Grupo Lamosa, S.A.B. de C.V. and its subsidiaries (the “Company”) are engaged in the manufacture of ceramic products for wall and floor coverings, bathroom fixtures, adhesives for ceramic tiles and real estate projects for sale. The Company’s address is Avenida Pedro Ramírez Vázquez No. 200-1 Col. Valle Oriente C.P. 66269 San Pedro Garza García, Nuevo León, Mexico.

a. Compliance status – The consolidated financial statements have been prepared in conformity with International Financial Reporting Standards (“IFRS”) and their amendments issued by the International Accounting Standards Board (“IASB”).

b. New IFRS - In the current year, the Company has applied a number of new and revised IFRSs issued by IASB that are mandatorily effective for an accounting period that begins on or after January 1, 2013.

Amendments to IFRS 7, Disclosures – Offsetting Financial Assets and Financial Liabilities- The amendments to IFRS 7 require entities to disclose information about rights of offset and related arrangements for financial instruments under an enforceable master netting agreement or similar arrangement. The amendments to the IFRS 7 have been applied retrospectively.

As the Group does not have any significant offsetting arrangements in place, the application of the amendments has had no material impact on the disclosures or on the amounts recognized in the consolidated financial statements.

IFRS 10 Consolidated Financial Statements- IFRS 10 replaces the parts of IAS 27, Consolidated and Separate Financial Statements that deal with consolidated financial statements. IFRS 10 changes the definition of control such that an investor has control over an investee when a) it has power over the investee; b) it is exposed, or has rights, to variable returns from its involvement with the investee and c) has the ability to use its power to affect its returns. All three of these criteria must be met for an investor to have control over an investee. The application of the IFRS 10 has had no impact, because since the day of the adaptation, the Company has control over the consolidated subsidiaries.

IFRS 11, Joint Arrangements - IFRS 11 deals with how a joint arrangement of which two or more parties have joint control should be classified and accounted for. Under IFRS 11, there are only two types of joint arrangements – joint operations and joint ventures.

The classification of joint arrangements under IFRS 11 is determined based on the rights and obligations of parties to the joint arrangements by considering the structure, the legal form of the arrangements, the contractual terms agreed by the parties to the arrangement, and, when relevant, other facts and circumstances. The Company dosen’t have joint arrangements.

IFRS 13, Fair Value Measurement - IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The scope of IFRS 13 is broad; the fair value measurement requirements of IFRS 13 apply to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements.

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under IFRS 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique. Also, IFRS 13 includes extensive disclosure requirements. In addition to the additional disclosures, the application of the IFRS 13 does not have a significant on the amounts recognized in the consolidated financial statements.

c. Basis of preparation – The consolidated financial statements were prepared based on the historical cost, except for that mentioned in the accounting policies in Note 3. The historical cost is generally based on the fair value of the consideration granted in exchange of the assets.

d. Classification of costs and expenses – The costs and expenses presented in the consolidated statements of income were classified based on their function, as that is the classification used by the industry the Company participates in. Thus, cost of sales was separated from the remaining costs and expenses.

e. Basis of consolidation – The financial statements of Grupo Lamosa, S.A.B. de C.V. (“Glasa”) and those of the controlled companies were considered to prepare the consolidated financial statements. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Glasa owns 100% of the capital stock of its subsidiaries. For consolidation purposes, all the significant balances and transactions between affiliated companies have been eliminated.

a. Cash and cash equivalents – Includes cash on hand, sigth bank deposits, and short-term investments that are readily convertible to cash, not subject to significant risk of changes in their value. Are measured at nominal value and yields are recognized in profit or loss as they are accrued.

b. Financial assets – Financial assets are recognised and derecognised on the trade date where there is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset during a period which is generally regulated by the market concerned, and are initially measured at fair value, plus transaction costs except for those financial assets classified at fair value through profit or loss, which are initially measured at fair value.

Effective interest method
Is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payable (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument (or, where appropriate), a shorter period, to the net carrying amount on initial recognition.

Income is recognised on an effective interest basis for debt instruments other than those financial assets classified as financial assets at fair value through profit or loss (FVTPL).

Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

For all other financial assets, objective evidence of impairment could include:

Certain categories of financial assets, such as trade receivables, are not assessed for impairment on an individual basis but on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Company’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period between 70 and 130 days, that is in the legal process, as well as observable changes in national or local economic conditions that correlate with default on receivables.

For financial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss.

When a financial asset is considered available for trade is impaired, the cumulative gain or loss previously recognized in other comprehensive income items is reclassified to the period’s profit or loss.

Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (FVTPL), ‘held-to-maturity’ investments, ‘available-for-sale’ (AFS) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Financial assets at fair value through profit or loss (FVTPL)
Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL.

A financial asset is classified as held for trading if:

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘other gains and losses’ line item in the consolidated statements of income.

Held to maturity investments
Bills of exchange and debt bonds with fixed or determinable payments and fixed maturities for which the Company has both the positive intention and the ability to hold to maturity are classified as investments held to maturity. Held-to-maturity investments are measured at amortised cost using the effective interest method less any impairment, recognising revenue on an effective yield basis.

Available-for-sale financial assets (AFS financial assets)
Are non-derivatives that are either designated as AFS or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.

Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in investment revaluation reserve, except for impairment losses, interest calculated using the effective interest method, and gains and losses on exchange, which are recognised in profit or loss. Where an investment is disposed or determined to impairment, the cumulative gain or loss previously recognised in the investment revaluation reserve is reclassified to income.

The fair value of AFS monetary financial assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate prevailing at the end of the reporting period. The foreign exchange gains and losses that are recognised in profit or loss are determined based on the amortised cost of the monetary asset. Other foreign exchange gains and losses are recognised in other comprehensive income.

Accounts receivable and other receivables
Accounts receivable and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market are classified as “accounts receivable”. Accounts receivable and other receivables (including trade accounts receivable, other receivables, cash and bank account balances) are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be insignificant.

c. Inventories – Inventories are stated at the lower of cost and net realisable value. Costs of inventories are determined on a weighted average cost method basis and include the acquisition or production cost which is incurred when purchasing or producing a product and other costs incurred in bringing inventories to their current location ad condition. For inventories of finished goods and inventories in progress, cost includes an appropriate share of production overheads based on normal operating capacity.

Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.

The Company reviews the carrying value of inventories, the presence of any indication of impairment that would indicate that the carrying amount may not be recoverable. Impairment is recorded if the net realisable value is less than the carrying value. The impairment indicators considered are, among others, obsolescence, low market prices, damage and firm sales commitments.

d. Real estate inventories – Real estate inventories consist of the cost of acquisition of land, licenses and tax, materials and direct and indirect costs incurred in the real estate business activity of the Company, and are valued at the lower of cost or net realizable value.

Directly related borrowing costs, incurred from loans related to the construction process are capitalised. See more detail in note 3.f for policy of capitalization of borrowing costs.

e. Property, plant, and equipment – Property, plant and equipment are initially recorded at their cost of acquisition and/or construction net of accumulated depreciation and/or accumulated impairment losses, if any. The borrowing costs related to the acquisition or construction of qualifying asset is capitalized as part of the cost of that asset, according to the Company´s policy. The improvements that have the effect of increasing the value of the asset, either because they increase the service capacity, improve efficiency or extend the useful life of the asset, are capitalized. Lower maintenance costs are recognized directly in costs in the period they are made. Depreciation of assets begins when the asset is ready for use.

The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

Except for the depreciation of machinery and equipment which is depreciated based on units produced with the total estimated asset during its service life, the depreciation of other fixed assets is calculated under the straight-line method based on the estimated useful lives, as follows:

Gain or loss on the sale or retirement of property, plant and equipment is calculated as the difference between the net income from the sale and the carrying amount of the asset and is recorded in other income (expenses) of the operations, when all significant risks and rewards of ownership of the asset are transferred to the buyer, which normally occurs when ownership of the property is transferred.

f. Borrowing costs – Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale, are added to the cost of those assets during the construction phase and up to the beginning of operation and / or exploitation. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

g. Investments in associates – An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, an investment in an associate is initially recognised in the consolidated statements of financial position at cost and adjusted thereafter to recognise the Company’s share of the profit or loss and other comprehensive income of the associate. When the Company’s share of losses of an associate exceeds the Company’s interest in that associate, the Company discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of the associate.

Any excess of the cost of acquisition over the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an associate recognised at the date of acquisition is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

Requirements of IAS 39 are applied to determine whether it is necessary to recognize an impairment loss in respect of the Company’s investment in an associate. When necessary, the impairment test of the total carrying value of the investment (including goodwill) in accordance with IAS 36, “Impairment of Assets”, as a single asset by comparing its recoverable amount (higher of value in use and fair value less cost of sales) against its carrying value. Any impairment loss recognised is part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.

When a group entity transacts with its associate, profits and losses resulting from the transactions with the associate are recognised in the Company’s consolidated financial statements only to the extent of interests in the associate that are not related to the Company.

h. Leases – Leases are classified as capital leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

The Company as lessee
Assets held under finance leases are initially recognised as assets of the Company at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated statements of financial position as a finance lease obligation. Lease payments are apportioned between interest expenses and reduction of the lease obligations so as to achieve a constant rate of interest on the remaining balance of the liability. Interest expenses are recognised immediately in profit or loss under the effective interest rate, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Company’s general policy on borrowing costs (see Note 3.f). Contingent rentals are recognised as expenses in the periods in which they are incurred.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

The Company as lessor
Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term.

The Company has no finance leases as lessor.

i. Intangible assets – Intangible assets represent payments whose benefits will be received in future years. The Company classifies its intangible assets into definite and indefinite-lived assets according to the period in which the Company expects to receive benefits.

Intangible assets with finite lives are amortized over their estimated useful lives. Intangible assets with indefinite lives are not amortized and are subject to an annual evaluation to determine if there is impairment of assets.

The Company primarily has trademarks, goodwill, and investments in software.

j. Goodwill – Goodwill arising from a business combination and recognized as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

Goodwill is not amortised but assessed for impairment at least annually. For the purposes of impairment testing, goodwill is allocated to each of the Company’s cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is indication that the unit may be impaired. If the recoverable amount of a cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in subsequent periods.

On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

k. Impairment of tangible and intangible assets other than goodwill – At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss.

l. Financial liabilities – Financial liabilities are classified as either financial liabilities “at FVTPL” or “debt or other financial liabilities”.

Financial liabilities at FVTPL
Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL.

Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability and is included in the ‘other gains and losses’ line item in the consolidated statements of income.

Debt and other financial liabilities
Include loans from financial institutions and other finance liabilities, which are initially measured at fair value, net of transaction costs and subsequently measured at amortised cost using the effective interest method, and the interest expense is recognised on an effective yield basis.

Financial liabilities are classified as short- term and long term according to their maturity.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

Derecognition
The Company derecognises financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire.

m. Derivative financial instruments – The Company values and records all operations with derivative financial instruments in the consolidated statements of financial position as either an asset or liability at fair value, regardless of the purpose of holding them.

The fair value of these instruments is determined based on the present value of cash flows. This method involves estimating future cash flows of derivatives according to the fixed rate of the derivative and the curve at that date to determine the variable flows, using the appropriate discount rate to estimate the present value. All derivatives of the Company are classified in Level 2 of the fair value hierarchy established by IFRS 13 from 2013 and IFRS 7, “Financial Instruments” – Disclosure, in 2012. Fair value measurements in Level 2 are those derived from different information than quoted prices included within Level 1 (fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities) that can be seen for the asset or liability, either directly (eg. , as prices) or indirectly (eg., derived from prices).

At the inception of the hedge relationship, the Company documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Company documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk.

Derivatives designated as a hedge are recognized valuation changes according to the type of coverage involved: (1) for fair value hedges, changes in both the derivative and the hedged item are recognized at fair value and are recognized in profit or loss, (2) when cash flows hedges, the effective portion is temporarily recognised in other comprehensive income and in profit or loss when the hedged item affects it; the ineffective portion is recognized immediately in profit or loss.

Hedge accounting is discontinued when the Company revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, when it no longer qualifies for hedge accounting or effectiveness is not high enough to compensate changes in fair value or cash flows of the hedged item.

When discontinuing cash flow hedge accounting, any gain or loss recognised in other comprehensive income and accumulated in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in profit or loss. Where a hedge for a forecasted transaction is proved satisfactory and subsequently does not meet the effectiveness test, the cumulative effects in other comprehensive income in equity are recognised in proportion to profit or loss, to the extent that the forecasted asset or liability affects it.

Certain derivative financial instruments contracted for hedging from an economic perspective that do not to meet all the requirements under the regulations, are designated for accounting purposes as held for trading. The fluctuation in the fair value of these derivative instruments are recognised in the consolidated statements of income.

The Company uses interest rate swaps, foreign exchange and commodity market prices (natural gas), to manage its exposure to fluctuations in interest rates, foreign exchange, and market prices of natural gas, respectively (see Note 5.2).

n. Short-term employee benefits – Short-term employee benefits are calculated based on the services provided, considering their current salaries and the liability is recognised as it accrues. It mainly includes workers’ profit sharing (PTU) payable, vacations and vacation premiums, and incentives.

o. Statutory employee profit sharing (PTU) – PTU is recorded in the period’s profit or loss in which it is incurred and presented in cost of goods sold and operating expenses.

p. Termination benefits – The Company provides benefits upon termination of employment under certain circumstances required. These benefits consist of a lump sum payment of three months’ salary plus 20 days per year worked in the event of unjustified dismissal.

Termination benefits are recognized when the Company decides to terminate the employment relationship with an employee or when the employee accepts an offer of termination.

q. Long-term employee benefits – The Company operates defined contribution retirement benefit plans and defined benefit plans.

Defined contribution retirement benefit plans – The Company legally makes payments that are equivalent to 2% of the salary of their workers integrated (met), to the plan defined contribution for the system of retirement savings established by law. The expense recognised for this item is $ 23,487 in 2013 and $ 19,937, in 2012.

Defined benefit plans – For defined benefit plans, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at the end of each reporting period. All remeasurements of the Company’s defined benefit obligations such as actuarial gains and losses are recognized directly in other comprehensive income (“OCI”) and shall not be recycled to profit or loss at any time. The Company presents service costs within cost of goods sold, administrative and selling expenses in the consolidated statements of income. The Company presents net interest cost within interest expense in the consolidated statements of income. The projected benefit obligation recognized in the consolidated statements of financial position represents the present value of the defined benefit obligation as of the end of each reporting period.

The defined benefit obligation recognised in the consolidated statements of financial position represents the present value of the defined benefit obligation less the fair value of plan assets.

The defined benefit plans that the Company provides its employees are:

Seniority premiums – In accordance with Mexican Labor Law, the Company provides seniority premium benefits to its employees under certain circumstances. These benefits consist of a one-time payment equivalent to 12 days wages for each year of service (at the employee’s most recent salary, but not to exceed twice the legal minimum wage), payable to all employees with 15 or more years of service, as well as to certain employees terminated involuntarily prior to the vesting of their seniority premium benefit.

Defined benefit plan – The Company has a pension plan with defined benefits that consists of a one-time payment or a monthly payment determined based on their base pay according to age and years of service. The retirement ages are: normal. - Staff with 50 years of age and at least 5 years of service; advanced. - Staff with 45 years of age and at least 15 years of service, and early. – Staff with 40 years of age and a minimum of 10 years of service.

Defined contribution plan – The Company has a pension plan with defined contribution benefits which such contributions equivalent to a maximum of 6.25% of the annual taxed wage.

The Company has two types of retirement: normal retirement - applies when turning 65 years of age and early retirement-applied with 55 years old and at least 5 years of service.

In the case of leaving prior to retirement, the employee’s entitlements on contributions will be adjusted to the years of service with the Company.

r. Provisions – Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

s. Revenue recognition – Revenue is measured at the fair value of the consideration received or receivable, reduced for estimated customer returns, rebates and other similar allowances granted by the Company.

Revenue from the sale of goods and real estate is recognised when all of the following conditions are satisfied:

t. Income taxes – Income tax expense represents the sum of the tax currently payable and deferred tax.

Current tax
The tax currently payable: income tax (“ISR”) and the business flat tax (“IETU”), is based on taxable profit for the year respectively, and is recognised in profit or loss of the period in which is incurred. Taxable profit differs from profit as reported in the consolidated statements of income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company’s liability for current tax is calculated using the tax rates that have been enacted or substantively enacted at the end of the reporting period.

Deferred tax
For deferred tax recognition, the Company determines whether ISR or IETU will be incurred based on financial forecasts and recognises the appropiate deferred tax to be paid; (as of December 2013 as a result of the 2014 tax reform, beginning in 2014, IETU is no longer recognized and the Company will only incur ISR). Deferred tax is recognised on the temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, including tax loss benefit. Deferred income tax asset is presented net of the reserve arising from the uncertainty of the realisation of certain benefits.

On initial recognition, such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and deferred tax liabilities are offset when there is a legal right to offset short-term assets with short-term liabilities and when they relate to income taxes relating to the same taxation authority and the Company intends to liquidate its assets and liabilities on a net basis.

Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

The business assets tax (“IMPAC”), expected to be recoverable is recorded as a tax credit and is presented in the consolidated statements of financial position increasing income tax deferred asset.

u. Foreign currency transactions – The separate financial statements of each subsidiary of the Company are prepared in the currency of the primary economic environment in which the Company operates (its functional currency). For purposes of these consolidated financial statements, the results and financial position of each entity are expressed in Mexican pesos, which is the functional currency of the Company and the presentation currency for the consolidated financial statements.

Foreign currency transactions are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Exchange differences on monetary items are recognised in profit or loss in the period in which they arise except for capitalisation of borrowing costs during the construction of assets on construction financing

v. Earnings per share (“EPS”) – EPS is calculated by dividing the net income attributable to controlling interest by the weighted average number of shares outstanding during the period. Earnings per share are based on 369,653,594 and 367,824,273 weighted average shares outstanding during 2013 and 2012, respectively. The Company has no potential dilutive instruments.

In the application of the accounting policies mentioned in Note 3, the Company’s management made judgments, estimates and assumptions about certain amounts of assets and liabilities of the financial statements. The estimates and associated assumptions are based on experience and other factors that are considered relevant. Actual results could differ from such estimates.

The estimates and associated assumptions are continuously reviewed. Amendments to accounting estimates are recognized in the period in which the estimate is modified if the modification affects only that period, or the current period and future periods if the review affects both current and future periods.

Critical accounting judgments and key uncertainty sources when applying the estimates made at the date of the consolidated financial statements, and that have a significant risk of resulting in an adjustment in carrying amounts of assets and liabilities during the next financial period are as follows:

The basic assumptions concerning the future and other key uncertainty sources in the estimates at the end of the reporting period, which have a significant risk of causing major adjustments to carrying amounts of assets and liabilities, are disclosed in the corresponding notes of each account or affected item.

The Company’s subject to transactions or contingent events on which it uses professional judgment in the development of estimates of probability of occurrence. The factors considered in these estimates are the legal situation at the date of the estimate, and the opinion of legal advisors.

The Company is exposed to different financial risks inherent in its operation, which are mainly: a) market risk (foreign exchange, interest and price rates mainly natural gas), b) liquidity risk and c) credit risk, for which it seeks to manage the potential negative effects thereof in its financial performance. These risks are evaluated through a program of risk management. According to the valuation of these risks and internal guidelines, the Company carries out operations with derivative financial instruments, which are only for purposes of coverage and must be previously approved by the Finance Committee, comprised of independent and related directors of the Company’s Board of Directors or the Board of Directors itself.

5.1 Categories and fair value of financial instruments
Below are the financial instruments and their fair value based on their category:

⁽¹⁾ See Note 3-a and 3-b.
⁽²⁾ See Note 3-m
⁽³⁾ See Note 3-l. This line includes liabilities related to suppliers, long-term debt and finance leases. For purposes of determining the fair value of long-term debt and finance leases discounted cash flow models were used. The fair value of long-term debt and finance leases is equivalent to their carrying value because the debt has variable interest rates applied, baseline rates (TIIE / LIBOR) are periodically adjusted according to market conditions in each period and for purposes of long-term debt, surcharge applies in relation to the degree of leverage of the Company, that through quarterly reviews.

5.2 Market risks
5.2.1 Exchange risk
The Company’s exposure to the volatility of the exchange rate of the Mexican peso against the U.S. dollar for the Company’s financial instruments is shown as follows (figures in this Note are expressed in thousands of U.S. dollars – US$):

The exchange rates in effect at the date of the consolidated financial statements per U.S. dollar were as follows:

At February 14, 2014, the interbank exchange rate established by Banco de México was $13.25 Mexican pesos per U.S. dollar.

5.2.2 Sensitivity analysis of exchange risk
As of December 31, 2013, had the Mx. Peso/U.S. dollar ratio increased by $1.00 Mexican peso, then the amount of the net monetary position in foreign currency would have increased by $228,069 impacting income before taxes and the Company’s stockholders’ equity would have resulted in a monetary position loss. If on the other hand, such ratio had decreased by $1.00 Mexican peso, then the effect would have been the opposite, i.e., a benefit in the income by $228,069 and stockholders’ equity would have resulted in a monetary position gain. Both scenarios represent the amount that Management considers reasonably likely to ocur within the year.

5.2.3 Interest rate risk.
All of the bank debt is contracted at a variable rate, which exposes the Company to interest risk. The risk exposure mainly lies in variations that could occur in the reference interest rate used as a base in Mexico and in the United States, (28-day Interbank Equilibrium Interest Rate or “TIIE” and the 3-month London Interbank Offered Rate or “LIBOR”).

The Company monitors trends in such interest rates, in recent years the trend of 28-day TIIE and 3 M LIBOR has gone down; the 28-day TIIE was at its lowest level in December 2013 (3.79%), while 3 M LIBOR was at its lowest level in October and November 2013 (0.24%). The Company has contracted hedges to cover a risk of a rise in the aforementioned interest rates. As of December 31, 2013, the Company recorded a bank debt balance in Mexican pesos of $2,160,007, with 28-day TIIE rate plus 1.75% and one in U.S. thousand dollars of $236,338 with a 3 month LIBOR rate plus (1.75% and 5.20%) (weighted average 4.01%). The interest expense recorded at the close of 2013 and 2012 was $293,179 and $463,556, respectively.

5.2.4 Sensitivity analysis of interest rate risk
If as of December 31, 2013, the interest rates on the Company’s debt instruments had increased one percentage point, which represents the percentage that Management considers reasonably likely to occur in the coming year, the impact in the income before income taxes and the Company’s stockholders’ equity would be of $58,600. The increase in a ratio would be generating a decrease in the income, and instead a decrease in such ratio would be generating an increase in the income.

5.2.5 Natural gas price risk
The Company is exposed to fluctuations in the price of natural gas. During the years ended December 31, 2013 and 2012, the Company consumed natural gas by approximately 9,394,135 and 8,993,082 million British Thermal Units (“MMBTUS”), respectively. Based on the guidelines established by the Finance Committee to cover the risk of the rise in the price of gas, a permanent strategy to hedge this input has been implemented by contracting derivative financial instruments that have been classified as cash flow hedges.

During the years ended December 31, 2013 and 2012, a total of 7,490,000 and 6,819,000 MMBTUS were hedged, respectively. The effect for the aforementioned hedging transaction represented charges of $4,591 and $1,177 in the 2013 and 2012 consolidated statements of income, respectively, which was presented within cost of sales.

As of December 31, 2013 and 2012, the Company has derivatives that hedge the natural gas price by approximately 9,020,000 and 6,190,000 MMBTUS, respectively. At the same date, the fair value of such hedges was as follows:

⁽¹⁾ In the case of options, the Company has the right, but not the obligation, to buy at the established price in exchange for the payment of a premium, paid at the beginning of each transaction; in the case of swaps, the Company has the right and the obligation to purchase at the established price. This transaction has no initial cost.

As of December 31, 2013 and 2012 and February 14, 2014, date of issuance of the consolidated financial statements, the natural gas market price is US$3.6725, US$3.5591 and US$5.3401, U.S. dollars of MMBTUS, respectively.

The valuation of the effective portion of derivative financial instruments recognised in other comprehensive income for the years ended December 31, 2013 and 2012 is as follows:

5.2.6 Sensitivity analysis of natural gas price risk
If as of the December 31, 2013, the gas price had increased by 10%, which represents the percentage that Management considers reasonably likely to occur in the coming year, the Company’s income before taxes would have decreased by $56,675, having an effect in stockholders’ equity of $39,672. If on the other hand, such ratio had decreased by 10%, then the effect would be the opposite. Such effects consider the aforementioned hedging strategy and the effect of the corresponding derivative financial instruments.

5.3 Liquidity risk
The Company is exposed to different industry factors, as well as to economic factors, which could affect the cash flow of its subsidiaries. Some of these factors are not controllable by the Company; however, the Company manages the liquidity risk through the monthly review of actual and projected cash flows to anticipate and control any eventuality. A contractual payments’analysis of non-derivative financial liabilities is disclosed in Note 14 and the maturity analysis for derivative financial liabilities is disclosed in Note 5.2.5, which will be settled in the short-term. This risk has been managed maintaining a proper cash balance for its operation and debt service, complemented by available lines of credit with various banks which to date, have not been needed to use.

5.4 Credit risk
The customer portfolio is composed predominantly by legal entities with roots and experience in the field of the construction finishing and with a considerable history in the distribution of the products of the Company’s brands, which usually constitute an important source in its line of business. For its credit risk management, the Company carries out a thorough selection of prospects interested in the accreditation for the purchase and distribution of products, as well as the annual evaluation of customers already established, through the analysis of qualitative and quantitative variables, including the analysis of financial statements, based on which and on the implementation of the regulations contained in the credit policy, credit limits are restated. The portfolio is based on the characteristics and conditions of customers, supported with promissory notes when necessary.

In addition, no customer individual or with affiliated companies represent more than 10% of sales or account receivables for the reported years in these consolidated financial statements.

During the years ended December 31, 2013 and 2012, the Company had idle capacity of 14.06% and 9.6%, respectively.

During the years ended December 31, 2013 and 2012, borrowing costs related to fixed asstets were no significant.

During the years ended December 31, 2013 and 2012, the Company canceled property, plant and equipment amounting to $30,960 and $37,665, respectively, of assets that were removed from use.

As of December 31, 2013, intangible assets with finite useful lives mainly refer to expenses of the Company related to the implementation of an Enterprise Resource Planning (ERP) system which will begin amortisation in 2014, when the Company estimates said item to be ready for its intended use.

For the years ended December 31, 2013 and 2012, borrowing costs related to intangible asstets were no significant.

For purposes of impairment tests, goodwill was assigned to the Company’s following cash generating units (CGU):

The following factors are considered to assess the recovery value of the CGU for impairment test purposes:

The discount and perpetuity growth rates used for the years ended December 31, 2013 and 2012, are as follows:

For the purposes of the calculation of the recover value of cash generating units, discount rates before tax are used, which are applied to cash flows before tax.

The Company’s management believes that any possible reasonable change in the factors to assess the recovery value will not cause the CGU value to exceed their recovery value.

a. According to the long-term loan agreements, the bank debt as of December 31, 2013 and 2012, is as follows:

Long-term debt maturities as of December 31, 2013 are as follows:

⁽¹⁾ Interest is determined based on variable rates at the end of the period.

TIIE and LIBOR interest rates were as follows:

b. The clauses of some long-term agreements of the Company set forth certain restrictions as well as the obligation to maintain some financial indicators, including maintaining minimum cash of US$25 million U.S. dollars. In addition, the Company has the obligation to make advance payments when certain assets that constitute the loan guarantee are sold. Such clauses have been fulfilled as of December 31, 2013.

During 2013, the Company made payments of long-term debt in advance of original maturity of the amount of $417,446.

c. As of December 31, 2013, there is a long-term debt aggregating to $3,224,254, which is pledged with a real estate inventory of $46,212, fixed assets with a carrying amount of $5,048,131, and current assets with a value of $5,122,591. In addition, the brands and patents owned by the Company are granted as a pledge.

The Company has contracted obligations for capital leases contracted in local and foreign currency with different financial institutions to purchase machinery and equipment, and vehicles, which consist of the following:

a) The main assumptions used for actuarial calculations of defined benefit plans:

a. The minimum non-withdrawal fixed capital stock consists of ordinary shares, at no par value, and variable capital of ordinary shares, at no par value. All the shares are freely subscribed.

b. According to the current stock market regulations in effect and the Company’s by-laws, each year the Annual Ordinary Stockholders’ Meeting of Grupo Lamosa, S.A.B. de C.V. approves the maximum amount of resources that the Company can allocate to the acquisition of shares of its capital stock. The maximum amount of resources approved for 2013 and 2012 at the Annual Stockholders’ Meetings held on March 12, 2013 and March 13, 2012 amounted to $ 90 million Mexican pesos for each of the aforementioned years. In relation to the year ended December 31, 2013 and 2012, the Company did not conduct transactions with shares of its capital stock.

c. At the general stockholders’ meetings held on March 12, 2013, dividends were declared for $73,562, from the net tax income account, equivalent 0.20 Mexican pesos per share; in adition, dividends were declared of 1%, equivalent a new share for every 100 shares in circulation. This dividend resulted in an increase in a variable portion of the capital, amounting to $25 issuing 3,709,084 shares of single series.

d. Retained earnings include the statutory legal reserve. The General Corporate Law requires that at least 5% of net income of the year be transferred to the legal reserve until the reserve equals 20% of capital stock at par value (historical pesos). The legal reserve may be capitalized but may not be distributed unless the entity is dissolved. The legal reserve must be replenished if it is reduced for any reason. At December 31, 2013 and 2012, the legal reserve, in historical pesos, was $480.

e. Stockholders’ equity, except restated paid-in capital and tax-retained earnings, will be subject to income tax payable by the Company at the rate in effect upon distribution. Any tax paid on such distribution may be credited against annual and estimated income tax payable of the year in which the tax on the dividend is paid and the two fiscal years following such payment.

f. The balances of the stockholders’ equity tax accounts are:

g. Capital management – For capital management purposes, the Company considers, in addition to stockholders’ equity and the items thereof, all the financing sources both internal and external, including liabilities with costs resulting from contracting short-term and long-term debt. Similarly, investment in working capital is considered by considering items such as customers, inventories and suppliers, as well as cash and cash equivalents.

The Company is subject to obligations arising from contacting a secured loan, whose balance as of December 31, 2013 amounted to $3,224,254. The main obligations contained in such agreements include the following financial covenants1:

⁽¹⁾ According to the contracts, financial covenants are determined using figures from the financial statements under MFRS.
⁽²⁾ The EBITDA is defined as the operating income added to depreciation and amortization and other items such as statutory employee profit sharing, doubtful accounts estimate, inventory write-downs, employee obligations, and impairment for long-lived assets.

During 2013, the Company carried out the management of its capital, fulfilling such requirement, fully complying with all of its financial commitments and showing ratios with better performance than those described above.

Below are some of the major items that are considered for the management of the Company’s capital as of December 31, 2013, showing them in comparison to those of the prior year.

The decrease in the total debt of $731,102 during 2013 arose mainly from the generation of cash flow of the Company. This cash flow allowed supporting the Company’s operations and cope with debt maturities scheduled for the year. In addition, debt prepayments of $417,446 were made, which helped to reduce the Company’s level of leverage and improve its financial structure.

The Company’s assets are not subject to any pending legal proceeding for which a contingency might arise, except for some ordinary or incidental litigation against which the Company is duly insured or the amounts of them are unimportant.

a. The Company is subject to ISR and until December 31, 2013, IETU.

ISR -The rate was 30% in 2013 and 2012 and as a result of the new 2014 ISR law (2014Tax Law), the rate will continue at 30% in 2014 and thereafter. The Entity incurred ISR on a consolidated basis up to 2013 with its Mexican subsidiaries. As a result of the 2014 tax reform, the tax consolidation regime was eliminated, and the Entity and its subsidiaries have the obligation to pay the deferred income tax determined as of that date during the subsequent five years beginning in 2014, as illustrated below.

Pursuant to Transitory Article 9, section XV, subsection d) of the 2014 Law, given that as of December 31, 2013 the Entity was considered to be a holding company and was subject to the payment scheme contained in Article 4, Section VI of the transitory provisions of the ISR law published in the Federal Official Gazette on December 7, 2009, or article 70-A of the ISR law of 2013 which was repealed, it must continue to pay the tax that it deferred under the tax consolidation scheme in 2007 and previous years based on the aforementioned provisions, until such payment is concluded.

IETU - – IETU was eliminated as of 2014; therefore, up to December 31, 2013, this tax was incurred both on revenues and deductions and certain tax credits based on cash flows from each year. The respective rate was 17.5%..

Income tax incurred will be the higher of ISR and IETU up to 2013.

Through 2012, based on its financial projections, the Company determined that its subsidiaries will basically pay ISR; therefore, it only recognizes deferred ISR. As of 2013, only deferred ISR is calculated due to the elimination of IETU.

Reconciliation of ISR asset and liability balances before the 2010 tax reform became effective, and the balances as of December 31, 2013, after recognition of the effects of such reform, are as follows:

a. The accounts receivables as of December 31, 2013 and 2012 were as follows:

Information reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance focuses on types of goods provided. These segments are managed separately, each requiring its own production, technology, and marketing and distribution strategies. Each market serves different customer bases.

The Company’s main products by segment are as follows:

The Company’s segments to be reported pursuant to IFRS 8, Operating segments, are as follows:

On February 14, 2014, the issuance of the consolidated financial statements was authorized by Ing. Federico Toussaint Elosúa, Chief Executive Officer, and Ing. Tomás Luis Garza de la Garza, Chief Financial Officer. These consolidated financial statements are subject to the approval of the Board of Directors at the ordinary stockholders’ meeting, where they may modify the consolidated financial statements, based on the provisions set forth by the Mexican General Corporate Law.