Desarrolladora Homex (HXM)

Mexican GAAP

As of May 31, 2004, the Mexican Institute of Public Accountants (“IMCP”) formally transferred the function of establishing and issuing financial reporting standards to the Mexican Board for Research and Development of Financial Reporting Standards (“CINIF”), consistent with the international trend of requiring this function be performed by an independent entity.

Accordingly, the task of establishing bulletins of Mexican GAAP and circulars previously issued by the IMCP was transferred to CINIF, who subsequently renamed standards of Mexican GAAP as “Normas de Información Financiera” (Financial Reporting Standards, or “NIFs”), and determined that NIFs encompass (i) new bulletins established under the new function; (ii) any interpretations issued thereon; (iii) any Mexican GAAP bulletins that have not been amended, replaced or revoked by the new NIFs; and (iv) International Financial Reporting Standards (“IFRS”) that are supplementary guidance to be used when Mexican GAAP does not provide primary guidance.

One of the main objectives of CINIF is to achieve greater concurrence with IFRS. To this end, it started by reviewing the theoretical concepts contained in Mexican GAAP and establishing a Conceptual Framework (“CF”) to support the development of financial reporting standards and to serve as a reference in solving issues arising in the accounting practice. The CF is formed by eight financial reporting standards, which comprise the NIF-A series. The NIF-A series, together with NIF B-1, were issued on October 31, 2005. Their provisions are effective for years beginning January 1, 2006, superseding all existing Mexican GAAP series A bulletins.

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The new NIFs are as follows:

The most significant changes established by these standards are as follows:

·                                In addition to the statement of changes in financial position, NIF A-3 includes the statement of cash flows, which should be issued when required by a particular standard.

·                                NIF A-5 includes a new classification for revenues and expenses: ordinary and not ordinary. Ordinary revenues and expenses are derived from transactions or events that are within the normal course of business or that are inherent in the entity’s activities, whether frequent or not; revenues and expenses classified as not ordinary refer to unusual transactions and events, whether frequent or not.

·                                NIF A-7 requires the presentation of comparative financial statements for at least the preceding period. Through December 31, 2004, the presentation of prior years’ financial statements was optional. The financial statements must disclose the authorized date for their issuance, and the name(s) of the officer(s) or administrative body(ies) authorizing the related issuance.

·                                NIF B-1 establishes that changes in particular standards, reclassifications and correction of errors must be recognized retroactively. Consequently, basic financial statements presented on a comparative basis with the current year that might be affected by the change, must be adjusted as of the beginning of the earliest period presented.

The Company has not fully assessed the effects of adopting these new standards on its financial information.

Mexican GAAP

As of May 31, 2004, the Mexican Institute of Public Accountants (“IMCP”) formally transferred the function of establishing and issuing financial reporting standards to the Mexican Board for Research and Development of Financial Reporting Standards (“CINIF”), consistent with the international trend of requiring this function be performed by an independent entity.

Accordingly, the task of establishing bulletins of Mexican GAAP and circulars previously issued by the IMCP was transferred to CINIF, who subsequently renamed standards of Mexican GAAP as “Normas de Información Financiera” (Financial Reporting Standards, or “NIFs”), and determined that NIFs encompass (i) new bulletins established under the new function; (ii) any interpretations issued thereon; (iii) any Mexican GAAP bulletins that have not been amended, replaced or revoked by the new NIFs; and (iv) International Financial Reporting Standards (“IFRS”) that are supplementary guidance to be used when Mexican GAAP does not provide primary guidance.

One of the main objectives of CINIF is to achieve greater concurrence with IFRS. To this end, it started by reviewing the theoretical concepts contained in Mexican GAAP and establishing a Conceptual Framework (“CF”) to support the development of financial reporting standards and to serve as a reference in solving issues arising in the accounting practice. The CF is formed by eight financial reporting standards, which comprise the NIF-A series. The NIF-A series, together with NIF B-1, were issued on October 31, 2005. Their provisions are effective for years beginning January 1, 2006, superseding all existing Mexican GAAP series A bulletins.

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Mexican GAAP

In May 2004, the Mexican Institute of Public Accountants, or IMCP (Instituto Mexicano de Contadores Públicos) issued Bulletin B-7, “Business Acquisitions”, whose application is mandatory for fiscal years beginning on or after January 1, 2005, although early adoption is encouraged.  Bulletin B-7 provides updated rules for the accounting treatment of business acquisitions and investments in associated entities.  Bulletin B-7 establishes that the purchase method shall be applied in accounting method for business combinations; eliminates the amortization of goodwill, which is currently subject to the impairment rules; establishes rules for the accounting treatment of asset transfers or share exchanges among entities under common control as well as for the acquisition of minority interests based on the provisions of Bulletin B-8, “Consolidated and combined financial statements and valuation of permanent investments in shares”.  Management beleives that the adoption of Bulletin B-7 as of January 1, 2005 will not have significant effects on our financial position or results of operations.

In April 2004, the IMCP issued Bulletin C-10, “Derivative instruments and hedging activities”, whose application is mandatory for fiscal years beginning on or after January 1, 2005, although early adoption is encouraged.  Bulletin C-10 establishes that any variances in the fair value, both of the derivative and the underlying, for fair value hedges must be reflected in current earnings when such variances occur; for cash flow hedges, the effective portion of fair value variances must be recognized in other comprehensive income in stockholders’ equity, while the ineffective portion must affect current earnings.

Bulletin C-10 establishes the conditions that must be met for an instrument to be considered as a derivative financial instrument.  Bulletin C-10 also provides for regulation of hedging activities, including, among others, the formal documentation at the inception of each hedge and a measurement of its effectiveness during its term.  In addition,, Bulletin C-10 classifies hedges into three categories: a) fair value hedges, b) cash flow hedges and c) foreign currency hedges, and provides for specific regulation with respect to valuation, recognition, presentation and disclosure for each category of hedge, Management believes that the adoption of Bulletin C-10 as of January 1, 2005, will not have significant effects on our financial position or results of operations.

In April 2004, the IMCP issued Amendment to Bulletin C-2, “Financial instruments”, whose application is mandatory for fiscal years beginning on or after January 1, 2005, although early adoption is encouraged.  Amendment to Bulleting C-2 establishes that any variance in the fair value of financial instruments classified as available for sale must be recognized in other comprehensive income and reclassified to current earnings upon sale of such instruments.  In addition, Amendment to Bulletin C-2 provides for the reclassification of certain financial instruments by category, provided that conditions and rules for their accounting recognition are met, and that impairment rules are applicable to financial instruments available for sale, establishing rules for their recognition. Management believes that the adoption of Amendment to Bulletin C-2 as of January 1, 2005, will not have significant effects on our financial position or results of operations.

In January 2004, the IMCP issued revised Bulletin D-3, “Labor obligations”, which replaces the concept of unforeseen severance payments that are recognized as earning in the period in which the payment decision is made, with that of “Severance payments at the end of the work relationship”, defined as payments granted to employees upon termination of the labor relationship prior to retirement age, for which the valuation and disclosure rules applicable to pension and seniority premium payments must be followed.

Bulletin D-3 is mandatory as of January 1, 2005, but allows for provides that earnings from a transition asset or liability may be immediately recognized or amortized over the average remaining labor life of employees. Management believes that the adoption of this Bulletin D-3 as of January 1, 2005, will not have significant effects on our financial position or results of operations.