Elco : Annual Financial Statements for the Year 2022 - translated version

ELCO LIMITED

ELCO LIMITED

Consolidated Financial information

As of December 31, 2022

(Convenience Translation into US Dollars)

This is an English translation of parts of the information included in the full Hebrew report of the company, that was published on March 28, 2023 (reference No. 2023-01-029014) at the ISA reporting website (magna.isa.gov.il) (hereafter: "the Hebrew Version"). The English version is Voluntary and only for convenience purposes. This is not an official translation and has no binding force. The translation in any case cannot perfectly reflect the Hebrew Version. In the event of any discrepancy between the Hebrew Version and this translation, the Hebrew Version shall prevail.

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ELCO LIMITED

ELCO LIMITED

CONSOLIDATED FINANCIAL INFORMATION

AS OF DECEMBER 31, 2022

Contents	Page
Auditors' Report	3
Consolidated Information of financial position	8-5
Consolidated Information of profit or loss	10
Consolidated Information of Comprehensive Income	11
Consolidated Information of Changes in Equity	12-10
Consolidated Information of Cash Flows	15-14
Notes to the Financial Information	19-16

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To: Elco LTD.

Re: Convenience Translation of Financial Information

Per your request, we have audited the accompanying consolidated financial information of Elco Ltd. ("the Company") as of December 31, 2022 and 2021 and for each of the three years in the period ended on December 31, 2022 ("the Financial Information"). The Financial Information is the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on the Financial Information based on our audits.

We did not audit the financial information of certain subsidiaries, whose assets constitute approximately 1.43% and 1.4% of the total consolidated assets as of December 31, 2022 and 2021, respectively, and whose revenues constitute approximately 1.33%, 1.2% and 0.6% of the total consolidated revenue for the years ended December 31, 2022, 2021 and 2020, respectively. Furthermore, we did not audit the financial information of certain companies accounted for at equity, the investment in which amounted to approximately 150,653 thousand dollars and 159,144 thousand dollars as of December 31, 2022 and 2021, respectively, and the Company's share of their profits (loss) amounted to approximately 40,848 thousand dollars, 13,318 thousand dollars and (855) thousand dollars for the years ended December 31, 2022, 2021 and 2020, respectively. The financial information for those companies were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for those companies, is based on the reports of the other auditors.

We conducted our audit in accordance with generally accepted auditing standards in Israel, including those prescribed by the Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Information are free of material misstatement. An audit includes examining, on the test basis, evidence supporting the amounts in the Financial Information. An audit also includes assessing the accounting principles used and the significant estimates made by the Company's Board of Directors and management, as well as evaluating the overall Financial Information presentation. We believe that our audit and the reports of the other auditors provide a reasonable basis for our opinion

The accompanying Financial Information in US Dollars are a convenience translation of the consolidated financial statements as prepared in New Israeli Shekels as the rate of exchange of the Shekel into US Dollars prevailing on December 31, 2022 as described in Note 3 of the Financial Information.

The accompanying Financial Information, which are derived from the Company's consolidated financial statements, are condensed financial information and do not include the disclosures required by International Financial Reporting Standards (IFRS). If the omitted disclosures were included in the accompanying Financial Information, it might influence the user's conclusions about the consolidated financial position, changes in equity, results of operations and cash flows of the Company. Accordingly, the accompanying Financial Information is not designed for those who are not informed about such matters.

Based on our audits and the reports of other auditors, we expressed an unqualified opinion on the consolidated financial statements in our report dated March 27, 2023.

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Key audit matters

Key audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the board of directors and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and

1. involved our especially challenging, subjective, or complex judgments. We addressed these matters in performing our audit and in formulating our opinion on the consolidated financial statements as a whole. The communication of key audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the key audit matters below, providing separate opinions on the key audit matters or on the accounts or disclosures to which they relate.

The following are the key audit matters in the Company's consolidated financial statements for the year ended December 31, 2022:

Determination of the fair value of investment property in investments that are accounted for at equity and the implementation of the hypothetical liquidation at book value (HLBV) method

The subsidiary company, Electra Real Estate Ltd., operating through its investee companies, directly and indirectly, serves as a limited partner (LP) in funds that invest in multifamily housing complexes in the United States and as a shareholder in the general partner of the investment funds (GP). The subsidiary company's holdings in funds that invest in multifamily housing complexes in the United States are accounted for at equity in its financial statements. The subsidiary company, operating through its investee companies, is a shareholder in the partner that manages the funds (GP), which, subject to the achievement of a target internal yield rate (IRR) in the various funds for the generality of the investors, entitles it to success (promote) fees at rates that vary between the various funds for the housing complexes in the United States.

Within the framework of the implementation of the equity method, the subsidiary company has adopted the hypothetical liquidation at book value (HLBV) method for the purpose of determining the subsidiary company's share of the profits that are allocated from the affiliated companies. Pursuant to the HLBV approach, the subsidiary company's share of the success (promote) fees from the funds that invest in multifamily housing complexes is calculated on the assumption that the investee company will realize its assets immediately in accordance with their carrying value in the accounting records at that time, based on their carrying values and taking other liabilities and investments that have been made, net, into account. The subsidiary company is entitled to success fees, which are distributed out of the investee company's profits, as the general partner (GP), where the overall profit from the disposal of the asset pursuant to the HLBV approach exceeds the yield rate for the limited partners (LP). Since the affiliated companies measure their investment property at fair value, so as part of the implementation of the HLBV method, the subsidiary company's share of the profits of the investee companies is affected by the fair value of the income-generating real estate properties.

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Audit procedures that we have performed, which are connected to the determination of the fair value of investment property in investments that are accounted for at equity and the implementation of the HLBV method

1. The examination and analysis of evaluation in relation to the investment property assets in the housing complexes funds, which were prepared by external appraiser on a sample basis, taking qualitative and quantitative considerations into account in relation to the sample that was identified;
2. the examination of the assumptions that served as the basis for the evaluations, including examination of the NOI on the various investment property assets, the examination of the discount rate that has been used in the appraisal work, comparative transactions, which have been taken into account in the basis of the evaluation and the methodology that has been implemented in the evaluation; (3) the review of the appraisals of the investment property, on a sample basis, by an expert department operating on our behalf, with an emphasis on the testing of the discount rates for the investment property assets; (4) referring questionnaires to the appraisers and receiving responses and clarifications, where necessary; (5) examination and reconciliation opposite the subsidiary company's documentation covering the mechanisms for the calculation of the success (promote) fees on the various real estate assets on a sample basis; (6) checking the arithmetical calculation and the various components that are included in the calculation of the success (promote) fees; and (7) the testing of the fairness of the recording and the format of the disclosure in the Company's consolidated financial statements.

Recognition of revenues from performance and entrepreneurial projects

The recognition of revenues from projects and the balance of the revenues receivable and receivables are significant matters in the Company's financial statements, through the subsidiary company Electra Ltd., based on the materiality and on the exercise of judgment by the management that is responsible for corporate governance, which is involved in these matters. The complexity and the exercise of judgment, which are connected to the assessment of the expected costs for the completion of the project and the expected revenues, which are based on management's estimates or on expert opinions and on the rate of completion, which are used by the Company, through the subsidiary company, for the recognition of the revenue.

We have identified this matter as a key audit matter, because of the complexity of the estimates that are used in the calculation.

The audit procedures that we have performed, which are connected to the recognition of revenue from entrepreneurial projects

We obtained understanding and we assessed the central internal controls and the information systems (IT), which were used in order to perform the calculations that are connected to the project. These controls include controls relating to policies and procedures in the determination of the rate of completion, the assessment of the balance of the revenues from the project, which are based on management's estimates or on expert opinions and the assessment of the expected costs to completion for the project including the testing of the existence of a loss-making contract. In addition, we checked the operational effectiveness of these controls.

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