2.- BASIS OF PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATION PRINCIPLES

2.1. Basis of Presentation of the Consolidated Financial Statements

The consolidated financial statements for 2017 were drawn up by the directors of NH Hotel Group, S.A. at the Board meeting held on 28 February 2018, in accordance with the regulatory reporting framework applicable to the Group, as established in the Code of Commerce and all other Spanish corporate law, and in the International Financial Reporting Standards (“IFRS”) adopted by the European Union in accordance with Regulation (EC) No. 1606/2002 of the European Parliament and in Act 62/2003, of 30 December, on Tax, Administrative, Labour and Social Security Measures as well as in the applicable standards and circulars of the National Securities Market Commission and the remaining Spanish accounting standards which may be applicable, and as such give a true and fair presentation the Group’s equity and financial position at 31 December 2017 and of the results of its operations, changes in equity and consolidated cash flows for the year then ended.

The consolidated financial statements for 2017 of the Group and the entities that it comprises have not yet been approved by the shareholders at the respective Annual General Meetings or by the respective shareholders or sole shareholders. Nonetheless, the directors of the Parent Company believe that said financial statements will be approved without any significant changes. The consolidated financial statements for 2016 were approved by the shareholders at the Annual General Meeting held on 29 June 2017 and filed with the Companies Registry of Madrid.

Since the accounting standards and valuation criteria applied in the preparation of the Group’s consolidated financial statements for 2017 may differ from those used by some of its component companies, the necessary adjustments and reclassifications have been made to standardise them and adapt them to the IFRS adopted by the European Union.

2.1.1 Standards and interpretations effective in this period

In 2017 new accounting standards came into force and were therefore taken into account when preparing the accompanying consolidated financial statements, but which did not give rise to a change in the Group’s accounting policies:

A) New obligatory regulations, amendments and interpretations for the year commencing 01 January 2017

New standards, amendments and interpretations		Obligatory application in the years beginning on or after
Amendments and/or interpretations
Amendment to IAS 7 disclosure initiative (published in January 2016)	Introduces additional disclosure requirements in order to improve information provided to users.	1 January 2017
Amendment to IAS 12: Deferred tax: recovery of underlying assets (published in January 2016)	Clarification of the principles set up in relation to the recognition of deferred tax assets for unrealised losses.

These regulations and amendments have been applied to these consolidated financial statements without significant impacts on either the reported figures or the presentation and breakdown of the information, either because they do not entail relevant changes or because they refer to economic facts that do not affect the Group.

B) New regulations, amendments and interpretations which will be obligatory in the years following the year commencing 01 January 2017

The following standards and interpretations had been published by the IASB on the date the consolidated financial statements were drawn up but had not yet entered into force, either because the date of their entry into force was subsequent to the date of these consolidated financial statements or because they had not yet been adopted by the European Union:

New standards, amendments and interpretations		Obligatory application in the years beginning on or after:
Approved for use in the European Union
IFRS 15 - Revenue from Contracts with Customers	New standard on revenue recognition, replacing IAS 18, IFRIC 15, IFRIC 18 and SIC-31.	1 January 2018
IFRS 9 Financial Instruments	It replaces the requirements for classification, valuation, recognition and derecognition of financial assets and liabilities in accounts, hedge accounting and impairment of IAS 39.
Amendment to IFRS 4 Insurance contracts	It allows entities under the scope of IFRS 4 the option of applying IFRS 9 (“overlay approach”) or their temporary exemption.
Improvements to IFRS 2014-2016 cycle	Minor amendments to a series of standards.
IFRS 16 Leases	Replaces IAS 17 and associated interpretations. The main change hinges on a single accounting model for lessees who will include all leases (with some exceptions) on the balance sheet with a similar impact to that of the current financial leases (the asset will depreciate due to the right of use and a financial expense for the cost of amortising the liability).	1 January 2019
Awaiting approval for use in the European Union as of the date of publication of this document
Amendment to IFRS 2 Classification and measurement of share-based payment transactions	Narrow-scope amendments clarifying specific matters such as the effects of vesting and non-vesting conditions in cash-settled share-based payments, the classification of share-based payments where there are net settlement clauses and some aspects of the modifications to terms of a share-based payment.	1 January 2018
Amendment to IAS 40 Reclassification of real estate investments	The amendment clarifies that the reclassification of an investment from or to real estate investment is only permitted when there is evidence of a change in its use.
IFRIC 22 Foreign currency transactions and advances	This interpretation establishes the “transaction date” for the purpose of determining the exchange rate applicable in transactions with foreign currency advances.
IFRIC 23 Uncertainty over income tax treatments	This interpretation clarifies application of recognition and measurement requirements in IAS 12 when there is uncertainty over acceptability by the tax authorities of a certain income tax treatment used by the entity.	1 January 2019
Amendment to IFRS 9 Characteristics of early cancellation with negative offset	It allows for the valuation of some financial instruments with early payment characteristics at amortised cost allowing the payment of an amount less than the unpaid amounts of principal and interest.
Amendment to IAS 28 Long-term interest in associates and joint ventures	Clarifies that IFRS 9 must be applied to long-term interests in an associate or joint venture if the equity method is not applied.
Amendment to IAS 19 Amendment, reduction or liquidation of a plan	In accordance with the proposed amendments, when there is a change in a defined benefit plan (due to an amendment, reduction or liquidation), the entity will use updated assumptions to determine the costs of the services and net interest for the period after the change to the plan.
IFRS 17 Insurance contracts	Replaces IFRS 4 and reflects the principles of registration, valuation, presentation and breakdown of insurance contracts with the objective that the entity provides relevant and reliable information which allows users of the information to determine the effect which contracts have on the financial statements.	1 January 2021
Amendment to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture	Clarification on the result of these operations if dealing with businesses or assets.	No date set

* (1) The approval status of the standards by the European Union can be consulted on the EFRAG website.

C) Analysis of IFRS 9 first application

IFRS 9 will replace IAS 39 as of the year beginning on 1 January 2018 and affects both financial instruments for assets and liabilities, covering three large blocks: classification and measurement, impairment and hedge accounting. There are very relevant differences with the current standard of recognition and measurement of financial instruments, the most significant being:

• Investments in financial assets whose contractual cash flows consist exclusively of principal and interest payments and, if the management model of such assets is to hold them to obtain the contractual flows will, in general, be valued at amortised cost. For the same assets, when the business model is to obtain the contractual flows and the sale of the assets, they will be measured at fair value with changes in other comprehensive profit and loss. All other financial assets which do not consist exclusively in of principal and interest payments and where the management model is their sale will be measured at fair value with changes in profit and loss. However, the Group may irrevocably choose to present the subsequent changes in the fair value of certain investments in equity instruments under “Other comprehensive income” (equity) and, in this case, generally only the dividends will be subsequently recognised in profit and loss.
• In regard to the valuation of financial liabilities optionally designated in fair value with changes in profit and loss, the amount of the change in the fair value of the financial liability which is attributable to changes in the credit risk itself must be presented in the “Other comprehensive profit and loss” (equity), unless this creates or increases an accounting asymmetry in profit and loss, and it will not be subsequently reclassified to the profit and loss account
• In relation to the impairment of financial assets, IFRS 9 requires the application of a model based on the expected loss, compared to the IAS 39 model structured on the loss incurred. Under this model, the Group will account for the expected loss, as well as the changes in this at each presentation date to reflect the changes in credit risk from the date of initial recognition. In other words, it is no longer necessary for an impairment event to occur before recognising a credit loss.

The Group’s intention is to apply IFRS 9 without restating the comparatives, i.e., the difference between the previous book values and the new values at the date of initial application of the standard will be recognised as an adjustment in reserves (equity) From an analysis of the Group’s financial assets and liabilities at 31 December 2017, the Group’s management has evaluated the effect of IFRS 9 on the annual accounts, as set out below:

Clasification and valuation

As a result of the preliminary analysis, there are no significant changes in the classification and measurement of financial assets based on the Group’s current model. The application of IFRS 9 will only have an impact on the presentation of other non-current financial investments (see Note 10).

The Group has renegotiated its financial liabilities (bonds and obligations) which, according to the provisions of IAS 39, were considered non-material and consequently did not require derecognition of financial liabilities. The treatment provided for by IFRS 9 requires recalculating the amortised cost book value of such financial liabilities on the renegotiation date and recognising a gain or loss for the change in the results of the period or at the time of applying the new standard. The estimated impact at 1 January 2018 is an 8.5 million euro decrease in the book value of financial liabilities, increasing the amount of opening reserves at that date.

All other financial assets and financial liabilities will continue to be measured on the same basis currently adopted by IAS 39.

Impairment

Financial assets measured at amortised cost, fair value through changes in other comprehensive results, accounts receivable from leases, assets from contracts with customers or a loan commitment and a financial guarantee contract will be subject to the provisions of IFRS 9 regarding impairment.

The new standard replaces the “incurred loss” models established in IAS 39 by the “expected loss” model. This model requires the registration of the financial assets on the date of initial recognition, as well as the amounts pending collection from customers of the expected loss resulting from a “default” during the next 12 months or throughout the life of the contract.

The Group has provisions on its trade debtors. As a result of the evaluation by the Group, it has been confirmed that it is not necessary to make significant adjustments to the provision of insolvencies recorded on the balance sheet.

D) Analysis of IFRS 15 first application

IFRS 15 is the new comprehensive standard for recognition of income with customers, and replaces standards and interpretations currently in force: IAS 18 on Revenue from ordinary activities, IAS 11 on Construction Contracts, IFRIC 13 on customer loyalty programmes, IFRIC 15 on agreements for the construction of real estate, IFRIC 18 on Transfers of assets from customers and SIC 31 of Revenue – Barter transactions involving advertising services.

The new revenue model applies to all contracts with customers except those falling within the scope of other IFRS, such as leases, insurance contracts and financial instruments.

The central recognition model is structured around the following five steps.

• Identify the contract with the customer.
• Identify the separate obligations of the contract.
• Determining the price of the transaction.
• Distribute the transaction price between the identified obligations.
• Account for the income when it fulfils the obligations.

Due to the Group’s activity, as well as the relationships with its customers, the Parent Company’s Directors consider that no significant changes derive from its application in relation to the current record of the Group’s operations.

E) Preliminary analysis of IFRS 16.

The directors are assessing the potential impact of the future application of these regulations, and in particular, the application of IFRS 16 on Leases will entail a very significant change in the Group’s consolidated financial statements, with an increase in assets due to the recognition of the right to use the leased asset, an increase in liabilities due to the corresponding future payment commitments and the impact of the consolidated profit and loss statements. In this regard, the scope of the transition to the application of the standard -early implementation is not intended- and the need for the adaptation of financial and accounting reporting systems are being assessed.

In relation to the other standards, amendments and interpretations, the Group is analysing all future impacts of the adoption of these standards and it is not possible to provide a reasonable estimate of their effects until that analysis is complete.

2.2. Information on 2016

As required by IAS 1, the information on 2016 contained in this consolidated annual report is presented for solely comparative purposes with the information on 2017 and consequently does not in itself constitute the Group’s consolidated financial statements for 2016.

2.3. Currency of presentation

These consolidated financial statements are presented in euros. Any foreign currency transactions have been recognised in accordance with the criteria described in Note 4.9.

2.4. Responsibility for the information, estimates made and sources of uncertainty

The Directors of the Parent Company are responsible for the information contained in these consolidated financial statements.

Estimates made by the management of the Group and of the consolidated entities (subsequently ratified by their Directors) have been used in preparing the Group’s consolidated financial statements to quantify some of the assets, liabilities, revenue, expenses and undertakings recognised. These estimates essentially refer to:

• Losses arising from asset impairment.
• The hypotheses used in the actuarial calculation of liabilities for pensions and other undertakings made to the workforce.
• The useful life of the tangible and intangible assets.
• The valuation of consolidation goodwill.
• The market value of specific assets.
• Calculation of provisions and evaluation of contingencies.
• The recoverability of the capitalized tax carryforward losses.

In spite of the fact that these estimates were carried out using the best information available at 31 December 2017 on events analysed, it is possible that events may take place in the future which compel their amendment (upwards or downwards) in years to come. This will be done in accordance with the provisions of IAS 8, prospectively recognising the effects of the change in estimate on the consolidated profit and loss statement.

2.5. Consolidation principles applied

2.5.1 subsidiaries (see Appendix i)

Subsidiaries are considered as any company included within the scope of consolidation in which the Parent Company directly or indirectly controls their management due to holding the majority of voting rights in the governance and decision-making body, with the ability to exercise control. This ability is shown when the Parent Company has the power to direct an investee entity’s financial and operating policy in order to obtain profits from its activities.

The financial statements of subsidiaries are consolidated with those of the Parent Company by applying the full consolidation method. Consequently, all significant balances and effects of any transactions taking place between them have been eliminated in the consolidation process. If necessary, adjustments are made to the financial statements of the subsidiaries to adapt the accounting policies used to those used by the Group.

Stakes held by non-controlling shareholders in the Group’s equity and results are respectively presented in the “Non-controlling interests” item of the consolidated balance sheet and of the consolidated comprehensive profit and loss statement.

The profit or loss of any subsidiaries acquired or disposed of during the financial year are included in the consolidated comprehensive profit and loss statement from the effective date of acquisition or until to the effective date of disposal, as appropriate.

2.5.2 Associates (see Appendix ii)

Associates are considered as any companies in which the Parent Company has the ability to exercise significant influence, though it does not exercise either control or joint control. In general terms, it is assumed that significant influence exists when the percentage stake (direct or indirect) held by the Group exceeds 20% of the voting rights, as long as it does not exceed 50%.

Associates are valued in the consolidated financial statements using the equity method; in other words, through the fraction of their net equity value the Group’s stake in their capital represents once any dividends received and other equity retirements have been considered. In the case of transactions with an associated company, the corresponding losses or gains are eliminated in the percentage of the Group’s stake in its capital.

The profit (loss) net of tax of the associate companies is included in the Group’s consolidated comprehensive profit and loss statement, in the item “Profit (Loss) from entities valued through the equity method”, according to the percentage of the Group’s stake. If, as a result of the losses incurred by an associate company, its equity were negative, in the Group’s consolidated balance sheet it would be nil; unless there were an obligation on the part of the Group to support it financially.

2.5.3 Foreign currency translation

The following criteria have been different applied for converting into euros the different items of the consolidated balance sheet and the consolidated comprehensive profit and loss statement of foreign companies included within the scope of consolidation:

• Assets and liabilities have been converted by applying the effective exchange rate prevailing at year-end.
• Equity has been converted by applying the historical exchange rate. The historical exchange rate existing at 31 December 2003 of any companies included within the scope of consolidation prior to the transitional date has been considered as the historical exchange rate.
• The consolidated comprehensive profit and loss statement has been converted by applying the average exchange rate of the financial year.

Any difference resulting from the application of these criteria have been included in the “Translation differences” item under the “Equity” heading.

Any adjustments arising from the application of IFRS at the time of acquisition of a foreign company with regard to market value and goodwill are considered as assets and liabilities of such company and are therefore converted using the exchange rate prevailing at year-end.

2.5.4 Changes in the scope of consolidation

The most significant changes in the scope of consolidation during 2017 and 2016 that affect the comparison between financial years were the following:

a.1 Changes in the scope of consolidation in 2017

a.1.1 Additions to the consolidation scope

On 17 November 2017, the Group acquired 100% of the share capital of Wilan Ander S.L. and Wilan Huel, S.L., as well as the assignment of the credit which the seller had with these companies. These companies own the properties operated by NH Hoteles España, such as the hotels NH Ciudad de Santander and NH Luz de Huelva, until the date of takeover under the lease.

Said acquisition was carried out in accordance with that stipulated in IFRS 3 Business Combinations. The effect of the acquisition on the consolidated financial position statement due to their fair values at 31 December 2017 was as follows:

	Thousands of euros
	WILAN HUEL, S.L.	WILAN ANDER, S.L.	TOTAL
Property, plant and equipment (Note 8)	4.888	6.809	11.697
Other non-current assets	37	52	89
Current assets	7	69	76
Debts with credit institutions	(3.676)	(5.135)	(8.811)
Other non-current liabilities	(37)	(52)	(89)
Current liabilities	(65)	(4)	(69)
Fair value of the acquired entity’s net assets	1.154	1.739	2.893
Loans granted prior to taking control	(875)	(1.117)	(1.992)
Net Consideration	(881)	(1.123)	(2.004)
Goodwill	(602)	(501)	(1.103)

The Group had granted subordinated loans amounting to 1,117 thousand euros to Wilan Ander, S.L. and 875 thousand euros to Wilan Huel, S.L. which the Group capitalised in the respective subsidiaries; the difference of 1,103 thousand euros corresponds to the Goodwill arising from the operation (see Note 6) and has been recorded against results.

In addition, the detail of the book value of the assets acquired and the revaluation carried out is as follows:

	Thousands of Euros
	BOOK VALUE OF THE ASSETS ACQUIRED	IMPAIRMENT REALISED	FAIR VALUE OF THE ASSETS ACQUIRED
Property, plant and equipment (Note 8)	11.776	(79)	11.697
Other non-current assets	69	20	89
Current assets	76	-	76
Debts with credit institutions	(8.811)	-	(8.811)
Other non-current liabilities	(89)	-	(89)
Current liabilities	(68)	-	(68)

a.1.2 Disposals to the consolidated scope

On 19 April 2017 the Group sold 400,000 registered shares making up the share capital of the commercial company Hesperia Enterprises de Venezuela, S.A. for 70,000 US dollars. The net result of the transaction was a consolidated profit of 3 thousand euros. An expenditure of 5,785 thousand euros was also recorded owing to the conversion differences associated with the aforementioned shareholding, which is entered in the net exchange differences item of the abridged consolidated comprehensive results.

a.2 Changes in the scope of consolidation in 2016

a.2.1 Additions to the consolidation scope

On 27 December 2016, the Group acquired 47% of the share capital of Palacio de la Merced, S.A., for an amount of 2,069 thousand euros, of which 621 thousand euros are outstanding

Up to the date of purchase, the Group held a minority shareholding of 25% in that Company which was consolidated using the equity method. Following the purchase, the Group holds a 72% holding in the share capital, thereby acquiring control of the share capital and, therefore, becoming consolidated by the full consolidation method.

Said acquisition was carried out in accordance with that stipulated in IFRS 3 Business Combinations. The effect of the acquisition of the aforementioned participating interest on the consolidated balance sheet at 31 December 2016 was as follows:

	Thousands of Euros
Property, plant and equipment	16.813
Intangible Assets	2
Other non-current assets	2
Current assets	453
Long-term bank borrowings	(4.372)
Short-term bank borrowings	(566)
Deferred tax liabilities	(698)
Other non-current liabilities	(1.301)
Current liabilities	(1.094
Non-controlling interests	(2.589)
Fair value of the acquired entity’s net assets	6.650
Cost of the previous shareholding	(1.718)
Net consideration	(2.069)
Profit of the transaction	2.863

In addition, the detail of the book value of the assets acquired and the revaluation carried out is as follows:

	Thousands of Euros
	BOOK VALUE OF THE ASSETS ACQUIRED	REVALUATION CARRIED OUT	FAIR VALUE OF THE ASSETS ACQUIRED
Property, plant and equipment	14.021	2.792	16.813
Intangible Assets	2	-	2
Other non-current assets	2	-	2
Current assets	453	-	453
Long-term bank borrowings	(4.372)	-	(4.372)
Short-term bank borrowings	(566)	-	(566)
Deferred tax liabilities	-	(698)	(698)
Other non-current liabilities	(1.301)	-	(1.301)
Current liabilities	(1.094)	-	(1.094)
Non-controlling interests	-	(2.589)	(2.589)

The effect of the acquisition of the additional ownership interest in the Company supposed a positive result of 2,863 thousand euros recorded in the “Gains on financial assets and liabilities and other” item in the consolidated comprehensive profit and loss statements.

On 28 December 2016, the Group acquired 50% of the inactive company Capredo Investments GmbH for 3,190 thousand euros, of which 3,150 thousand euros is still outstanding at 2017 year-end (see Note 16), and now holds 100% of the share capital of this Company. In this regard, the Company owns a plot of land located in the Dominican Republic that does not have the consideration of business in accordance with IFRS 3. Following the acquisition, the Group acquired control of the company whose previous cost amounted to 6,764 thousand euros. The net assets associated with Capredo Investments GmbH are recorded as “Non-current assets classified as held for sale and discontinued operations” (see Note 11).

The effect of the acquisition has had no effect on the consolidated comprehensive profit and loss statement.

a.2.2 Disposals

On 16 March 2016, the Group carried out the representative sale of a 4% stake in the company Varallo Comercial, S.A., in which it previously held a 14% stake. The net result of the transaction supposed a consolidated profit of 194 thousand euros and a negative effect of 635 thousand euros owing to the conversion differences associated with the aforementioned shareholding, which is entered in the net exchange differences item of the consolidated comprehensive profit and loss statement. As a result of this sale, the Group lost its significant influence on the aforementioned holding, ceasing to be considered an associate company and now being recognised under the “Other non-current financial assets” heading at fair value amounting to 9,343 thousand euros (see Note 10.2).

2.5.5 intra-group eliminations

All accounts receivable and accounts payable, and transactions performed between subsidiaries, with associate companies and joint ventures, and among each other, have been eliminated in the consolidation process.

2.5.6 valuation uniformity

The consolidation of the entities included in the scope of consolidation has been performed based on their individual financial statements, which are prepared in accordance with the Spanish General Accounting Plan for companies resident in Spain and in accordance with their own local regulations for foreign companies. All significant adjustments necessary to adapt them to International Financial Reporting Standards and/or homogenise them with the accounting principles of the parent company have been considered in the consolidation process.