Adoption of IFRS
Slough Estates PLC
13 July 2005
13 July 2005
Slough Estates plc and Subsidiaries (Slough)
Adoption of International Financial Reporting Standards (IFRS)
2004 Income statement and balance sheet
Slough Estates plc is today presenting information to show the effect of
adopting IFRS* on its income statement and balance sheet for the year ended 31
December 2004 in preparation for the adoption IFRS and to outline the Group's
accounting policies under IFRS.
IFRS does not affect cash flows.
Financial effect on 2004 results
£m UK GAAP IFRS
Net rental income 230.9 234.6
Profit before tax 209.1 388.0
Profit after tax 167.4 295.8
Shareholders' funds 2,446.2 2,165.1
In summary the most notable changes to Slough's financial statements are:
• revaluation surpluses and deficits on investment properties are charged
to the income statement (IAS 40).
• deferred tax on revaluations is taken to the income statement or
revaluation reserve depending on the classification of the underlying
properties (IAS 12).
• pension deficits are recognised in full on the balance sheet.
• the Group's share of the profit after tax and net assets of its joint
ventures and associate are shown on one line in the income statement and
balance sheet respectively (IAS 31).
• the final dividend is included in equity, following its approval at the
Group's Annual General Meeting.
* References to 'IFRS' throughout this document refer to the application of
International Financial Reporting Standards,including International Accounting
Standards ('IAS') and interpretations of those standards ('SIC') issued by the
International Accounting Standards Board ('IASB') and its Committees.
For further information, please contact:
Slough Estates
Dick Kingston/David Sleath
Tel: 01753 537171
A business update interview with Ian Coull in video/audio and text will be
available from 07:00 on: www.sloughestates.com and on http://www.cantos.com
Slough Estates plc - reconciliation of profit
Group income statement
------------------ ------- ------ ------ ------ ------- --------
£ million As at Events after Income Leases Employee Investment in
associate &
31 December the taxes IAS 17 benefits joint ventures
2004 sheet date IAS 12 IAS 19 IAS 28 & 31
UK GAAP IAS 10
------------------ ------- ------ ------ ------ ------- --------
Gross rental
income from
investment
properties 252.1 (0.9)
Interest
received on
finance lease
assets - 0.9
Other property
related income 13.1
Property
outgoings (34.3)
------------------ ------- ------ ------ ------ ------- --------
Net rental
income 230.9 - - - - -
------------------ ------- ------ ------ ------ ------- --------
Proceeds on
sale of
trading
properties 32.3
Carrying value
of trading
properties
sold (28.4)
Trading
property
rental income 4.4
Property
outgoings
relating to
trading
properties (1.2)
------------------ ------- ------ ------ ------ ------- --------
Net income
from trading
properties 7.1 - - - - -
------------------ ------- ------ ------ ------ ------- --------
Income from
sale of
utilities and
gas 35.1
Cost of sales (42.3)
------------------ ------- ------ ------ ------ ------- --------
Net income
from utilities
and gas (7.2) - - - - -
------------------ ------- ------ ------ ------ ------- --------
Other
investment
income 10.0
Administration
expenses (15.2) 0.2
Gain on
disposal of
property
assets 62.3
Valuation
gains and
losses - (2.1)
------------------ ------- ------ ------ ------ ------- --------
Operating
income 287.9 - - (2.1) 0.2 -
------------------ ------- ------ ------ ------ ------- --------
Finance costs (101.4) (0.9) 2.7
Finance income 6.7
Share of
profit from
associate and
joint ventures
after tax 15.9 8.0
------------------ ------- ------ ------ ------ ------- --------
Profit before
tax 209.1 - - (2.1) (0.7) 10.7
------------------ ------- ------ ------ ------ ------- --------
Taxation -
current and
deferred (41.7) (35.8) 1.1
------------------ ------- ------ ------ ------ ------- --------
167.4 - (35.8) (2.1) (0.7) 11.8
Preference
dividends (11.2)
------------------ ------- ------ ------ ------ ------- --------
156.2 - (35.8) (2.1) (0.7) 11.8
Ordinary
dividends (67.0) 67.0
------------------ ------- ------ ------ ------ ------- --------
Profit for the
year 89.2 67.0 (35.8) (2.1) (0.7) 11.8
------------------ ------- ------ ------ ------ ------- --------
Attributable
to minority
interests (1.6) 0.4
Attributable
to equity
shareholders 90.8 67.0 (35.8) (2.1) (1.1) 11.8
------------------ ------- ------ ------ ------ ------- --------
89.2 67.0 (35.8) (2.1) (0.7) 11.8
------------------ ------- ------ ------ ------ ------- --------
Slough Estates plc - reconciliation of profit
Group income statement / continued
------------------ ------- ------- -------- ------- ------- -------
£ million Investment Share-based Business Operating Effects of As at
property payments combinations lease changes in 31 December
IAS 40 IFRS 2 IFRS 3 incentives foreign 2004
exchange
SIC-15 rates and other IAS
------------------ ------- ------- -------- ------- ------- -------
Gross rental
income from
investment
properties 4.7 1.5 257.4
Interest
received on
finance lease
assets - 0.9
Other property
related income 0.3 13.4
Property
outgoings (2.8) (37.1)
------------------ ------- ------- -------- ------- ------- -------
Net rental
income - - - 4.7 (1.0) 234.6
------------------ ------- ------- -------- ------- ------- -------
Proceeds on
sale of
trading
properties (0.9) 31.4
Carrying value
of trading
properties
sold 0.7 (27.7)
Trading
property
rental income (0.2) 4.2
Property
outgoings
relating to
trading
properties 0.1 (1.1)
------------------ ------- ------- -------- ------- ------- -------
Net income
from trading
properties - - - (0.3) 6.8
------------------ ------- ------- -------- ------- ------- -------
Income from
sale of
utilities and
gas 0.3 35.4
Cost of sales (0.5) (42.8)
------------------ ------- ------- -------- ------- ------- -------
Net income
from utilities
and gas - - - (0.2) (7.4)
------------------ ------- ------- -------- ------- ------- -------
Other
investment
income 0.5 10.5
Administration
expenses 0.4 (0.1) (14.7)
Gain on
disposal of
property
assets 2.4 64.7
Valuation
gains and
losses 164.0 7.4 (8.6) 3.9 164.6
------------------ ------- ------- -------- ------- ------- -------
Operating
income 164.0 0.4 7.4 (3.9) 5.2 459.1
------------------ ------- ------- -------- ------- ------- -------
Finance costs (2.3) (101.9)
Finance income - 6.7
Share of
profit from
associate and
joint ventures
after
tax 0.2 24.1
------------------ ------- ------- -------- ------- ------- -------
Profit before
tax 164.0 0.4 7.4 (3.9) 3.1 388.0
------------------ ------- ------- -------- ------- ------- -------
Taxation -
current and
deferred (14.7) (1.1) (92.2)
------------------ ------- ------- -------- ------- ------- -------
149.3 0.4 7.4 (3.9) 2.0 295.8
Preference
dividends (11.2)
------------------ ------- ------- -------- ------- ------- -------
149.3 0.4 7.4 (3.9) 2.0 284.6
Ordinary - -
dividends ------- ------- -------- ------- ------- -------
------------------
Profit for the
year 149.3 0.4 7.4 (3.9) 2.0 284.6
------------------ ------- ------- -------- ------- ------- -------
Attributable
to minority
interests - (1.2)
Attributable
to equity
shareholders 149.3 0.4 7.4 (3.9) 2.0 285.8
------------------ ------- ------- -------- ------- ------- -------
149.3 0.4 7.4 (3.9) 2.0 284.6
------------------ ------- ------- -------- ------- ------- -------
IAS 10 - Ordinary dividend excluded from the income statement. Recognised on the
balance sheet when approved.
IAS 12 - Mainly deferred tax on investment property valuation surpluses, with
movements in the income statement. Previously disclosed in the notes.
IAS 40 - Investment property valuation surpluses taken to the income
statement.
IAS 17 - Finance leases included on the balance sheet as a debtor. No
revaluation. Previously accounted for as investment property.
IAS 19 - Recognise in full the cumulative deficits at the transition date
1January 2004 - corridor approach not adopted.
IAS 28 & 31 - Equity account for the results of joint ventures and associate's
profits, including its share of valuation surpluses and deficits, interest and
taxation as a one line entry in PBT.
IFRS 2 - Share option plans fair valued at the date of grant and costs taken to
the income statement over the vesting period. Transitional exemption used
IFRS 3 - Re-classify the acquisition of Ravenseft from a business acquisition to
a property acquisition. Goodwill eliminated. Opted to apply this standard with
effect from I January 2004.
SIC 15 - Lease incentives amortised over period of lease or to the first break
whichever is the shorter.
Slough Estates plc
Group balance sheet
Reconciliation of equity
Slough Estates As at Events after Income Property, Leases Letting fees Employee
plc
Group balance 31 December the balance taxes plant & IAS 17 & other benefits
sheet
Reconciliation
of equity 2004 sheet date IAS 12 equipment IAS 17 IAS 19
£ millions UK GAAP IAS 10 IAS 16
£m £m
--------------- -------- ------- ------ ------- ------ ------- -------
Non-current
assets
Investment
properties 3,795.6 (276.8) (21.2) (9.9)
Property,
plant and
equipment 118.0 276.8
Negative
goodwill (4.7)
Finance lease
receivables - 10.9
Available-for-
sale
investments 38.4
Investments in
joint ventures
and associate 92.3
Deferred
taxation asset 0.3
--------------- -------- ------- ------ ------- ------ ------- -------
Total
non-current
assets 4,039.9 - - - (10.3) (9.9) -
--------------- -------- ------- ------ ------- ------ ------- -------
Current
assets
Inventories 1.9
Trading
properties 125.3
Finance lease
receivables - 0.1
Trade and
other
receivables 84.0 9.8 (0.5)
Derivative -
assets
Cash and cash
equivalents 397.4
--------------- -------- ------- ------ ------- ------ ------- -------
Total current
assets 608.6 - - - 0.1 9.8 (0.5)
--------------- -------- ------- ------ ------- ------ ------- -------
--------------- -------- ------- ------ ------- ------ ------- -------
Total assets 4,648.5 - - - (10.2) (0.1) (0.5)
--------------- -------- ------- ------ ------- ------ ------- -------
Non-current
liabilities
Borrowings 1,683.5
Obligations
under finance
leases - 0.5
Pension scheme
deficit 1.2 40.3
Deferred tax
provision 192.1 260.3
Provisions for
liabilities
and charges 18.3
Other
creditors 15.2 1.9
--------------- -------- ------- ------ ------- ------ ------- -------
Total
non-current
liabilities 1,910.3 - 260.3 - 0.5 1.9 40.3
--------------- -------- ------- ------ ------- ------ ------- -------
Current
liabilities
Borrowings 39.2
Tax
liabilities 46.2 1.2
Trade and
other payables 185.3 (41.3) 0.2 0.2
Derivative -
liabilities -------- ------- ------ ------- ------ ------- -------
---------------
Total current
liabilities 270.7 (41.3) 1.2 - - 0.2 0.2
--------------- -------- ------- ------ ------- ------ ------- -------
--------------- -------- ------- ------ ------- ------ ------- -------
Total
liabilities 2,181.0 (41.3) 261.5 - 0.5 2.1 40.5
--------------- -------- ------- ------ ------- ------ ------- -------
--------------- -------- ------- ------ ------- ------ ------- -------
Net assets 2,467.5 41.3 (261.5) - (10.7) (2.2) (41.0)
--------------- -------- ------- ------ ------- ------ ------- -------
Equity
Called up
ordinary share
capital 138.8
Share premium
account 339.1
Own shares
held (5.2)
Other reserves 1,664.6 (14.0)
Retained
earnings 308.9 41.3 (245.6) - (10.7) (2.2) (41.0)
--------------- -------- ------- ------ ------- ------ ------- -------
2,446.2 41.3 (259.6) - (10.7) (2.2) (41.0)
--------------- -------- ------- ------ ------- ------ ------- -------
Minority
interests 21.3 (1.9)
--------------- -------- ------- ------ ------- ------ ------- -------
Total equity 2,467.5 41.3 (261.5) - (10.7) (2.2) (41.0)
--------------- -------- ------- ------ ------- ------ ------- -------
Slough Estates plc
Group balance sheet
Reconciliation of equity - continued
------------- -------- ------- -------- ------- ------- ------ -------- ------
Slough Estates Investments in Share-based Business Operating Reserve As at Financial As at
plc
Group balance associate & payments combinations lease transfers 31 Dec instruments 1 Jan
sheet
Reconciliation
of equity joint ventures IFRS 2 IFRS 3 incentives 2004 IAS 39 2005
£ millions IAS 28 & 31 SIC-15 IAS IAS
------------- -------- ------- -------- ------- ------- ------ -------- ------
Non-current
assets
Investment
properties (35.0) 3,452.7 - 3,452.7
Property,
plant and
equipment 394.8 - 394.8
Negative
goodwill 4.7 - - -
Finance lease
receivables 10.9 - 10.9
Available-for-
sale
investments 38.4 4.1 42.5
Investments in
joint ventures
and associate (8.2) 84.1 - 84.1
Deferred
taxation asset (0.1) 0.2 - 0.2
------------- -------- ------- -------- ------- ------- ------ -------- ------
Total
non-current
assets (8.2) - 4.7 (35.1) - 3,981.1 4.1 3,985.2
------------- -------- ------- -------- ------- ------- ------ -------- ------
Current
assets
Inventories 1.9 - 1.9
Trading
properties 125.3 - 125.3
Finance lease
receivables 0.1 - 0.1
Trade and
other
receivables (1.4) 23.1 115.0 (0.3) 114.7
Derivative
assets - 3.8 3.8
------------- -------- ------- -------- ------- ------- ------ -------- ------
Cash and cash
equivalents 397.4 - 397.4
------------- -------- ------- -------- ------- ------- ------ -------- ------
Total current
assets - - (1.4) 23.1 - 639.7 3.5 643.2
------------- -------- ------- -------- ------- ------- ------ -------- ------
------------- -------- ------- -------- ------- ------- ------ -------- ------
Total assets (8.2) - 3.3 (12.0) - 4,620.8 7.6 4,628.4
------------- -------- ------- -------- ------- ------- ------ -------- ------
Non-current
liabilities
Borrowings 1,683.5 110.1 1,793.6
Obligations
under finance
leases 0.5 - 0.5
Pension scheme
deficit 41.5 - 41.5
Deferred tax
provision (4.1) 0.1 448.4 - 448.4
Provisions for
liabilities
and charges 18.3 - 18.3
Other
creditors (1.3) 15.8 - 15.8
------------- -------- ------- -------- ------- ------- ------ -------- ------
Total
non-current
liabilities - (1.3) (4.1) 0.1 - 2,208.0 110.1 2,318.1
------------- -------- ------- -------- ------- ------- ------ -------- ------
Current
liabilities
Borrowings 39.2 (0.1) 39.1
Tax
liabilities 47.4 (1.0) 46.4
Trade and
other payables (2.7) 141.7 (4.2) 137.5
Derivative
liabilities - 6.7 6.7
------------- -------- ------- -------- ------- ------- ------ -------- ------
Total current
liabilities - - - (2.7) 228.3 1.4 229.7
------------- -------- ------- -------- ------- ------- ------ -------- ------
------------- -------- ------- -------- ------- ------- ------ -------- ------
Total
liabilities - (1.3) (4.1) (2.6) - 2,436.3 111.5 2,547.8
------------- -------- ------- -------- ------- ------- ------ -------- ------
------------- -------- ------- -------- ------- ------- ------ -------- ------
Net assets (8.2) 1.3 7.4 (9.4) - 2,184.5 (103.9) 2,080.6
------------- -------- ------- -------- ------- ------- ------ -------- ------
Equity
Called up
ordinary share
capital 138.8 (34.0) 104.8
Share premium
account 339.1 (98.2) 240.9
Own shares
held (5.2) - (5.2)
Other reserves (50.2) 0.2 0.1 (1,541.2) 59.5 42.6 102.1
Retained
earnings 42.0 1.1 7.4 (9.5) 1,541.2 1,632.9 (14.0) 1,618.9
------------- -------- ------- -------- ------- ------- ------ -------- ------
(8.2) 1.3 7.4 (9.4) - 2,165.1 (103.6) 2,061.5
------------- -------- ------- -------- ------- ------- ------ -------- ------
Minority
interests 19.4 (0.3) 19.1
------------- -------- ------- -------- ------- ------- ------ -------- ------
Total equity (8.2) 1.3 7.4 (9.4) - 2,184.5 (103.9) 2,080.6
------------- -------- ------- -------- ------- ------- ------ -------- ------
This paper summaries the :
• principal accounting policy differences between UK GAAP and IFRS as they
affect Slough.
• the effect of the adoption of IFRS on the income statement and balance
sheet for the year ended on 31 December 2004.
• Group's principal accounting policies under IFRS.
IFRS continues to evolve. Consequently, the financial information contained in
this release may be amended before it is presented as comparative figures in the
IFRS accounts to be issued by the Group for the six months ending 30 June 2005
as well as for the year ending 31 December 2005. The financial information
contained in this release does not constitute a complete set of financial
statements (including comparative figures and all relevant and required notes)
and therefore does not purport to show a true and fair view of the Group's
financial position and results of operations in accordance with IFRS for the
year to 31 December 2004.
Transition to International Financial Reporting Standards
All listed companies on European Union Exchanges are required to present IFRS
financial statements for accounting periods beginning on or after 1 January
2005. Therefore, Slough will present its consolidated interim and full year
financial results for the year ending 31 December 2005 in accordance with IFRS,
together with IFRS comparatives. Reconciliations will be provided of certain key
figures to UK GAAP.
Slough's transition date for the adoption of IFRS is 1 January 2004, in
accordance with IFRS 1, 'First-time adoption of International Financial
Reporting Standards'.
Significant differences between UK GAAP and IFRS
These differences are summarised below.
1. IAS 40 - Investment property
Under IAS 40, an investment property will be recognised in the accounts at fair
value, with revaluation gains being taken directly to the profit and loss
account rather than the revaluation reserve. Accumulated revaluation surpluses
relating to investment properties as at the transition date have been
reallocated to retained earnings. This treatment does not, however, have any
impact on the distributable profits. Valuation gains relating to development
properties amounting to £36.3m remain in revaluation reserves under IAS 16 until
the developments are completed and then the surplus is transferred to retained
earnings.
2. IAS 12 - Income taxes
Under IAS 12, deferred tax is recognised on 'temporary differences' rather than
'timing differences', which has been the basis in the UK since SSAP 15.
Timing differences, which focus on profit and loss movements, are the difference
between the taxable amount and the pre-tax accounting profit that originate in
one reporting period and reverse in one or more subsequent periods. Temporary
differences, which focus on balance sheet movements, are the differences between
the carrying amount of an asset or liability in the balance sheet and its tax
base.
In many cases, the deferred tax provision will be the same under IAS 12 as under
the current FRS 19. However, under FRS 19, deferred tax is not provided on the
revaluation surplus when a fixed asset is revalued without there being any
commitment to sell the asset. IAS 12 requires deferred tax to be provided in
these circumstances. Where the revaluation has been reflected directly in
reserves, the deferred tax will also be charged straight to reserves, with no
direct impact on earnings.
The tax provision has been mitigated by recognising indexation allowances on the
land element of the investment properties. As Slough is unable to demonstrate
that its assets are available for sale, it cannot recognise the indexation
relating to the building element. This amount of £91m remains as a contingent
asset and is disclosed by way of note at 31 December 2004.
3. IAS 19 - Employee benefits
This standard continues the requirement of FRS 17 for defined benefit pension
schemes. The net effect for the year ended 31 December 2004 is to reduce profit
before tax by £0.7m. In addition, the prepayment recognised under UK GAAP in
respect of additional contributions (£0.5m at 31 December 2004) is not
recognised under IAS 19, while the net actuarial deficit of £40.3m is recognised
in full. Service costs, the expected return on pension scheme assets and
interest on pension scheme liabilities will be charged in arriving at profit
before tax, while experience gains and losses will flow through the Statement of
Recognised Income and Expense, broadly equivalent to UK GAAP's Statement of
Recognised Gains and Losses.
4. IAS 31 - Interests in joint ventures
Under UK GAAP, Slough was required to recognise its share of the joint ventures
and associate profit before interest and its share of interest and tax with the
group figures on the face of the profit and loss account. The Group's aggregate
share of the gross assets and gross liabilities of the joint ventures were shown
separately on the balance sheet.
IAS 31 allows companies to make a one-time choice as to whether joint ventures
will be accounted under the equity method or proportionally consolidated. Slough
has opted to use the equity method and report its joint ventures' and
associate's profit after tax as a single line in the income statement and its
share of the net assets as a single line in the balance sheet. Additional
disclosures will be made of the underlying income, expenditure, assets and
liabilities for the joint ventures, together with supplemental notes.
5. IAS 17 - Leases
IAS 17 requires a lease to be classified as either a finance lease or an
operating lease. A finance lease exists if substantially all the risks and
rewards are transferred to the tenant.
Slough has tested all of its leases and has established that the majority are
operating leases. Some twelve finance leases have been identified and these will
be accounted for as such.
The accounting treatment of a finance lease under IAS is to assume that the
building has been effectively sold to the tenant. The building is, effectively,
classified as a debtor on the balance sheet at the inception of the lease at an
amount equal to the net present value of the minimum lease payments. The impact
on the balance sheet is to reduce investment properties by £21.7m, increase
debtors by £10.9m and reduce retained earnings by £10.8m.
Under IAS the rental income for the whole property is split into three elements:
Rental income on the land;
Interest income on the debtor balance due from the tenant; and
Repayment of the debtor.
The impact on the previously reported 2004 UK GAAP profit is to reduce profit
before tax by £0.1m.
Since the carrying value of the finance lease is not reassessed at each
reporting date, the open market value of the building may differ significantly
from the value of the finance lease receivable at that date.
Where an investment property is itself subject to a head or groundlease, that
headlease must be treated as if it was a finance lease and accounted for
accordingly. In total 4 properties are affected, leading to the recognition of a
finance lease liability of £0.5m at 31 December 2004 and an increase in the
carrying value of the Group's properties by £0.5m.
6. IAS 10 - Events after the balance sheet date
IAS 10 requires that a liability should not be recognized in respect of a
dividend until the paying company has an obligation to make the payment. This
would normally be when it was declared or approved at the annual general meeting
in the case of the final dividend for the year. As a result the 2004 proposed
final dividend of £41.2m is excluded from the IFRS balance sheet and written
back to retained earnings.
IFRS also requires that dividends and distributions are presented in a different
way to current UK GAAP. Under IFRS, dividends are not considered to be an
expense of the paying company so they are not included in the income statement.
Instead, dividends are treated as a reserve item and are, therefore, presented
in the statement of changes in equity alongside other transactions with
shareholders.
7. IAS 32 and 39 - Financial Instruments
The Group has chosen to take the exemption permitted under IFRS from applying
IAS 32 and 39 in the year ended 31 December 2004. However, there are a number of
effects on Slough which will apply from 1 January 2005.
(a) Preference Shares
Under UK GAAP Slough's cumulative redeemable convertible preference shares are
shown within share capital on the Group's balance sheet. Under IFRS the shares
are considered to be a form of debt with an embedded derivative (known as an
equity instrument) in respect of the option for shareholders to convert.
Slough has therefore split the value of the shares between a financial liability
(which will be shown within Creditors) and an equity instrument (which will be
shown within Shareholders' Funds). Interest costs will also increase as a charge
will arise in relation to the financial liability shown within creditors. The
effect of this accounting will be to reduce the Group's net assets, reduce
profits and increase its liabilities.
There is no effect on the 2004 numbers as we have decided to apply IAS 32 and 39
with effect from 1 January 2005 as allowed by the standards. However, the
finance charge will be increased by £13.8m in 2005, as a result of this change
in accounting policy.
(b) Interest rate hedges and other derivatives
Under IFRS, the Group is required to recognise the fair value of its derivatives
including interest rate hedges and currency swaps on the balance sheet and
movements in those values within the income statement. Currently these are
disclosed but not recognised in the Group's accounts. Slough's interest rate
hedges and currency swaps do not meet the strict criteria set out in the
standard for hedge accounting. Although the Group is satisfied that,
economically, all of the Group's interest rate hedges do indeed offset interest
rate exposures, the practical difficulty in forecasting accurately the amount
and timing of cash receipts and payments associated with investment portfolio
transactions means that the IAS 39 tests on hedge effectiveness may not be met.
In addition, in many cases, the length of the hedge could exceed the remaining
term of the Group's committed bank facilities.
(c) Available-for-sale investments
Under UK GAAP, Slough accounted for its trade investments at the lower of cost
and market value and these were shown in current assets on the balance sheet.
Profits and losses arising from their disposal were taken to income.
Under IAS 39, these investments are carried at fair value and classified in the
balance sheet as available-for-sale investments under non-current assets.
Movements in fair value are taken directly to equity and recycled through the
income statement when the investments are realised.
8. SIC-15 - Operating leases - incentives
The cost of rent free periods and other incentives given to tenants under
operating leases must be spread over the term of the lease rather than, as under
UK GAAP, to the first review to market rents. Further, there are no transitional
provisions so that incentives granted before the UK standard came into effect
have now been brought back into account. This will change the timing but not the
aggregate amount recognised in relation to lease incentives.
9. IFRS 3 - Business combinations
Goodwill arising on acquisitions is not amortised under IFRS, but is subject to
impairment review at each reporting date.
Slough's acquisition of net assets in the exchange of properties with Land
Securities Group plc has been treated as an acquisition of assets rather than of
a business. Adjustments have therefore been made to remove the negative goodwill
of £4.7m and deferred tax of £4.1m created under UK GAAP.
10. IFRS 2 - Share-based payment
IFRS2 requires the cost of granting share options and other share-based
remuneration to employees and directors to be recognised through the income
statement. Slough has used the Black-Scholes option valuation model and the
resulting fair value will be charged through the income statement over the
vesting period of the options. Fair value should take account of the likelihood
of the options becoming 'in the money' in the future. This results in a credit
to the income statement in the year of £0.4m, which is net of provisions
previously made by the Group in respect of the cost of certain of the
share-based compensation arrangements. Only share based transactions after 7
November 2002 that had not vested by 1 January 2005 have been restated, as
permitted by the Standard.
Other considerations
As permitted by the standard, Slough has elected to adopt IAS 32 and 39 from 1
January 2005. The Group has decided to take advantage of the exemption in IFRS1
in relation to defined benefit schemes and not to adopt the corridor approach
and will recognise in full the pension scheme deficit on the balance sheet.
Slough Estates plc accounting policies under IFRS
The following is list of Slough's accounting policies under IFRS and will be
applied to:
the opening IFRS balance sheet as at 1 January 2004, the date of transition to
IFRS, and the IFRS balance sheet as at 31 December 2004 and income statement for
the year then ended attached to this announcement and which will be presented as
comparative information in the Group's first IFRS Financial Statements.
Basis of preparation
The income statement and balance sheet have been prepared, in accordance with
applicable International Accounting Standards (IAS) and International Financial
Reporting Standards (IFRS) issued by the International Accounting Standards
Board (IASB) and on the basis that all such standards will be endorsed by the
European Union ('the EU'). These standards are also collectively referred to as
IFRS.
Although there is a now a fairly stable platform, standards continue to evolve
and those currently in issue and endorsed by the EU are subject to
interpretation by the International Financial Reporting Interpretations
Committee ('IFRIC') and further standards may be issued and endorsed by the EU
before 31 December 2005. These uncertainties could result in the need to change
the basis of accounting or presentation of certain financial information from
that applied in the preparation of this document.
Slough is required to apply its IFRS accounting policies retrospectively to
determine its opening IFRS balance sheet at the transition date of 1 January
2004 and the comparative information for the year ending 31 January 2005:
• Business combinations prior to 1 January 2004 have not been restated to
comply with IFRS 3, 'Business Combinations'
• The Group has applied IFRS 2, 'Share-based payment', retrospectively
only to awards made after 7 November 2002 that had not vested at 1 January
2005
The preparation of financial statements in conformity with IFRS requires the use
of estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Although these estimates are
based on management's best knowledge of the amount, event or actions, actual
results may ultimately differ from those estimates.
Basis of consolidation
The consolidated financial statements of the Group include the financial
statements of Slough Estates plc ('the Company') its subsidiaries and the
Group's share of profits and losses and net assets of joint ventures and
associate made up to 31 December.
Where necessary, adjustments are made to the financial statements of
subsidiaries to bring the accounting policies used into line with those used by
other members of the Group.
Intra-group balances and any unrealised gains and losses arising from
intra-group transactions are eliminated in preparing the consolidated financial
statements. Unrealised gains arising from transactions with joint ventures are
eliminated to the extent of the Group's interest in the joint venture concerned.
Unrealised losses are eliminated in the same way, but only to the extent that
there is no evidence of impairment.
Investments in associates
An associate is an entity over which the Group is in a position to exercise
significant influence, but not control, through participation in the financial
and operating policy decisions of the investee.
The results and assets and liabilities of associates are incorporated in these
financial statements using the equity method of accounting. Investments in
associates are carried in the balance sheet at cost as adjusted by
post-acquisition changes in the Group's share of the net assets of the
associate, less any impairment in the value of individual investments.
Where a group entity transacts with an associate of the Group, unrealised
profits and losses are eliminated to the extent of the Group's interest in the
relevant associate, except to the extent that unrealised losses provide evidence
of an impairment of the asset transferred.
Investments in joint ventures
A joint venture is a contractual arrangement whereby the Group and other parties
undertake an economic activity that is subject to joint control.
Where a group company undertakes its activities under joint venture arrangements
directly, the Group's share of jointly controlled assets and any liabilities
incurred jointly with other ventures are recognised in the financial statements
of the Group and classified according to their nature. Liabilities and expenses
incurred directly in respect of interests in jointly controlled assets are
accounted for on an accrual basis.
Joint venture arrangements which involve the establishment of a separate entity
in which each venturer has an interest are referred to as jointly controlled
entities. The Group reports its interests in jointly controlled entities using
equity accounting. Investments in joint ventures are carried in the balance
sheet at cost as adjusted by post-acquisition changes in the Group's share of
the net assets of the joint venture, less any impairment in the value of
individual investments.
Where the Group transacts with its jointly controlled entities, unrealised
profits and losses are eliminated to the extent of the Group's interest in the
joint venture, except to the extent that unrealised losses provide evidence of
an impairment of the asset transferred.
On disposal of a subsidiary, associate or jointly controlled entity, the
attributable amount of unamortised goodwill is included in the determination of
the profit or loss on disposal.
Goodwill
On acquisition, the assets and liabilities of a subsidiary, joint venture or
associate are measured at their fair value at the date of acquisition. Any
excess (deficiency) of the joint ventures or associate cost of acquisition over
(below) the fair values of the identifiable net assets acquired is recognised as
goodwill (negative goodwill). Goodwill is carried in the balance sheet at cost
less any accumulated impairment losses. Negative goodwill is immediately
recognised in the income statement.
Derivative financial instruments ('derivatives')
The Group uses derivatives, particularly interest rate swaps, to help manage its
interest rate risk. The Group does not hold or issue derivatives for trading
purposes.
Derivatives are recognised initially at cost. Subsequent to initial recognition,
derivatives are stated at fair value. The gain or loss on re-measurement to fair
value is recognised immediately in income unless the derivatives qualify for
hedge accounting, in which case recognition depends on the nature of the item
being hedged.
Where a derivative is designated as a hedge of the variability of a highly
probable forecasted transaction, ie an interest payment, the element of the gain
or loss on the derivative that is an effective hedge is recognised directly in
equity. When the hedge of a forecasted transaction subsequently results in the
recognition of a financial asset or a financial liability, the associated gains
or losses that were recognised directly in equity are reclassified into profit
or loss in the same period or periods during which the asset acquired or
liability assumed affects profit or loss, ie when interest income or expense is
recognised. The ineffective part of any gain or loss is recognised in the income
statement immediately.
Foreign currencies
Transactions in currencies other than sterling are initially recorded at the
rates of exchange prevailing on the dates of the transactions. Monetary assets
and liabilities denominated in such currencies are retranslated at the rates
prevailing on the balance sheet date. Profits and losses arising on exchange are
included in income for the period, unless the UK foreign currency denominated
loans are designated as a hedge of the Group's investment in its overseas
subsidiaries. In this case the exchange difference is taken to equity until the
realisation of the overseas investment and then it is transferred to income as
part of the profit or loss on realisation.
On consolidation, the assets and liabilities of the Group's overseas operations
are translated at exchange rates prevailing on the balance sheet date. Income
and expense items are translated at the average exchange rates for the period.
Exchange differences arising, if any, are classified as equity and transferred
to the Group's translation reserve. Such translation differences are recognised
as income or expenses in the period in which the operation is disposed of.
Investment properties
Investment properties are those that are held either to earn rental income or
for capital appreciation or both. In addition, properties held under operating
leases are accounted for as investment properties when the rest of the
definition of an investment property is met. In such cases, the operating leases
concerned are accounted for as if they were finance leases.
Valuation surplus and deficit arising in the period are included in the income
statement.
Redevelopment of existing investment properties for the purpose of earning
future rental income continue to be accounted for as investment properties.
Investment properties are measured initially at cost, including related
transaction costs. After initial recognition at cost, investment properties are
carried at their fair values based on a professional valuation made as of each
reporting date. Properties are treated as acquired at the point when the Group
assumes the significant risks and returns of ownership and as disposed when
these are transferred to the buyer. Additions to investment properties consist
of costs of a capital nature and, in the case of investment properties under
development, capitalised interest. Certain internal staff and associated costs
directly attributable to the management of the developments under construction
are also capitalised.
When the Group begins to redevelop an existing investment property with a view
to sale, the property is transferred to trading properties and held as a current
asset. The property is re-measured to fair value as at the date of the transfer
with any gain or loss being taken to profit or loss. The re-measured amount
becomes the deemed cost at which the property is then carried in trading
properties.
Property that is being constructed or developed for future use as an investment
property, but which has not previously been classified as such, is classified as
investment property under development within property, plant and equipment. This
is recognised initially at cost but is subsequently re-measured to fair value at
each reporting date. Any gain or loss on re-measurement is taken direct to
equity unless the loss in the period exceeds the net cumulative gain previously
recognised in equity. In the latter case, the amount by which the loss in the
period exceeds the net cumulative gain previously recognised is taken to profit
or loss. On completion, the property is transferred to investment property with
any final difference on re-measurement accounted for in accordance with the
foregoing policy.
The gain or loss arising on the disposal of a property is determined as the
difference between the sales proceeds and the carrying amount of the asset at
the beginning of the period and is recognised in income.
Valuations
The Group's completed investment properties and development properties
classified as property plant and equipment were externally valued as at 31
December 2004 by Insignia Richard Ellis or Colliers Conrad Ritblat Erdman or CB
Hillier Parker in the United Kingdom, in the USA by Walden-Marling Inc
(previously Realty Services International, Inc), in Canada by Altus Group in
Belgium by De Crombrugghe & Partners s.a. and in France by Insignia Bourdais
Expertises s.a.
C B Hillier Parker and Insignia Richard Ellis have valued part of the portfolio
since 1986 and Colliers Conrad Ritblat Erdman since 1989. CB Hillier Parker and
Insignia Richard Ellis also undertake some professional and letting work on
behalf of the Group, although this activity is limited in relation to the
activities of the Group as a whole. All three companies advise us that the total
fees paid by the Group represent less than 5% of their total revenue in any year
and have adopted policies for the regular rotation of the responsible valuer.
Property, plant and equipment
These are properties acquired for development and completed offices occupied by
the group companies. They are fair valued on the same basis as investment
properties.
Surpluses and deficits arising on the revaluation of such land and buildings is
credited to the properties revaluation reserve, except to the extent that it
reverses a revaluation decrease for the same asset previously recognised in
income, in which case the increase is credited to the income statement to the
extent of the decrease previously charged. A decrease in carrying amount arising
on the revaluation of such land and buildings is charged as an expense to the
extent that it exceeds the balance, if any, held in the properties revaluation
reserve relating to a previous revaluation of that asset.
Depreciation on revalued buildings is charged to income. On the subsequent sale
or retirement of a revalued property, the attributable revaluation surplus
remaining in the properties revaluation reserve is transferred directly to
accumulated profits.
The gain or loss arising on the disposal or retirement of an asset is determined
as the difference between the sales proceeds and the carrying amount of the
asset at the beginning of the period and is recognised in income.
Owner occupied properties are depreciated over their estimated useful lives,
normally 30-50 years.
Plant and equipment comprise the power station assets, oil and gas plant and
equipment, computers, motor vehicles, furniture, fixtures and fittings, and
improvements to Group offices. These assets are stated at cost less accumulated
depreciation and are depreciated on a straight-line basis over their estimated
useful lives.
The residual values and useful lives of all property, plant and equipment are
reviewed, and adjusted if appropriate, at the end of each financial year-end.
Leases
Group company as lessee
a) Operating lease - leases in which substantially all risks and rewards of
ownership are retained by another party, the lessor, are classified as operating
leases. Payments, including prepayments, made under operating leases (net of any
incentives received from the lessor) are charged to the income statement on a
straight-line basis over the period of the lease.
b) Finance lease - leases of assets where the Group has substantially all the
risks and rewards of ownership are classified as finance leases. Finance leases
are capitalised at the lease's commencement at the lower of the fair value of
the property and the present value of the minimum lease payments. Each lease
payment is allocated between the liability and finance charges so as to achieve
a constant rate on the finance balance outstanding. The corresponding rental
obligations, net of finance charges, are included in current and non-current
borrowings. The finance charges are charged to the income statement over the
lease period so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period. The investment properties
acquired under finance leases are carried at their fair value.
A group company as lessor
a) Operating lease - properties leased out to tenants under operating leases are
included in investment properties in the balance sheet.
b) Finance lease - when assets are leased out under a finance lease, the present
value of the minimum lease payments is recognised as a receivable. The
difference between the gross receivable and the present value of the receivable
is recognised as unearned finance income. Lease income is recognised over the
term of the lease using the net investment method before tax, which reflects a
constant periodic rate of return. Where only the buildings element of a property
lease is classified as a finance lease, the land element is shown within
operating leases.
Trading properties and longer term pre-sold construction contracts
Properties developed and held for sale are classified as trading properties and
are shown at the lower of cost and net realisable value. Cost includes direct
expenditure and interest capitalised during the development period. The
development period ends when the property is available for its intended sale.
Profit from pre-sold trading developments is recognised according to the stage
reached in the contract by reference to the value of work completed using the
percentage of completion method. An appropriate estimate of the profit
attributable to work completed is recognised once the outcome of the contract
can be estimated reliably. The gross amount due from customers for contract work
is shown as a receivable. The gross amount due comprises costs incurred plus
recognised profits less the sum of recognised losses and progress billings.
Where the sum of recognised losses and progress billings exceeds costs incurred
plus recognised profits, the amount is shown as a liability.
Stocks
Stocks (utilities and oil and gas) are stated at the lower of cost and net
realisable value. Cost comprises direct materials and, where applicable, direct
labour costs and those overheads that have been incurred in bringing the
inventories to their present location and condition. Cost is calculated using
the weighted average method. Net realisable value represents the estimated
selling price less all estimated costs of completion and costs to be incurred in
marketing, selling and distribution.
Trade and other receivables
Trade and other receivables are recognised initially at fair value. A provision
for impairment of trade receivables is established where there is objective
evidence that the Group will not be able to collect all amounts due according to
the original terms of the receivables concerned.
Available-for-sale investments
Available-for-sale investments are non-derivative financial assets that are
designated as available for sale. These represent mainly the investments in
Charterhouse USA, Candover and certain warrants in US companies which are
tenants of the group.
The investments are held at fair value with gains and losses taken to equity.
These gains and losses are recycled through the income statement on realisation.
If there is objective evidence that the asset is impaired the cumulative loss
that had been recognised directly in equity is removed from equity and
recognised in the income statement even though the asset has not been
derecognised.
The amount removed from equity and recognised in the income statement, is the
difference between the acquisition cost (net of any principal repayment and
amortisation) and current fair value, less any impairment loss on that financial
asset previously recognised in income.
Impairment losses recognised in the income statement are not reversed through
income.
Cash and cash equivalents
Cash and cash equivalents comprises cash balances, deposits held at call with
banks and other short-term highly liquid investments with original maturities of
three months or less. Bank overdrafts that are repayable on demand and form an
integral part of the Group's cash management are included as a component of cash
and cash equivalents for the purpose of the statement of cash flows.
Impairment
The Group's assets are other than investment properties are reviewed at each
reporting date to determine whether there is any indication of impairment. If
any such indication exists, the asset's recoverable amount is estimated (see
below). An impairment loss is recognised in income whenever the carrying amount
of an asset exceeds its recoverable amount. For the purposes of assessing
impairment, assets are grouped together at the lowest levels for which there are
separately identifiable cash flows.
The recoverable amount of an asset is the greater of its net selling price and
its value in use. The value in use is determined as the net present value of the
future cash flows expected to be derived from the asset, discounted using a
pre-tax discount rate that reflects current market assessments of the time value
of money and the risks specific to the asset.
An impairment loss is reversed if there has been a change in the estimates used
to determine the recoverable amount. An impairment loss is reversed only to the
extent that the asset's carrying amount after the reversal does not exceed the
amount that would have been determined, net of applicable depreciation, if no
impairment loss had been recognised.
Share capital
Ordinary shares are classed as equity. External costs directly attributable to
the issue of new shares are shown in equity as a deduction, net of tax, from the
proceeds.
Borrowings
Borrowings other than bank overdrafts are recognised initially at fair value
less attributable transaction costs. Subsequent to initial recognition,
borrowings are stated at amortised cost with any difference between the amount
initially recognised and redemption value being recognised in the income
statement over the period of the borrowings, using the effective interest
method.
Convertible redeemable preference shares
The Convertible redeemable preference shares are regarded as compound
instruments, consisting of a liability component and an equity component. At the
date of issue, the fair value of the liability component is estimated using the
prevailing market interest rate for similar non-convertible debt. The difference
between the net proceeds of issue of the convertible redeemable preference
shares and the fair value assigned to the liability component, representing the
embedded option to convert the liability into equity of the Group, is included
in equity (capital reserves).
Issue costs are apportioned between the liability and equity components of the
convertible redeemable preference shares based on their relative carrying
amounts at the date of issue. The portion relating to the equity component is
charged directly against equity.
The interest expense on the liability component is calculated by applying the
prevailing market interest rate for similar non-convertible debt to the
liability component of the instrument. The difference between this amount and
the interest paid is added to the carrying amount of the convertible loan note.
Pensions
The obligations of defined pension schemes are measured at discounted present
value while scheme assets are measured at their fair value. The operating and
financing costs of such plans are recognised separately in the income statement;
service costs are spread systematically over the working lives of the employees
concerned and financing costs are recognised in the periods in which they arise.
Actuarial gains and losses arising from either experience differing from
previous actuarial assumptions or changes to those assumptions are recognised
immediately in the statement of recognised income and expense.
Contributions to defined contribution schemes are expensed as incurred.
The retirement benefit obligation recognised in the balance sheet represents the
present value of the defined benefit obligation.
Provisions
A provision is recognised in the balance sheet when the Group has a constructive
or legal obligation as a result of a past event and it is probable that an
outflow of economic benefits will be required to settle the obligation. If the
effect is material, provisions are determined by discounting the expected future
cash flows at a pre-tax rate that reflects current market assessments of the
time value of money and, where appropriate, the risks specific to the liability.
A provision for onerous contracts is recognised when the expected benefits to be
derived by the Group from a contract are lower than the unavoidable cost of
meeting its obligations under the contract.
Provision is made for dilapidations that will crystallise in the future where,
on the basis of the present condition of the property, an obligation exists at
the reporting date and can be reliably measured. The estimate is revised over
the remaining period of the lease to reflect changes in the condition of the
building or other changes in circumstances. The estimate of the obligation takes
account of relevant external advice.
Trade and other payables
Trade and other payables are stated at cost.
Revenue
Revenue comprises rental income, service charges and other recoveries from
tenants of the Group's investment and trading properties, proceeds of sales of
its trading properties and income arising on long-term trading property
contracts. Rental income includes the net income from managed operations such as
car parks, food courts and serviced offices. Service charges and other
recoveries include income in relation to services charges and directly
recoverable expenditure together with any chargeable management fees. Where
revenue is obtained from the rendering of services, it is recognised by
reference to the stage of completion of the relevant transactions at the
reporting date.
Rental income from investment property leased out under operating lease is
recognised in the income statement on a straight-line basis over the term of the
lease. Lease incentives granted are recognised as an integral part of the net
consideration for the use of the property and are therefore also recognised on
the same, straight-line basis.
When property is let out under a finance lease, the Group recognises a
receivable at an amount equal to the net investment in the lease at inception of
the lease. Rentals received are accounted for as repayments of principal and
finance income as appropriate.
Minimum lease payments receivable on finance leases are apportioned between
finance income and reduction of the outstanding receivable. Finance income is
allocated to each period during the lease term so as to produce a constant
periodic rate of interest on the remaining net investment in the finance lease.
Contingent rents, being those lease payments that are not fixed at the inception
of a lease, for example increases arising on rent reviews, are recorded as
income in the periods in which they are earned. Rent reviews are recognised as
income when it is virtually certain that they will be received.
Surrender premiums received in the period from tenants vacating the property
before the end of the lease are included in rental income.
A property is regarded as sold when the significant risks and returns have been
transferred to the buyer. For conditional exchanges, sales are recognised as the
conditions are satisfied.
Share-based payment
The cost of granting share options and other share-based remuneration to
employees and directors is recognised through the income statement. The Group
has used the Black-Scholes option valuation model and the resulting value is
amortised through the income statement over the vesting period of the options.
The change is reversed if it appears likely that the performance criteria will
not be met.
Own shares held in connection with employee share plans or other share based
payment arrangements are treated as treasury shares and deducted from equity,
and no profit or loss is recognised on their sale, issue or cancellation.
Borrowing costs
Gross borrowing costs relating to direct expenditure on properties under
development or undergoing major refurbishment are capitalised. The interest
capitalised is calculated using the Group's weighted average cost of borrowings.
Interest is capitalised as from the commencement of the development work until
the date of practical completion, or the date the property is ready for its
intended sale. The capitalisation of finance costs is suspended if there are
prolonged periods when development activity is interrupted.
All other borrowing costs are recognised in profit or loss in the period in
which they are incurred.
Income tax
Income tax expense represents the sum of the tax currently payable and deferred
tax.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amount of assets and liabilities in the financial
statements and the corresponding tax basis used in the computation of the
taxable profit, and is accounted for using the balance sheet liability method.
Deferred tax liabilities are generally recognised for all taxable temporary
differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which deductible
temporary differences can be utilised. Such assets are not recognised if the
temporary differences arises from goodwill (or negative goodwill) or from the
initial recognition (other than in a business combination) of other assets and
liabilities in a transaction that affects neither the tax profit nor the
accounting profit.
No provision is made for temporary differences (i) arising on the initial
recognition of assets or liabilities that affect neither accounting nor taxable
profit and (ii) relating to investments in subsidiaries to the extent that they
will not reverse in the foreseeable future.
Indexation on land is recognised as a reduction of the deferred tax liability
but not on the buildings unless the properties are in the process of being sold.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profit will be available to allow all or part of the asset to be
recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset realised. Deferred tax is
charged or credited in the income statement, except when it relates to items
charged or credited directly to equity, in which case the deferred tax is also
dealt with in equity.
Deferred tax assets and liabilities are offset when they relate to income taxes
levied by the same taxation authority and the Group is entitled to settle its
current tax assets and liabilities on a net basis.
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