CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR

ENDED 31 DECEMBER 2004

1 Status and operations

The General Organisation For Social Insurance (“the Organisation”) and its subsidiary undertakings constitute the “Group”. The Organisation was established by Amiri Decree 24 of 1976, as amended, with effect from 1 October 1976. The social insurance scheme covers:

• Old age pensions, disability and death benefits
• Employment injuries benefits
• Temporary disability (sickness or maternity) benefits
• Unemployment benefits
• Insurance for self-employed persons and professionals
• Insurance for employers
• Family allowances
• Other types of insurance that fall within the scope of social security.

Currently, the scheme covers the above except the third, fourth and eighth items and covers employees of all registered entities employing five or more persons.

2 Actuarial position

An independent actuary was appointed and carried out the calculation to estimate the actuarial present value of the promised retirement benefits as at 31 December 2004 in accordance with International Accounting Standard 26 “Accounting and Reporting by Retirement Benefit Plans” (Note 23).

3 Placements with banks

4 Fixed deposits

Fixed deposits amounting to BD444,474,363 (2003: BD351,875,723) bear interest which ranged between 1.75% to 2.5% per annum (2003 : 1.25 % to 2% per annum) and are held with the Group's bankers having maturities ranging between 15 and 180 days.

5 Social insurance contributions receivable

The social insurance contributions receivable are generally due within 15 days after the month for which the social contribution invoice is raised by the Organisation.

The movement of the provision is as follows:

Net social insurance contributions receivable represents the social insurance and other contribution income accrued during 2004 and earlier years but not received at 31 December 2004, after deducting the provision for bad and doubtful social insurance contributions receivable.

6 Net pension loans receivable

Net pension loans receivable represents the net balance of pension loans provided as at 31 December 2004 by the Group in accordance with the Minister of Labour and Social Affairs Order (1) for the year 2002.

7 Other receivables

Compensation receivable from the Government represents the amount approved by the Ministry as compensation for the loans extended in prior years by the Group for the construction and development of the Bahrain International Exhibition Centre, the loan to National Hotels Company and grants for other projects in the Kingdom of Bahrain amounting to BD7,635,602. These loans were written-off in the Group's statement of income in previous years. Accordingly, in July 2004, the Government paid the Group an amount of BD5,276,721 as compensation for these losses, with the balance of BD2,358,881 being reflected as compensation receivable from the Government, which has been received in 2005.

8 Held-for- trading investments

Held-for-trading investments represents amounts invested in quoted equities, bonds and other financial instruments by portfolio managers located in the United States of America, Japan and Europe.

9 Available-for-sale investments

11 Investments in associated undertakings

The Organisation has the following investments in associated undertakings:

Investments in associated undertakings have been ascertained based on the Organisation's proportionate share in the net assets of the associated undertakings in accordance with the audited financial statements of the associated undertakings for the year ended 31 December 2004.

The land in Southern Area Development Company BSC (c) (“SDC”), an associated undertaking, has been revalued in 2003 to BD66,039,099, resulting in a revaluation surplus of BD59,778,181. The carrying value of the Organisation's investment in SDC has not been adjusted for this revaluation surplus on a conservative basis.

12 Investment properties

Investment properties includes land amounting to BD12,198,086 (2003 : BD10,751,980) and buildings amounting to BD25,902,576 (2003 : BD25,839,551). The fair value of the land, which was evaluated in April 2003 by taking the average of three independent registered valuers, amounted to BD16,898,710 . At 31 December 2004, the management estimated the fair value of the investment properties at BD50,373,553.

13 Investment in subsidiary undertakings

Bahrain Investment Bank BSC (c), Bahrain (“BIB”)

BIB is incorporated as a closed joint stock company in the Kingdom of Bahrain and operates as an investment banking institution under a license granted by the Bahrain Monetary Agency. In September 1987, all the shares of the Bank were acquired by the Organisation.

Marina Club S.P.C., Bahrain (“MC”)

MC is a single person company registered in the Kingdom of Bahrain and is engaged in the business of harbouring pleasure crafts and providing catering, sports, gymnasium and marine related services. Its registered office is in Adliya, Kingdom of Bahrain . During 2001, the shareholders entered into an agreement with the Organisation, whereby the Organisation, a 40% shareholder before the sale, acquired the remaining 60% of the share capital of the company.

14 Property, plant and equipment

15 Trade and other payables

Retirement benefits cost

The Organisation employed five expatriates (2003: five expatriates) and 277 Bahrainis (2003: 277 Bahrainis) as at 31 December 2004.

Bahraini employees are covered by the pension scheme for the Organisation of the Government of Bahrain. Employees and the Group contributes monthly to this scheme on a fixed-percentage-of-salary basis.

Expatriate employees on limited-term contracts are entitled to leaving indemnity payable under the provisions of the Bahrain Labour Law for the Private Sector, 1976, as amended.

Provision for employees' leaving indemnity

16 Net investment income

17 Other income

Other income includes compensation approved by the Government for the loans granted by the Group in prior years which had been written off to the statement of income. The total amount receivable amounted to BD7,635,602 of which BD5,276,721 was received during 2004. The balance amount of BD2,358,881 has been recorded as a receivable (Note 7) which has been fully received in 2005.

18 Effective interest rates on cash and bonds

The effective interest rate is the historical annual yield on fixed-rate instruments carried at amortised cost and the current market yield for a floating rate instrument or a short-term fixed deposit. The following table presents the effective rates of the financial instruments:

19 Financial assets and liabilities and risk management

Financial instruments consist of financial assets and financial liabilities.

Financial assets of the Group include cash and bank balances, placements with banks, fixed deposits, receivables and investments.

Financial liabilities of the Group include trade and other payables.

The risks associated with financial instruments and the Group's approach to managing such risks is set out below:

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

The Group has deposits and investments in currencies other than Bahrain Dinars and United States Dollars. The Bahraini Dinar is effectively pegged to the United States Dollar; thus, currency risk is expected to occur only in respect of other currencies.

The Group's exposure to currency risk, as well as the currency-wise concentration of investments, expressed in the equivalent of Bahrain Dinars (excluding short-term deposits and assets and liabilities) is summarised below:

Net currency wise concentration of investments in Bahrain Dinar equivalents

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market rates of interest.

The Group's short-term fixed deposits are at fixed interest rates and mature within one year. Investments in Government bonds consist of both fixed and floating rate instruments. The effective interest rates on deposits and bonds are set out in Note 18.

Derivatives: The Group does not use derivative financial instruments to hedge its currency, interest rate or market risk.

Market risk is the risk that the value of financial instrument will fluctuate as a result of changes in market prices on account of factors specific to the individual security or to its issuer or factors affecting the securities market. The Group is exposed to market risk with respect to its investments in different securities.

The Group's limits market risk by maintaining a well-diversified portfolio and by continuous monitoring of pertinent developments in international securities markets. In addition, the Group actively monitors the key factors that are likely to affect the prices of securities, including operational and financial performance of investees. The geographical concentration of the Group's investments is set out in Note 20.

Cash is placed with national and international banks with good credit ratings. Credit risk on receivables is limited to local employers in the private sector, which are carried net of impairment allowances. The Group monitors its credit risk with respect to receivables from employers in accordance with defined policies and procedures. Credit risk in respect of investments is managed by the Group through monitoring credit exposures and continually assessing the creditworthiness of counterparties.

Liquidity risk is the risk that an enterprise will encounter financial difficulty in raising funds to meet commitments associated with financial instruments and social insurance obligations. Liquidity risk may arise from the inability to sell a financial asset at a price close to its fair value.

Liquidity requirements are monitored on a daily basis and the management ensures that sufficient funds are available to meet all liabilities as they fall due. In the normal course of business, the Group does not normally resort to borrowings but has the ability to raise funds from banks at short notice.

Fair value is the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Differences can, therefore, arise between the carrying values under the historical cost method and fair value estimates.

Underlying the definition of fair value is a presumption that an enterprise is a going concern without any need or intention to either liquidate, curtail materially the scale of its operations or undertake a transaction on adverse terms.

The fair value of the Group's financial assets and liabilities are not materially different from their carrying values.

20 Comparative figures

Certain comparative balances have been reclassified, wherever necessary, to conform with the presentation adopted at 31 December 2004.

21 Geographical concentration of investments

22 Segmental analysis

Business segments

A business segment is a group of assets and operations engaged in products or services that are subject to risk and returns that are different from those of other business segments. A summary of the assets, liabilities and operations of the different business segments is as follows:

Geographical segments

A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments.

A geographical concentration of the Group's investments has been provided in Note 20. As the Group operations are located only in the Kingdom of Bahrain , geographical segments of the total assets, liabilities and operations have not been provided.

23 Actuarial position

The actuarial present value of promised benefits can be further analysed as follows:

The actuarial estimate has been prepared by independent actuaries, Muhanna & Co., Cyprus . The actuary has calculated the actuarial present value of promised benefits accruing under the terms and conditions of the scheme at 31 December 2004. The method used to calculate the actuarial liability as well as the standard contribution rate is the “Projected Unit Method” in accordance with International Accounting Standard 19 “Employee Benefits”. For the purpose of the actuarial computation, the actuarial liability has been calculated based on the present value of the benefits accrued at the valuation date, taking into account the final earnings for members in service. The discount rate has been taken at 5.5% per annum, based on the long term return of the Organisation.

As is evident from the above, the unfunded deficit at 31 December 2004 amounts to BD406,106,607. The management of the Organistion is currently in the process of reviewing this unfunded deficit and considering options available to cover the shortfall.