Auditor's Report

As part of our audit, we performed the following procedures:

• We understood and considered the process followed by Management in preparing the financial projection scenarios and its relation to historical performance, and in estimating the probability of occurrence for each scenario, to finally define the weighted scenario.
• We compared the probability of occurrence assigned by Management to each scenario, as well as the economic recovery curves with direct impact on occupancy rates, with current public official information on economic forecasts for Mexico.
• We compared the period of discount granted to tenants and the period over which the shopping centers would remain closed with real evolution in 2020 and actual discounts granted.
• We compared projected lease income with that considered in the process of valuation of the pertinent investment property.
• We read the financial debt restructuring agreements and the clauses with positive and negative covenants, as well as the clauses on financial ratios to be complied with in the financial debt contracts executed by the Company and evaluated the Company’s analysis regarding those clauses that could give rise to a future noncompliance situation.
• We obtained a copy of the waivers granted by banking institutions disclosed in Note 21 and checked the payment terms considered by Management against the contracts and the waivers.
• In addition, we assessed the consistency of the information disclosed in notes to the financial statements with the information described above.

Recovery of Deferred Income Tax Asset

As mentioned in Notes 4 and 26 to the consolidated financial statements, the Company records deferred income tax assets on tax loss carryforwards generated by some subsidiaries; therefore, it tested their recoverability before recognizing them in the financial statements and during the closing and financial reporting process. The subsidiary that mostly records these tax losses generates an important portion of its income through the services of shopping center development, administration of lease agreements and collections management provided to related parties, which are eliminated in the consolidation process.

We focused on this mater in the course of our audit, mainly due to the following reasons: 1) the significance of the amount of tax loss carryforwards ($548,255 thousand at December 31, 2020), 2) the estimate of the recoverable value of deferred assets involves applying significant judgments by the Company’s Management in determining income, projections and future tax results expected by the Company, and 3) that, as described above and in Note 4, in view of the COVID-19 contingency, Management prepared different financial projection scenarios to capture the effect of uncertainty as to the length of the interruption of operations and the expected recovery curve, which originated the application of additional significant judgments to estimate the impact that this situation will have on its projections and expected future tax results.

In particular, we focused our audit efforts on the following key assumptions considered by the Company’s Management in estimating future financial and tax projections to assess the recoverability of deferred income tax assets on tax losses: 1) economic recovery curves with direct impact on shopping centers occupancy rate, 2) the probability of occurrence assigned by Management to each scenario to define a weighted scenario, 3) number of shopping centers to be built in the next years, from which derive the amount of revenue from development services and the increase in income from administration of lease agreements and collections management, 4) lease income, 5) increases in fees for other administrative services provided to related parties, and 6) the period over which the Company’s shopping centers remained or will intermittently be closed, as well as the periods of discount granted to tenants.

As part of our audit, we performed the following procedures:

• We evaluated and considered future financial and tax projections prepared by Management, as well as the processes followed to prepare them and their relation to historical performance.
• We considered whether Management applied its previously defined internal process to prepare the financial and tax projections, devising various scenarios and estimating the probability of occurrence for each of them, to finally define the weighted scenario.
• We compared the probability of occurrence assigned by Management to each scenario, as well as the economic recovery curves with direct impact on occupancy rates, with current public official information on economic forecasts for Mexico.
• We compared projected lease income with that considered in the process of valuation of the pertinent investment property.
• We evaluated income from administration of lease agreements and collections management and from the development of new shopping centers for the Group based on the percentages and fees agreed upon between related parties and on the new developments projected as per the plans approved by Management.
• We evaluated and considered Company’s Management statements in relation to the number of shopping centers to be built in the next years and compared them with the organic growth expected at group level over the next years, with the Company’s installed capacity resources, with its past experience in implementing growth plans and with market trends.
• We compared the increases in fees for other administrative services provided to related parties with the amount considered as taxable income of the subsidiary in the determination of current income tax and evaluated its tax treatment.
• We compared the period of discount granted to tenants and the period over which the shopping centers will remain closed with real evolution in 2020 and actual discounts granted.
• Also, we verified that tax loss carryforwards are still valid and most expire in a long term.
• For the purpose of evaluating the disclosures made by the Company on these assumptions, we discussed the sensitivity analysis with Management and estimated to what extent the assumptions should be modified for additional impairment to be applicable.

Fair Value of Investment Properties

As mentioned in Notes 4 and 15 consolidated financial statements, the Company records its investment properties at fair value in the consolidated statement of financial position. Year-to-year variations in fair value are recorded as profit or loss in the consolidated statement of income. The relevant assumptions and the pertinent valuation method are disclosed in Note 15.

We focused on this mater in the course of our audit, due to the following reasons: 1) the significance of the value of investment properties ($12,757 million), representing 72% of total assets, and the fact that this is the asset from which the Company’s core business activity derives, 2) the assumptions used in estimating fair value involve applying significant judgments by Management; and 3) as described above, in view of the COVID-19 contingency, Management prepared different financial projection scenarios to capture the effect of uncertainty as to the length of the interruption of operations and the expected recovery curve, which originated the application of additional significant judgments to estimate the fair value of these investments.

As part of our audit, we performed the following procedures:

• We understood and evaluated the design and operation of the controls implemented by Management in the process of investment properties’ valuation.
• We compared the model applied in the determination of the fair value of investment properties with methods used and acknowledged in the industry for the valuation of assets with similar characteristcs.
• As to the financial projections that Management provides to the independent appraisers responsible for determining fair values jointly with our valuation specialists, we understood and considered the process followed by Management in preparing the financial projection scenarios and its relation to historical performance, and in estimating the probability of occurrence for each scenario, to finally define the weighted scenario; and we compared the probability of occurrence assigned by Management to each scenario, as well as the economic recovery curves with direct impact on occupancy rates, with current public official information on economic forecasts for Mexico.
• With the assistance of our valuation specialists, we compared the discount rate, terminal capitalization rate and direct capitalization rate with comparable market rates for the investment properties portfolio.
• We compared with the prior year the fair value for the year, the net operating income for the base year of the financial projection, and the occupancy rate of investment property.
• We checked the revenues (rental prices) for current and future years, lease terms and square meters, considered to prepare the cash flows projections, against the terms of the agreements in effect, including consideration of the inflation adjustment.
• We compared the period of discount granted to tenants and the period over which the shopping centers will remain closed with real evolution in 2020 and actual discounts granted.
• In addition, we assessed the consistency of the information disclosed in notes to the financial statements with the information provided by the Company’s Management, as described above.