The application of IMFRS 14 to the consolidated financial statements had the following effects with respect to the years ended December 31, 2009 and 2008 consolidated statements of income:

Basic and diluted earnings per share (EPS) of controlling interest before IMFRS 14 adjustments for the years ended December 31, 2009 and 2008 were Ps.5.50 and Ps. 4.72, respectively; after IMFRS adjustments EPS were Ps. 4.68 and Ps. 2.77, for the same periods, respectively.

The application of IMFRS 14 did not have significant effects on the consolidated statements of cash flows for the years ended December 31, 2009 and 2008, except for the presentation of the following items related to the operating activities: income before income tax, trade accounts receivable, inventories and land held for future developments, prepaid expenses and other assets and trade accounts payable.

MFRS C-1, Cash and cash equivalents
Mexican FRS C-1 was issued by the CINIF in November 2009 to replace Mexican accounting Bulletin C-1, Cash, and is effective for fiscal years beginning on or after January 1, 2010. The main differences between Mexican FRS C-1 and Mexican accounting Bulletin C-1 lie in the presentation of restricted cash and the substitution of the term “short-term investments” by the new term “liquid investments”, which are those investments whose maturities do not exceed three months.

The adoption of this MFRS did not have significant effects on the Company’s consolidated financial statements, except for the reclassification of restricted cash to cash and cash equivalents in the consolidated balance sheets as of December 31, 2010 and 2009 (see Note 5).

IMFRS 19, Changes derived from the adoption of International Financial Reporting Standards
On August 31, 2010, CINIF issued Interpretation to Mexican FRS 19, Changes derived from the adoption of International Financial Reporting Standards (IFRS) which became effective for financial statements issued on or after September 30, 2010 and requires the disclosures that must be made in the notes to the financial statements prepared under MFRS prior to the adoption of International Financial Reporting Standards. Since the Company is listed in the Mexican Stock Exchange it has the obligation to prepare and present its financial information under IFRS beginning 2012.

At the date of the financial statements the Company is in the process of evaluating the effects that the adoption of this new standard will have on its consolidated financial statements.

Effective in 2009:
The most relevant standards that came into force in 2009 are described below:

MFRS B-7, Business Acquisitions
This MFRS substitutes Bulletin B-7 Business Acquisitions and was issued by the CINI F to replace Mexican accounting Bulletin B-7 Business Acquisitions. This standard establishes general rules for the initial recognition of net assets, non-controlling interests and other items, as of the acquisition date.

According to this statement, purchase and restructuring expenses resulting from acquisition process, should not be part of the consideration, because these expenses are not an amount being shared by the business acquired.

In addition, MFRS B-7 requires a company to recognize noncontrolling interests in the acquiree at fair value as of the acquisition date.

MFRS B-8, Consolidated or Combined Financial Statements
The CINIF issued in December 2008, MFRS B-8 Consolidated or Combined Financial Statements which replaces Mexican Bulletin B-8 Consolidated Financial Statements and describes general rules for the preparation, presentation and disclosure of consolidated and combined financial statements.

The main changes of this MFRS are as follows: (a) this rule defines “Specific-Purpose Entity” (SPE), establishes the cases in which an entity has control over a SPE, and when a company should consolidate this type of entity; (b) addresses that potential voting rights should be analyzed when evaluating the existence of control over an entity; and, (c) set new terms for “controlling interest” instead of “majority interest,” and “non-controlling interest” instead of “minority interest.”

The adoption of this MFRS did not have any effect on the Company’s consolidated financial statements.

MFRS C-7, Investments in Associates and Other Permanent Investments
MFRS C-7 was issued by CINIF in December 2008 and describes the accounting treatment for investments in associates and “other permanent investments”, which were previously treated within Bulletin B-8 Consolidated Financial Statements. This MFRS requires the recognition of a Specific-Purpose Entity, through equity method. Also, this MFRS establishes that potential voting rights should be considered when analyzing the existence of significant influence.

In addition, this rule defines a procedure and a limit for the recognition of losses in an associate.

The adoption of this MFRS required the Company to consider the associate in Egypt as another permanent investment effective January 1, 2009, and no longer as an associate, and therefore to stop applying the equity method of accounting to this company.

MFRS C-8, Intangible Assets
This rule substitutes Bulletin C-8 Intangible Assets. The new rule defines intangible assets as non-monetary items and broadens the criteria of identification, indicating that an intangible asset must be separable; this means that such asset could be sold, transferred, or used by the entity. In addition, intangible asset arises from legal or contractual rights, whether those rights are transferable or separable from the entity.

On the other hand, this standard establishes that preoperative costs should be eliminated from the capitalized balance, affecting retained earnings, and without restating prior financial statements.

This amount should be presented as an accounting change in consolidated financial statements.

The adoption of this MFRS did not have any effect on the Company’s consolidated financial statements.

MFRS D-8, Share-Based Payments
MFRS D-8 establishes the recognition of share-based transactions. When an entity purchases goods or pay services through share-based transactions, the entity is required to recognize those goods or services at fair value and the corresponding increase in equity. According with MFRS D-8, if share-based payments cannot be settled with equity instruments, they have to be settled using an indirect method considering MFRS D-8 parameters, and thus recorded as a liability.

The adoption of this MFRS did not have material effect on the Company’s consolidated financial statements.

IMFRS 18, Effects on Recognition from the 2010 Tax Reform Bill in Income Taxes
On December 15, 2009 the CINIF published the Interpretation 18 of Mexican Financial Reporting Standards with the objective to provide guidance in regards to the 2010 Tax Reform Bill about the accounting recognition that should be completed in the companies’ financial statements.

This IMFRS establishes certain parameters for the recognition of changes to the new Tax Reform, mainly in regards to Income Tax rates changes, changes to the consolidation regime (fundamentally related to tax losses), losses on stock transfers, special consolidation terms, distributed dividends not from Net Tax Profit Account (CUFIN), consolidation tax benefits and differences between CUFIN. The effects of the application of IMFRS 18 are disclosed in Note 24.

Effective in 2008:
The most relevant standards that came into force in 2008 are described below:

MFRS B-2, Statement of Cash Flows
In November 2007, MFRS B-2 was issued by the CINIF to replace Mexican accounting Bulletin B-12, Statement of Changes in Financial Position. This standard establishes that the statement of changes in financial position is substituted by a statement of cash flows as part of the basic financial statements. The main differences between both statements lie in the fact that the statement of cash flows shows the entity’s cash receipts and disbursements for the period, while the statement of changes in financial position showed the changes in the entity’s financial structure rather than its cash flows. In an inflationary environment, the amounts of both financial statements are expressed in constant Mexican pesos. However, in preparing the statement of cash flows, the entity must first eliminate the effects of inflation for the period and, accordingly, determine cash flows at constant Mexican pesos, while in the statement of changes in financial position, the effects of inflation for the period were not eliminated.

MFRS B-2 establishes that in the statement of cash flows, the entity must first present cash flows derived from operating activities, then from investing activities, the sum of these activities and finally cash flows derived from financing activities. The statement of changes in financial position first shows the entity’s operating activities, then financing activities and finally its investing activities. Under this new standard, the statement of cash flows may be determined by applying the direct or indirect method.

The transitory rules of MFRS B-2 establish that the application of this standard is prospective.

MFRS B-10, Effects of Inflation
In July 2007, the CINIF issued MFRS B-10, Effects of Inflation. MFRS B-10 defines the two economic environments in Mexico that will determine whether or not entities must recognize the effects of inflation on financial information: i) inflationary, when inflation is equal to or higher than 26%; accumulated in the preceding three fiscal years (an 8% annual average); and ii) non-inflationary, when accumulated inflation for the preceding three fiscal years is less than the aforementioned accumulated 26%. Based on these definitions, the effects of inflation on financial information must be recognized only when entities operate in an inflationary environment.

This standard also establishes the accounting rules applicable whenever the economy changes from any type of environment to another. When the economy changes from an inflationary environment to a non-inflationary one, the entity must maintain in its financial statements the effects of inflation recognized through the immediate prior year, since the amounts of prior periods are taken as the base amounts of the financial statements for the period of change and subsequent periods. Whenever the economy changes from a noninflationary environment to an inflationary one, the effects of inflation on the financial information are recognized retrospectively, meaning that all information for prior periods must be adjusted to recognize the accumulated effects of inflation of the periods in which the economic environment was considered non-inflationary.

This standard also abolishes the use of the specific-indexation method for the valuation of imported fixed assets and the replacement-cost method for the valuation of inventories, thus eliminating the result from holding non-monetary assets.

The Interpretation 9 of MFRS establishes that comparative financial statements for years prior to 2008 must be expressed in Mexican pesos with purchasing power at December 31, 2007, which was the last date on which the effects of inflation were recognized.

The realized result from holding non-monetary assets must be reclassified to retained earnings, while the unrealized portion must be maintained as such within equity, and reclassified to results of operations when the asset giving rise to it is realized. Whenever it is deemed impractical to separate the realized from the unrealized result from holding non-monetary assets, the full amount of this item may be reclassified to the retained earnings.

The effect of the adoption of this standard on the Company’s 2008 consolidated financial statements is the Company’s ceasing to recognize the effects of inflation on its financial information; therefore no monetary result was determined. The accumulated monetary position as of December 31, 2007 that was Ps. 346,641 was reclassified to the retained earnings.

MFRS B-15, Foreign Currency Translation
MFRS B-15 incorporates the concepts of recording currency, functional currency and reporting currency, and establishes the methodology to translate financial information of a foreign entity, based on those terms. Additionally, this rule is aligned with NIF B-10, which defines translation procedures of financial information from subsidiaries that operate in inflationary and non-inflationary environments. Prior to the application of this rule, translation of financial information from foreign subsidiaries was according to inflationary environments methodology.

The Company’s foreign operations in India and Brazil were measured in accordance with this MFRS and their figures are included in the consolidated financial statements.

MFRS D-3, Employee Benefits
MFRS D-3, Employee Benefits replaces the previous MFRS accounting Bulletin D-3, Labor Obligations. The most significant changes contained in MFRS D-3 are as follows:

i) shorter periods for the amortization of unamortized items such as transition obligations, with the option to credit or charge actuarial gains or losses directly to results of operations, as they accrue. As further disclosed in Note 14, during 2008 the Company prospectively changed the amortization periods for its transition liability from those of 10-22 year periods in prior years, to a four year period starting in 2008, resulting in Ps. 5,559 in additional labor costs being recognized in its 2008 statement of income;

ii) elimination of the recognition of an additional liability and resulting recognition of an intangible asset and comprehensive income item. As further disclosed in Note 14, upon the adoption of MFRS D-3 the Company reversed its intangible asset of Ps. 30,092 and additional liability of Ps. 34,189 resulting in a credit to equity of Ps. 4,097 in 2008;

iii) accounting treatment of current-year and deferred employee profit-sharing, requiring that deferred employee profit-sharing be recognized using the asset and liability method established under MFRS D-4. The Company recorded a deferred profit sharing asset of Ps. 29,667 upon adoption of MFRS D-3. That asset has been adjusted to a value of Ps. 26,606 as of December 31, 2008. As of December 31, 2010 and 2009 there was no deferred profit sharing.

iv) current-year and deferred employee profit-sharing expense is to be presented as an ordinary expense in the income statement rather than as part of taxes on profits.

The impact of the adoption of MFRS D-3 is as indicated above.

MFRS D-4, Taxes on Profit
The CINIF also issued Mexican FRS D-4, Taxes on Profits which replaces Mexican accounting Bulletin D-4 Accounting for Income Taxes, asset Tax and Employee Profit-sharing. The most significant changes attributable to MFRS D-4 are as follows:

i) the concept of permanent differences is eliminated. The asset and liability method requires the recognition of deferred taxes on all differences in balance sheet accounts for financial and tax reporting purposes, regardless of whether they are permanent or temporary;

ii) because current and deferred employee profit-sharing is now considered as an ordinary expense under MFRS D-3, it is excluded from this standard;

iii) asset taxes are required to be recognized as a tax credit and, consequently, as a deferred income tax asset only in those cases in which there is certainty as to its future realization; and

iv) the cumulative effect of adopting Mexican accounting Bulletin D-4 is to be reclassified to retained earnings, unless it is identified with comprehensive items in equity not yet taken to income.

The adoption of this MFRS did not have any effect on the Company’s consolidated financial statements.

b) Revenue and cost recognition Home sales

Revenues, costs and expenses from the Company’s homes sales are recognized when all of the following conditions are fulfilled:

a) the Company has transferred the control to the homebuyer, in other words, the significant risks and benefits due to the property or the assets ownership.
b) the Company does not retain any continued participation of the actual management of the sold assets, in the usual grade associated with the property, nor does retain the effective control of the sold assets;
c)  the revenues amount can be estimated reliably;
d) it is probable that the Company will receive the economic benefits associated with the transaction; and
e) the costs and expenses incurred or to be incurred related to the transaction can be estimated reliably.

The above conditions are typically met upon the completion of construction, and signing by the Company, the customer and (if applicable) the lender, the legal contracts and deeds of ownership (escritura) over the property. At that time, the customer would have the legal to take possession of the home.

The cost of sales represents the cost incurred in the development of housing revenues by the Company during the year. These costs include land, direct materials, labor and all the indirect costs related to the development of the project such as indirect labor, equipment, repairs, depreciation and the capitalization of the comprehensive financing costs.

Construction services
Construction services revenues and costs are recorded pursuant to the percentage-of-completion method, measured by the percentage of actual costs incurred to total estimated costs for each development and each project, in accordance to Bulletin D-7. Under this method, the estimated revenue for each development and project is multiplied by such percentage to determine the amount of revenue to be recognized. Management periodically evaluates the fairness of estimates used to determine the percentage of completion. If, as a result of such evaluation, it becomes apparent that estimated costs on uncompleted projects exceed expected revenues, a provision for estimated costs is recorded in the period in which such costs are determined.

During the years ended December 31, 2010 and 2009 the Company provided construction services only to Mexican government entities.

c) Recognition of the effects of inflation

Effective January 1, 2008 the Company adopted MFRS B-10, Effects of Inflation. Based on this Standard, the Company did not recognize the effects of inflation in the financial information for the years ended December 31, 2010, 2009 and 2008.

Cumulative inflation in Mexico over 2008, 2009 and 2010 is less than 26% and therefore, in conformity with MFRS B-10, Mexico’s current economic environment is considered non-inflationary. Furthermore, the three year cumulative inflation in both of the Company’s foreign locations (Brazil and India) is also less than 26% through December 31, 2010. Accordingly, the Company’s financial information for 2010, 2009 and 2008 was prepared without recognizing the effects of inflation.

d) Use of estimates
In conformity with MFRS, the preparation of financial statements requires the use of estimates and assumptions in certain areas. Actual results could differ from these estimates.

e) Cash and cash equivalents
Cash and cash equivalents consist basically of bank deposits and highly liquid investments with purchased maturities of less than 90 days. These investments are stated at cost plus accrued interest, which is similar to their market value.

f) Allowance for doubtful accounts
The Company’s policy is to provide for doubtful accounts based on balances of uncollected accounts receivable, applying several percentages based on their aging status.

g) Inventories and costs of sales
Construction-in-process, construction materials and land for development and future development are recorded at acquisition cost.
Land for future developments refers to land reserves to be developed by the Company.

MFRS D-6 establishes the determination of the amount from the comprehensive financing cost (CFC) that shall be capitalized. The land under development inventories and construction-in-process include the capitalized CFC. The Company capitalizes the CFC that results from the application of the weighted average rate of the debt to the weighted average of the construction-in-process investment and the land under development during the acquisition period. In regards to debt in foreign currency, the capitalized CFC includes the corresponding exchange gains and losses (see Note 7).

The Company reviews the carrying amounts of its inventories annually or earlier when an impairment indicator suggest that such amounts might not be recoverable. If events or changes in circumstances indicate that the carrying value may not be recoverable an assessment is undertaken to determine whether carrying values are in excess of their net realizable value. Net realizable value is the estimated sales price in the ordinary course of business, less estimated costs for completion and effecting a sale.

Net realizable value for development properties is based on internal project evaluations where assumptions are made about the project’s expected revenues and expenses. Valuation of these projects is performed according to lower cost of market principle. If the carrying amount of project exceeds the net realizable value, a provision is recorded to reflect the inventory at the recoverable amount in the balance sheet.

Impairment losses are recognized in the income statement.

As of December 31, 2010, 2009 and 2008, no impairment has been recognized with respect to the Company’s inventories.

h) Property and equipment
Property and equipment is recorded at acquisition cost. Depreciation is calculated using the straight-line
method based on the remaining useful lives of the related assets, as follows:

The value of property and equipment is reviewed whenever there are indications of impairment. When the recovery value of an asset, which is the greater of its selling price and value in use (the present value of future cash flows), is lower than its net carrying value, the difference is recognized as an impairment loss. At December 31, 2010 and 2009, no impairment losses have been recognized with respect to the Company’s property and equipment.

i)  Leases
The Company classifies agreements to lease property and equipment as operating or capital, in conformity with the guidelines of Bulletin D-5, Leases.

Lease arrangements are recognized as capital leases if they meet at least one of the following conditions:

a)  Under the agreement, the ownership of the leased asset is transferred to the lessee upon termination of the lease.
b) The agreement includes an option to purchase the asset at a reduced price.
c)  The term of the lease is basically the same as the remaining useful life of the leased asset.
d)  The present value of minimum lease payments is at least 90% of the market value of the leased asset, net of any benefit or scrap value.

When the lessor retains the risks or benefits inherent to the ownership of the leased asset, the agreements are classified as operating leases and rent is charged to results of operations.

j) Goodwill
Goodwill represents the difference between the purchase price and the fair value of the net assets acquired at the date of purchase in accordance with the purchase method of accounting.

Goodwill is recorded initially at acquisition cost.

Goodwill is not amortized; however, it is subject to annual impairment tests, and is adjusted for any impairment losses. Goodwill is allocated to the affordable entry-level segment.

Goodwill as of December 31, 2010 and 2009 was Ps. 731,861.

k) Impairment of indefinite lived assets
The Company reviews the carrying amounts of assets with indefinite useful life annually or earlier when an impairment indicator suggests that such amounts might not be recoverable, considering the greater of the present value of future net cash flows using an appropriate discount rate, or the net sales price upon disposal. Impairment is recorded when the carrying amounts exceed the greater of the amounts mentioned above. The impairment indicators considered for these purposes are, among others, the operating losses or negative cash flows in the period if they are combined with a history or projection of losses; depreciation and amortization charged to results, which in percentage terms in relation to revenues are substantially higher than that of previous years; obsolescence; reduction in the demand for the products manufactured; competition; and other legal and economic factors.

As of December 31, 2010 and 2009, no impairment has been recognized with respect to the Company’s assets with indefinite lives.

l) Other assets
Expenses related to the placement of the various borrowings disclosed in Note 11 are recorded at cost.
These amounts will be amortized under the straightline method over the respective loan terms and disclosed in Note 10.

m) Employee retirement obligations
The Company grants seniority premiums and termination pay, covering all its employees. The related calculations are based on the provisions of the Mexican Federal Labor Law (FLL). Under FLL, workers are entitled to certain benefits at the time of their separation from the Company under certain circumstances. Seniority premiums and termination payments are recognized periodically using the projected unit-credit method and financial assumptions.

As disclosed in Note 14, effective January 1, 2008 the Company adopted MFRS D-3. As a result of this adoption, the transition liability of labor obligations is now being amortized over a four-year period.

n) Derivative financial instruments
Derivative financial instruments are used for hedging purposes. At December 31, 2010 and 2009, all derivative
instruments were recognized in the balance sheet at fair value, initially represented by the amount of consideration agreed (both assets and liabilities). Transaction costs and cash flow received or delivered to adjust these instruments to fair value at the beginning of the transaction, not related to premiums on options, are amortized during the respective term. The changes in the fair value of derivative financial instruments that do not qualify as hedging instruments are recognized in income in valuation effects of derivative instruments caption. Financial instruments that qualify as hedging instruments are recognized in equity as part of other comprehensive income.

o) Liabilities, provisions, contingent assets and liabilities and commitments
Liability provisions are recognized whenever (i) the Company has current obligations (legal or assumed) derived from past events, (ii) the liability will probably give rise to a future cash disbursement for its settlement and (iii) the liability can be reasonably estimated.

The Company recognizes a liability for a loss contingency when it is probable (i.e. the probability that the event will occur is greater than the probability that it will not). That certain effects related to past events, will materialize and can be reasonably quantified. These events and the financial impact are also disclosed as lost contingencies in the consolidated financial statements when the risk of loss is deemed to be other than remote. The Company does not recognize an asset for a gain contingency until the gain is realized.

p) Deferred taxes
The Company recognizes deferred taxes using the asset and liability method. Under this method, deferred taxes are recognized on all temporary differences between the book and tax values of assets and liabilities, using the enacted income tax or flat rate business tax (IETU) rate at the time the financial statements are issued, which is the enacted rate that will be in effect at the time the temporary differences giving rise to deferred tax assets and liabilities are expected to be recovered or settled.

Deferred tax assets are evaluated periodically in order to determine their recoverability.

q) Deferred employee statutory profit sharing
Beginning January 1, 2008 the Company uses MFRS D-3, Employee Benefits that considers the accounting treatment for Employee Statutory Profit-Sharing. This Standard establishes the Companies to use the asset and liability method to compute and recognize the deferred liability or asset for profit-sharing, in a similar manner as the deferred income tax computation, and establishes the initial recognition of the deferred profit-sharing, if any, to be reclassified to retained earnings, unless it is identified with comprehensive items in equity not yet taken to income.
Current year and deferred employee profit-sharing expense is to be presented as an ordinary expense in the statement of income rather than as part of taxes on profits.

At year ended December 31, 2008, the deferred profitsharing amounted Ps. 26,606. The initial recognition of the deferred profit-sharing under MFRS D-3 amounts Ps. 29,667 that was recorded in the other equity account. The deferred asset effect generated during 2008 amounts to Ps. 127,305, of which the Company created a valuation allowance of Ps. 100,699, which according with the Company’s projections were more likely than not to not be recovered. The deferred asset effect generated during 2009 was Ps. 52,392. The Company created a valuation allowance of Ps. 78,998 (Ps. 26,606 of 2008 and Ps. 52,392 of 2009), which according with the Company’s projections were more likely than not to not be recovered. At the year ended December 31, 2010, there was not deferred profitsharing to be recognized.

r) Foreign currency balances and transactions
Foreign currency transactions are recorded at the applicable exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Mexican pesos at the applicable exchange rate in effect at the balance sheet date. Exchange fluctuations are recorded as a component of net comprehensive financing cost (income) in the consolidated statements of income.

See Note 18 for the Company’s consolidated foreign currency position at the end of each year and the exchange rates used to translate foreign currency denominated balances.

s) Stock option plan
The Company implemented a plan through which certain of its executives and company officials receive remuneration in the form of share-based payment transactions, whereby these individuals render services as consideration for equity instruments.

Given the settlement feature contained within the plan, the awards were treated as “Liability Awards” from its implementation and through December 31, 2008. Compensation cost was measured by reference to the fair value of the awards at each balance sheet date. During 2009 and as a result of certain modifications made to the plan, the awards were modified so as to become equity-settled. The fair value of share based compensation is determined using an appropriate pricing model (see Note 17d).

t) Earnings per share
Earnings per share are calculated by dividing net income of controlling interest by the weighted average number of shares outstanding during the year. The Company does not have any dilutive securities beyond the stock options disclosed in Note 17d, the effects of which were immaterial in all periods. Accordingly basic and diluted earnings per share presented were the same during such periods.

u) Comprehensive income
Comprehensive income is represented by net income, the effect of the translation of the financial statements of the foreign subsidiaries and the effect of the change in the fair value of financial instruments that meet the criteria of hedge accounting.

v) Statement of income presentation
The costs and expenses reflected in the statement of income are presented according to their function, since this classification allows an adequate analysis of gross profits and operating margins. The Company’s operating income is presented because it is an important indicator of its overall performance and results, and includes ordinary income, operating costs and expenses. Other ordinary income (expenses) is therefore excluded.

w) Reclassifications
Certain amounts in the 2009 and 2008 statements of income have been reclassified in order to conform with 2010 presentations. The effects of these reclassifications were recognized with retrospective application, in accordance with MFRS B-1, Accounting changes and error corrections.

x) Segment reporting
Segment reporting is presented in accordance with the information prepared for the internal decision making process. The information is presented according to the type of housing on sale by the Company and others.