.  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, 2017 was $ 2,643 (2016 - $Nil).





Accounts receivable from Ferrocarril Transandino, an affiliate, for working capital requirements at December 31, 2017 were $18,359,000 (2015 - $21,708,000). These receivables fluctuate as the Company utilizes the railway, locomotives and rolling stock, and stations and yards of Ferrocarril Transandino.





Accounts receivable from Peru Belmond Hotel SA at December 31, 2017 was $5,000 (2016 -$6,000).





Accounts receivable from Belmond Peru Management S.A. at December 31, 2017 was $39,000 (2016 - $Nil).








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Accounts receivable from Venice Simplon Orient Express at December 31, 2017 was $110,000 (2016 - $Nil).





The accounts receivable from Rail Asset S.A.C. for loans and working capital requirements were fully paid as of December 31, 2016.





The amount due to Ferrocarril Transandino at December 31, 2017 was $279,000 (2016 - $295,000) 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 2017, the Company received services from Ferrocarril Transandino in the amount of $26,593,000 (2016 - $26,181,000; 2015 - $20,276,000), including a value added tax of 18% (2016 and 2015 - 18%).





Perurail guarantees the long-term debt obligations of Ferrocarril Transandino S.A. 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 $1,000,000. Ferrocarril Transandino had no long-term debt outstanding as of December 31, 2017 (2016 - $Nil; 2015 - $2,927,000). See Notes 1(a) and 6.





The amount due to Belmond Peru S.A. for expense reimbursements at December 31, 2017 was $6,000 (2016 - $Nil).





The amount due to Belmond Peru Management S.A. at December 31, 2017 was $3,675,000 (2016 - $5,122,000; 2015 - $4,071,000) relating to the invoicing of management fees and expense reimbursements established in the current management agreement.





The amount due to Belmond Ltd. at December 31, 2017 was $Nil (2016 - $41,000) relating to the invoicing of licence fees and marketing expenses.





The amount due to Peru Belmond Experiences S.A. at December 31, 2017 was $14,000 (2016 - $Nil) relating to the invoicing of working capital facilities.





The amount due to Peru Belmond Hotels S.A. at December 31, 2017 was $256,000 (2016 -$190,000) 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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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 sheet of Ferrocarril Transandino S.A. as of December 31, 2017, and the related statements of operations and comprehensive (loss)/income, of changes in shareholders’ equity and of cash flows for the year then ended, 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, 2017, and the results of its operations and its cash flows for the year then ended  in conformity with accounting principles generally accepted in the United States of America.





The accompanying balance sheet of Ferrocarril Transandino S.A. as of December 31, 2016, and the related statements of operations and comprehensive (loss)/income, of changes in shareholders’ equity and cash flows for the years ended December 31, 2016 and 2015 are presented for purposes of complying with Rule 3-09 of SEC Regulation S-X; however, Rule 3-09 does not require the 2016 and 2015 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 audit. 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 Securities and Exchange Commission and the PCAOB.





We conducted our audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.








/s/ Gaveglio, Aparicio y Asociados S. Civil de R. L.Lima, PeruJune 26, 2018Countersigned 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


20172016December 31,$’000$’000(unaudited)AssetsCash9971,214Restricted cash9,9216,984Accounts receivable, net of allowances of $Nil and $Nil7721,334Due from related parties279296Inventories4,4743,810Prepaid expenses and other2,7063,632Total current assets19,14917,270Property, plant and equipment, net of accumulated depreciation of $1,224 and $1,190443247Deferred costs, net of impairment loss of $58,531 and accumulated amortization of $27,134 and $23,44727,60482,564Intangible assets, net of accumulated amortization of $835 and $81892109Deferred income tax asset, net4,354—Other assets—2,512Total non-current assets32,49385,432Total assets51,642102,702Liabilities and Shareholders’ EquityWorking capital facilities—2,125Accounts payable1,658751Accrued liabilities20,02513,544Due to related parties18,44421,805Total current liabilities40,12738,225Deferred income tax liability, net—12,481Deferred revenue7,54410,498Total long-term liabilities7,54422,979Total liabilities47,67161,204Commitments and contingencies (Note 10)Shareholders’ equity:Common shares S/1.00 par value (25,000 shares authorized):Issued - 25,000 (2016 - 25,000)7,8577,857Legal reserve546546Retained (deficit)/earnings(4,432)33,095Total shareholders’ equity3,97141,498Total liabilities and shareholders’ equity51,642102,702


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








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Ferrocarril Transandino S.A.


Statements of Operations and Comprehensive (Loss)/Income


201720162015Year ended December 31,$’000$’000$’000(unaudited)(unaudited)Revenue, net of discounts31,06426,12519,831Expenses:Cost of services(13,174)(11,271)(7,445)Selling, general and administrative(6,281)(4,010)(3,214)Depreciation and amortization(3,738)(4,798)(3,684)Impairment of assets(58,531)——Total operating costs and expenses(81,724)(20,079)(14,343)(Losses)/earnings from operations(50,660)6,0465,488Interest expense, net(204)(361)(1,068)Foreign currency, net(100)(78)351(Losses)/earnings before income tax(50,964)5,6074,771Benefit from/(provision for) income taxes13,437(1,014)1,398Net (losses)/earnings and comprehensive (losses)/income(37,527)4,5936,169





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, 2015 (unaudited)7,85754622,33330,736Net earnings (unaudited)——6,1696,169Balance at December 31, 2015 (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)3,971





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








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Ferrocarril Transandino S.A.


Statements of Cash Flows


201720162015Year ended December 31,$’000$’000$’000(unaudited)(unaudited)Cash flows from operating activities:Net (losses)/earnings(37,527)4,5936,169Adjustment to reconcile net (losses)/earnings to net cash provided by operating activities:Depreciation342336Amortization3,7044,7753,648Impairment of assets58,531——Change in deferred tax(16,835)(1,474)(1,398)Change in assets and liabilities:(Increase)/decrease in accounts receivable562(1,104)208Decrease/(increase) in prepaid expenses and other9262,039(2,798)(Increase)/decrease in inventories(664)49(105)Increase/(decrease) in accounts payable403(1,927)(1,562)Increase/(decrease) in due from related parties17(78)2Increase in accrued liabilities6,4818,237140(Decrease)/increase in deferred revenue(442)(2,248)1,723Total adjustments52,7178,292(106)Net cash provided by operating activities15,19012,8856,063Cash flows from investing activities:Increase in restricted cash(2,937)(467)(1,442)Capital expenditures(6,984)(6,603)(2,953)Net cash used in investing activities(9,921)(7,070)(4,395)Cash flows from financing activities:Payments on working capital facilities(2,125)(6,496)(4,060)(Decrease)/increase in due from related parties(3,361)7472,127Net cash used in financing activities(5,486)(5,749)(1,933)Net (decrease) /increase in cash(217)66(265)Cash at beginning of year1,2141,1481,413Cash at end of year9971,2141,148





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 501, 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 and third requests for extensions in 2009 and 2017, 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 17 years are remaining as of December 31, 2017. The life of the concession is now expected to expire in September 2034.





(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





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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 and major 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 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





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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, 2017 and 2016 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 livesInstallations5 to 33 yearsMachinery and equipment10 yearsTransport units5 yearsOwned locomotives and rolling stock10 yearsFurniture and fixtures and Computer equipment5 to 10 years





(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 and third requests for extensions in 2009 and 2017, 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 17 years are remaining as of December 31, 2017. 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 (2016: $Nil; 2015: $Nil).​ 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 moment 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.







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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 to be paid during 2018. Under the Concession Contract, the Company is not entitled to generate additional credits.





(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 the liquidity risk through its procedure 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 estimates to pay in full the liability with its related affiliate, Perurail S.A. ("Perurail") (see Note 12), by 2021.





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 the 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 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 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, 2019 under the modified retrospective approach with a cumulative effect recognized in equity and no prior period restatement.





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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 lease liability and a right-of use asset for most leases, including operating leases. The new standard will also distinguish leases as either finance leases or operating leases. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein, with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. 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. Ferrocarril Transandino is currently evaluating the impact of the adoption of this guidance on its financial statements, but expects that this standard may have a material effect on its balance sheet.





In August 2016, the FASB issued new guidance which clarifies the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The new guidance will be applied on a retrospective basis where applicable. The Company intends to adopt the standard in the annual period beginning January 1, 2018. The Company is assessing the impact of the classification rules under the eight types of cash flow identified by the new guidance, in particular, those related to debt prepayments or extinguishment, proceeds from insurance settlements, distributions from equity method investees and separately identifiable cash flows. Ferrocarril Transandino does not expect the adoption of this guidance to have a material effect on its financial statements.





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 guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. The new guidance will be applied on a modified retrospective basis, recognizing the effects in retained earnings as of the beginning of the year of adoption. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements. The Company intends to adopt the standard in the annual period beginning January 1, 2018 and does not expect the adoption of this guidance to have a material effect on its 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. The Company intends to adopt the standard in the annual period beginning January 1, 2018. Ferrocarril Transandino is currently assessing the impact of this guidance on its financial statements. As cash, cash equivalents and restricted cash are presented in more than one line item on the balance sheet, a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet will be required. The Company does not expect the adoption of this guidance to have a material effect 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 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 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.








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2.    Property, plant and equipment





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


20172016December 31,$’000$’000(unaudited)Machinery and equipment879809Transport units717559Furniture and fixtures71691,6671,437Less: Accumulated depreciation(1,224)(1,190)Total property, plant and equipment, net of accumulated depreciation443247





The depreciation charge on property, plant and equipment for the year ended December 31, 2017 was $34,000 ( 2016 - $23,000; 2015 - $36,000).





In 2017, the Company acquired assets in the amount of $230,000 (2016 - $17,000; 2015 - $82,000), which are mainly related to improvements to the railway track.





No property, plant and equipment impairments were recorded in the years ended December 31, 2017 , 2016 and 2015 .








3.    Deferred costs





Deferred costs consist of the following as of December 31, 2017 and 2016 :


Total$’000Carrying amount:Balance at January 1, 2016 (unaudited)97,997Additions (unaudited)8,014Balance at December 31, 2016 (unaudited)106,011Additions7,258Balance at December 31, 2017113,269Accumulated amortization:Balance at January 1, 2016 (unaudited)18,686Charge for the period (unaudited)4,761Balance at December 31, 2016 (unaudited)23,447Charge for the period3,687Impairment58,531Balance at December 31, 201785,665Net book value:December 31, 2016 (unaudited)82,564December 31, 201727,604








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Amortization expense for the year ended December 31,2017 was $3,687,000 (2016 - $4,761,000; 2015 - $3,627,000).





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, 2017 was $7,258,000 (2016 - $8,014,000; 2015 - $3,444,000).





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 thee 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 and third requests for extensions in 2009 and 2017, 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 17 years are remaining as of December 31, 2017. 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 of the asset, Ferrocarril Transandino concluded that an impairment trigger existed and an impairment test was required. 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 (loss)/income.





There were no impairments of assets in the years ended December 31, 2016 and 2015.








4.    Intangible assets





Intangible assets consist of the following as of December 31, 2017 and 2016 :


ConcessionsSoftware and licensesTotal$’000$’000$’000Carrying amount:Balance at January 1, 2016 (unaudited)228699927Additions (unaudited)———Balance at December 31, 2016 (unaudited)228699927Additions———Balance at December 31, 2017228699927Accumulated amortization:Balance at January 1, 2016 (unaudited)123681804Charge for the period (unaudited)8614Balance at December 31, 2016 (unaudited)131687818Charge for the period8917Balance at December 31, 2017139696835Net book value:December 31, 2016 (unaudited)9712109December 31, 201789392





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Amortization expense for the year ended December 31, 2017 was $17,000 (2016 - $14,000; 2015 - $21,000).





Estimated amortization expense for each of the years ended December 31, 2018 to 2022 is $17,000.








5.  Working capital facilities





Working capital facilities are composed of the following, all repayable within one year:


20172016December 31,$’000$’000(unaudited)Working capital facilities—2,125





In 2017, the working capital facilities were paid in full. In 2016, the working capital facilities accrued interest at a weighted average rate of 3.73% and included a short term facility to finance insurance policies.





At December 31, 2017, the Company had approved lines of credit of approximately $5,150,000 (2016 - $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 $5,070,000 was undrawn as at December 31, 2017 (2016 - $ 2,950,000). The remaining amount of $80,000 as at December 31, 2017 (2016 - $75,000), relates to non-executed guarantee letters issued to cover operational needs.








6.  Accrued liabilities





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





20172016December 31,$’000$’000(unaudited)Concession fee to the State (see Note 1(p))9,0187,112Accrual for tax contingencies3,4972,488Deferred revenue2,9552,836Current tax payable1,968—Remuneration and profit sharing payable732206Provision for purchases and services731434Vacation payable110112Other tax payable10125Employees’ length of service compensation2420Other accounts payable88931120,02513,544








7.  Income taxes





The provision for income taxes consists of the following:


201720162015Year ended December 31,$’000$’000$’000(unaudited)(unaudited)(Losses)/earnings before income tax(50,964)5,6074,771Current income tax charge(3,398)(2,488)—Deferred income tax credit/(charge)16,8351,474(1,398)Total13,437(1,014)(1,398)





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The reconciliations of the Peruvian income tax rate to the Company’s effective income tax rate for the three years ended December 31, 2017 , 2016 and 2015 are as follows:


201720162015Year ended December 31,%%%(unaudited)(unaudited)Peruvian income tax rate29.52828Permanent differences—611Change of rate—(2)—Other(3.5)(14)(10)Effective tax rate26.01829





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:





201720162015Year ended December 31,$’000$’000$’000(unaudited)(unaudited)Provisions included in books1063619Other deferred income tax assets—8581,953Deferred income tax assets1068941,972Fixed assets and intangibles(4,538)11,52411,943Other deferred tax liabilities786340Deferred income tax liabilities(4,460)11,58711,983Net deferred income tax (assets)/liabilities(4,354)12,48113,955





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 will continue to be taxed at 6.8% income tax rate regardless of whether the distribution is 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





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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 profits in 2015 and 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





As of December 31, 2017, the Company has administrative proceedings pending with various local governments with an aggregate claimed exposure of approximately $2,000,000. The Company does not believe that these claims have merit and expects to prevail.





In 2017, the Company issued a $9,899,000 third party bank guarantee in favor of MTC to guarantee the compliance of the Concession Contract (2016: $7,261,000).








11.  Supplemental cash flow information


201720162015Year ended December 31,$’000$’000$’000(unaudited)(unaudited)Cash paid during the period for:Interest—19222Income taxes140165164





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 $504,000 and $1,428,000 for the years ended December 31, 2017 and 2016, respectively.








12.  Related party transactions





Accounts receivable to Perurail at December 31, 2017 was $279,000 (2016 - $296,000) 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 2017, the Company provided services to Perurail in the amount of $26,593,000 (2016 - $26,181,000; 2015 - $20,276,000), including a value added tax of 18% (2016 and 2015 - 18%).





The amount due to Perurail for working capital requirements at December 31, 2017 was $18,359,000 (2016 - $21,708,000). 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, 2017 was $76,000 (2016 - $67,000) 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, 2017 was $ 8,000 (2016 - $22,000) relating to external expenses reimbursements.





The amount due to Belmond Peru S.A. at December 31, 2017 was $1,000 (2016 - Nil) relating to expense reimbursements established in the current management agreement.








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EXHIBIT INDEX Exhibit No.Incorporated by Reference toDescription3.1Exhibit 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 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 10.2 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, 201510.8Exhibit 10.3 to the September 30, 2015 Form 10-QLetter Agreement between Belmond (UK) Ltd and H. Roeland Vos dated September 20, 201510.9Exhibit 10.11 to the 2012 Form 10-KForm of Severance Agreement between Belmond Ltd. and certain of its officers, as amended10.10Exhibit 10.12 to the 2012 Form 10-KForm of Indemnification Agreement between Belmond Ltd. and its non-executive directors and certain of its officers12Statement of computation of ratios*21Subsidiaries of Belmond Ltd.*23Consent of Deloitte LLP relating to Form S-3 Registration Statement No. 333-215029 and Form S-8 Registration Statements No. 333-58298, No. 333-129152, No. 333-147448, No. 333-161459, No. 333-168588 and No. 333-183142*23.1Consent of Pazos, López de Romaña, Rodriguez S.C.








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Exhibit No.Incorporated by Reference toDescription23.2Consent 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, 2017 .





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: June 27, 2018








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














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