13th Jul 2005 07:01
Slough Estates PLC13 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 ofadopting IFRS* on its income statement and balance sheet for the year ended 31December 2004 in preparation for the adoption IFRS and to outline the Group'saccounting policies under IFRS. IFRS does not affect cash flows. Financial effect on 2004 results £m UK GAAP IFRSNet rental income 230.9 234.6Profit before tax 209.1 388.0Profit after tax 167.4 295.8Shareholders' 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 ofInternational Financial Reporting Standards,including International AccountingStandards ("IAS") and interpretations of those standards ("SIC") issued by theInternational Accounting Standards Board ("IASB") and its Committees. For further information, please contact: Slough EstatesDick Kingston/David SleathTel: 01753 537171 A business update interview with Ian Coull in video/audio and text will beavailable from 07:00 on: www.sloughestates.com and on http://www.cantos.com Slough Estates plc - reconciliation of profitGroup 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 rentalincome frominvestmentproperties 252.1 (0.9)Interestreceived onfinance leaseassets - 0.9Other propertyrelated income 13.1Propertyoutgoings (34.3)------------------ ------- ------ ------ ------ ------- --------Net rentalincome 230.9 - - - - ------------------- ------- ------ ------ ------ ------- -------- Proceeds onsale oftradingproperties 32.3Carrying valueof tradingpropertiessold (28.4)Tradingpropertyrental income 4.4Propertyoutgoingsrelating totradingproperties (1.2)------------------ ------- ------ ------ ------ ------- --------Net incomefrom tradingproperties 7.1 - - - - ------------------- ------- ------ ------ ------ ------- -------- Income fromsale ofutilities andgas 35.1Cost of sales (42.3)------------------ ------- ------ ------ ------ ------- --------Net incomefrom utilitiesand gas (7.2) - - - - ------------------- ------- ------ ------ ------ ------- -------- Otherinvestmentincome 10.0Administrationexpenses (15.2) 0.2Gain ondisposal ofpropertyassets 62.3Valuationgains andlosses - (2.1)------------------ ------- ------ ------ ------ ------- --------Operatingincome 287.9 - - (2.1) 0.2 ------------------- ------- ------ ------ ------ ------- -------- Finance costs (101.4) (0.9) 2.7Finance income 6.7Share ofprofit fromassociate andjoint venturesafter tax 15.9 8.0------------------ ------- ------ ------ ------ ------- --------Profit beforetax 209.1 - - (2.1) (0.7) 10.7------------------ ------- ------ ------ ------ ------- -------- Taxation -current anddeferred (41.7) (35.8) 1.1------------------ ------- ------ ------ ------ ------- -------- 167.4 - (35.8) (2.1) (0.7) 11.8Preferencedividends (11.2)------------------ ------- ------ ------ ------ ------- -------- 156.2 - (35.8) (2.1) (0.7) 11.8Ordinarydividends (67.0) 67.0------------------ ------- ------ ------ ------ ------- --------Profit for theyear 89.2 67.0 (35.8) (2.1) (0.7) 11.8------------------ ------- ------ ------ ------ ------- -------- Attributableto minorityinterests (1.6) 0.4Attributableto equityshareholders 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 profitGroup 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 rentalincome frominvestmentproperties 4.7 1.5 257.4Interestreceived onfinance leaseassets - 0.9Other propertyrelated income 0.3 13.4Propertyoutgoings (2.8) (37.1)------------------ ------- ------- -------- ------- ------- -------Net rentalincome - - - 4.7 (1.0) 234.6------------------ ------- ------- -------- ------- ------- ------- Proceeds onsale oftradingproperties (0.9) 31.4Carrying valueof tradingpropertiessold 0.7 (27.7)Tradingpropertyrental income (0.2) 4.2Propertyoutgoingsrelating totradingproperties 0.1 (1.1)------------------ ------- ------- -------- ------- ------- -------Net incomefrom tradingproperties - - - (0.3) 6.8------------------ ------- ------- -------- ------- ------- ------- Income fromsale ofutilities andgas 0.3 35.4Cost of sales (0.5) (42.8)------------------ ------- ------- -------- ------- ------- -------Net incomefrom utilitiesand gas - - - (0.2) (7.4)------------------ ------- ------- -------- ------- ------- ------- Otherinvestmentincome 0.5 10.5Administrationexpenses 0.4 (0.1) (14.7)Gain ondisposal ofpropertyassets 2.4 64.7Valuationgains andlosses 164.0 7.4 (8.6) 3.9 164.6------------------ ------- ------- -------- ------- ------- -------Operatingincome 164.0 0.4 7.4 (3.9) 5.2 459.1------------------ ------- ------- -------- ------- ------- ------- Finance costs (2.3) (101.9)Finance income - 6.7Share ofprofit fromassociate andjoint venturesaftertax 0.2 24.1------------------ ------- ------- -------- ------- ------- -------Profit beforetax 164.0 0.4 7.4 (3.9) 3.1 388.0------------------ ------- ------- -------- ------- ------- ------- Taxation -current anddeferred (14.7) (1.1) (92.2)------------------ ------- ------- -------- ------- ------- ------- 149.3 0.4 7.4 (3.9) 2.0 295.8Preferencedividends (11.2)------------------ ------- ------- -------- ------- ------- ------- 149.3 0.4 7.4 (3.9) 2.0 284.6Ordinary - -dividends ------- ------- -------- ------- ------- -------------------------Profit for theyear 149.3 0.4 7.4 (3.9) 2.0 284.6------------------ ------- ------- -------- ------- ------- ------- Attributableto minorityinterests - (1.2)Attributableto equityshareholders 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 thebalance sheet when approved. IAS 12 - Mainly deferred tax on investment property valuation surpluses, withmovements in the income statement. Previously disclosed in the notes. IAS 40 - Investment property valuation surpluses taken to the incomestatement. IAS 17 - Finance leases included on the balance sheet as a debtor. Norevaluation. Previously accounted for as investment property. IAS 19 - Recognise in full the cumulative deficits at the transition date1January 2004 - corridor approach not adopted. IAS 28 & 31 - Equity account for the results of joint ventures and associate'sprofits, including its share of valuation surpluses and deficits, interest andtaxation as a one line entry in PBT. IFRS 2 - Share option plans fair valued at the date of grant and costs taken tothe income statement over the vesting period. Transitional exemption used IFRS 3 - Re-classify the acquisition of Ravenseft from a business acquisition toa property acquisition. Goodwill eliminated. Opted to apply this standard witheffect from I January 2004. SIC 15 - Lease incentives amortised over period of lease or to the first breakwhichever is the shorter. Slough Estates plcGroup balance sheetReconciliation of equity Slough Estates As at Events after Income Property, Leases Letting fees EmployeeplcGroup balance 31 December the balance taxes plant & IAS 17 & other benefitssheetReconciliationof equity 2004 sheet date IAS 12 equipment IAS 17 IAS 19£ millions UK GAAP IAS 10 IAS 16 £m £m--------------- -------- ------- ------ ------- ------ ------- ------- Non-currentassetsInvestmentproperties 3,795.6 (276.8) (21.2) (9.9)Property,plant andequipment 118.0 276.8Negativegoodwill (4.7)Finance leasereceivables - 10.9Available-for-saleinvestments 38.4Investments injoint venturesand associate 92.3Deferredtaxation asset 0.3--------------- -------- ------- ------ ------- ------ ------- -------Totalnon-currentassets 4,039.9 - - - (10.3) (9.9) ---------------- -------- ------- ------ ------- ------ ------- ------- CurrentassetsInventories 1.9Tradingproperties 125.3Finance leasereceivables - 0.1Trade andotherreceivables 84.0 9.8 (0.5)Derivative -assetsCash and cashequivalents 397.4--------------- -------- ------- ------ ------- ------ ------- -------Total currentassets 608.6 - - - 0.1 9.8 (0.5)--------------- -------- ------- ------ ------- ------ ------- ---------------------- -------- ------- ------ ------- ------ ------- -------Total assets 4,648.5 - - - (10.2) (0.1) (0.5)--------------- -------- ------- ------ ------- ------ ------- ------- Non-currentliabilitiesBorrowings 1,683.5Obligationsunder financeleases - 0.5Pension schemedeficit 1.2 40.3Deferred taxprovision 192.1 260.3Provisions forliabilitiesand charges 18.3Othercreditors 15.2 1.9--------------- -------- ------- ------ ------- ------ ------- -------Totalnon-currentliabilities 1,910.3 - 260.3 - 0.5 1.9 40.3--------------- -------- ------- ------ ------- ------ ------- ------- CurrentliabilitiesBorrowings 39.2Taxliabilities 46.2 1.2Trade andother payables 185.3 (41.3) 0.2 0.2Derivative -liabilities -------- ------- ------ ------- ------ ------- ----------------------Total currentliabilities 270.7 (41.3) 1.2 - - 0.2 0.2--------------- -------- ------- ------ ------- ------ ------- ---------------------- -------- ------- ------ ------- ------ ------- -------Totalliabilities 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)--------------- -------- ------- ------ ------- ------ ------- ------- EquityCalled upordinary sharecapital 138.8Share premiumaccount 339.1Own sharesheld (5.2)Other reserves 1,664.6 (14.0)Retainedearnings 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)--------------- -------- ------- ------ ------- ------ ------- ------- Minorityinterests 21.3 (1.9)--------------- -------- ------- ------ ------- ------ ------- -------Total equity 2,467.5 41.3 (261.5) - (10.7) (2.2) (41.0)--------------- -------- ------- ------ ------- ------ ------- ------- Slough Estates plcGroup balance sheetReconciliation of equity - continued ------------- -------- ------- -------- ------- ------- ------ -------- ------Slough Estates Investments in Share-based Business Operating Reserve As at Financial As atplcGroup balance associate & payments combinations lease transfers 31 Dec instruments 1 JansheetReconciliationof equity joint ventures IFRS 2 IFRS 3 incentives 2004 IAS 39 2005£ millions IAS 28 & 31 SIC-15 IAS IAS------------- -------- ------- -------- ------- ------- ------ -------- ------ Non-currentassetsInvestmentproperties (35.0) 3,452.7 - 3,452.7Property,plant andequipment 394.8 - 394.8Negativegoodwill 4.7 - - -Finance leasereceivables 10.9 - 10.9Available-for-saleinvestments 38.4 4.1 42.5Investments injoint venturesand associate (8.2) 84.1 - 84.1Deferredtaxation asset (0.1) 0.2 - 0.2------------- -------- ------- -------- ------- ------- ------ -------- ------Totalnon-currentassets (8.2) - 4.7 (35.1) - 3,981.1 4.1 3,985.2------------- -------- ------- -------- ------- ------- ------ -------- ------ CurrentassetsInventories 1.9 - 1.9Tradingproperties 125.3 - 125.3Finance leasereceivables 0.1 - 0.1Trade andotherreceivables (1.4) 23.1 115.0 (0.3) 114.7Derivativeassets - 3.8 3.8------------- -------- ------- -------- ------- ------- ------ -------- ------Cash and cashequivalents 397.4 - 397.4------------- -------- ------- -------- ------- ------- ------ -------- ------Total currentassets - - (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-currentliabilitiesBorrowings 1,683.5 110.1 1,793.6Obligationsunder financeleases 0.5 - 0.5Pension schemedeficit 41.5 - 41.5Deferred taxprovision (4.1) 0.1 448.4 - 448.4Provisions forliabilitiesand charges 18.3 - 18.3Othercreditors (1.3) 15.8 - 15.8------------- -------- ------- -------- ------- ------- ------ -------- ------Totalnon-currentliabilities - (1.3) (4.1) 0.1 - 2,208.0 110.1 2,318.1------------- -------- ------- -------- ------- ------- ------ -------- ------ CurrentliabilitiesBorrowings 39.2 (0.1) 39.1Taxliabilities 47.4 (1.0) 46.4Trade andother payables (2.7) 141.7 (4.2) 137.5Derivativeliabilities - 6.7 6.7------------- -------- ------- -------- ------- ------- ------ -------- ------Total currentliabilities - - - (2.7) 228.3 1.4 229.7------------- -------- ------- -------- ------- ------- ------ -------- ------------------- -------- ------- -------- ------- ------- ------ -------- ------Totalliabilities - (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------------- -------- ------- -------- ------- ------- ------ -------- ------ EquityCalled upordinary sharecapital 138.8 (34.0) 104.8Share premiumaccount 339.1 (98.2) 240.9Own sharesheld (5.2) - (5.2)Other reserves (50.2) 0.2 0.1 (1,541.2) 59.5 42.6 102.1Retainedearnings 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------------- -------- ------- -------- ------- ------- ------ -------- ------ Minorityinterests 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 inthis release may be amended before it is presented as comparative figures in theIFRS accounts to be issued by the Group for the six months ending 30 June 2005as well as for the year ending 31 December 2005. The financial informationcontained in this release does not constitute a complete set of financialstatements (including comparative figures and all relevant and required notes)and therefore does not purport to show a true and fair view of the Group'sfinancial position and results of operations in accordance with IFRS for theyear to 31 December 2004. Transition to International Financial Reporting Standards All listed companies on European Union Exchanges are required to present IFRSfinancial statements for accounting periods beginning on or after 1 January2005. Therefore, Slough will present its consolidated interim and full yearfinancial results for the year ending 31 December 2005 in accordance with IFRS,together with IFRS comparatives. Reconciliations will be provided of certain keyfigures to UK GAAP. Slough's transition date for the adoption of IFRS is 1 January 2004, inaccordance with IFRS 1, "First-time adoption of International FinancialReporting 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 fairvalue, with revaluation gains being taken directly to the profit and lossaccount rather than the revaluation reserve. Accumulated revaluation surplusesrelating to investment properties as at the transition date have beenreallocated to retained earnings. This treatment does not, however, have anyimpact on the distributable profits. Valuation gains relating to developmentproperties amounting to £36.3m remain in revaluation reserves under IAS 16 untilthe developments are completed and then the surplus is transferred to retainedearnings. 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 differencebetween the taxable amount and the pre-tax accounting profit that originate inone reporting period and reverse in one or more subsequent periods. Temporarydifferences, which focus on balance sheet movements, are the differences betweenthe carrying amount of an asset or liability in the balance sheet and its taxbase. In many cases, the deferred tax provision will be the same under IAS 12 as underthe current FRS 19. However, under FRS 19, deferred tax is not provided on therevaluation surplus when a fixed asset is revalued without there being anycommitment to sell the asset. IAS 12 requires deferred tax to be provided inthese circumstances. Where the revaluation has been reflected directly inreserves, the deferred tax will also be charged straight to reserves, with nodirect impact on earnings. The tax provision has been mitigated by recognising indexation allowances on theland element of the investment properties. As Slough is unable to demonstratethat its assets are available for sale, it cannot recognise the indexationrelating to the building element. This amount of £91m remains as a contingentasset 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 pensionschemes. The net effect for the year ended 31 December 2004 is to reduce profitbefore tax by £0.7m. In addition, the prepayment recognised under UK GAAP inrespect of additional contributions (£0.5m at 31 December 2004) is notrecognised under IAS 19, while the net actuarial deficit of £40.3m is recognisedin full. Service costs, the expected return on pension scheme assets andinterest on pension scheme liabilities will be charged in arriving at profitbefore tax, while experience gains and losses will flow through the Statement ofRecognised Income and Expense, broadly equivalent to UK GAAP's Statement ofRecognised Gains and Losses. 4. IAS 31 - Interests in joint ventures Under UK GAAP, Slough was required to recognise its share of the joint venturesand associate profit before interest and its share of interest and tax with thegroup figures on the face of the profit and loss account. The Group's aggregateshare of the gross assets and gross liabilities of the joint ventures were shownseparately on the balance sheet. IAS 31 allows companies to make a one-time choice as to whether joint ventureswill be accounted under the equity method or proportionally consolidated. Sloughhas opted to use the equity method and report its joint ventures' andassociate's profit after tax as a single line in the income statement and itsshare of the net assets as a single line in the balance sheet. Additionaldisclosures will be made of the underlying income, expenditure, assets andliabilities 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 anoperating lease. A finance lease exists if substantially all the risks andrewards are transferred to the tenant. Slough has tested all of its leases and has established that the majority areoperating leases. Some twelve finance leases have been identified and these willbe accounted for as such. The accounting treatment of a finance lease under IAS is to assume that thebuilding 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 anamount equal to the net present value of the minimum lease payments. The impacton the balance sheet is to reduce investment properties by £21.7m, increasedebtors 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; andRepayment of the debtor. The impact on the previously reported 2004 UK GAAP profit is to reduce profitbefore tax by £0.1m. Since the carrying value of the finance lease is not reassessed at eachreporting date, the open market value of the building may differ significantlyfrom the value of the finance lease receivable at that date. Where an investment property is itself subject to a head or groundlease, thatheadlease must be treated as if it was a finance lease and accounted foraccordingly. In total 4 properties are affected, leading to the recognition of afinance lease liability of £0.5m at 31 December 2004 and an increase in thecarrying 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 adividend until the paying company has an obligation to make the payment. Thiswould normally be when it was declared or approved at the annual general meetingin the case of the final dividend for the year. As a result the 2004 proposedfinal dividend of £41.2m is excluded from the IFRS balance sheet and writtenback to retained earnings. IFRS also requires that dividends and distributions are presented in a differentway to current UK GAAP. Under IFRS, dividends are not considered to be anexpense of the paying company so they are not included in the income statement. Instead, dividends are treated as a reserve item and are, therefore, presentedin the statement of changes in equity alongside other transactions withshareholders. 7. IAS 32 and 39 - Financial Instruments The Group has chosen to take the exemption permitted under IFRS from applyingIAS 32 and 39 in the year ended 31 December 2004. However, there are a number ofeffects on Slough which will apply from 1 January 2005. (a) Preference Shares Under UK GAAP Slough's cumulative redeemable convertible preference shares areshown within share capital on the Group's balance sheet. Under IFRS the sharesare considered to be a form of debt with an embedded derivative (known as anequity 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 beshown within Shareholders' Funds). Interest costs will also increase as a chargewill arise in relation to the financial liability shown within creditors. Theeffect of this accounting will be to reduce the Group's net assets, reduceprofits and increase its liabilities. There is no effect on the 2004 numbers as we have decided to apply IAS 32 and 39with effect from 1 January 2005 as allowed by the standards. However, thefinance charge will be increased by £13.8m in 2005, as a result of this changein accounting policy. (b) Interest rate hedges and other derivatives Under IFRS, the Group is required to recognise the fair value of its derivativesincluding interest rate hedges and currency swaps on the balance sheet andmovements in those values within the income statement. Currently these aredisclosed but not recognised in the Group's accounts. Slough's interest ratehedges and currency swaps do not meet the strict criteria set out in thestandard for hedge accounting. Although the Group is satisfied that,economically, all of the Group's interest rate hedges do indeed offset interestrate exposures, the practical difficulty in forecasting accurately the amountand timing of cash receipts and payments associated with investment portfoliotransactions 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 remainingterm 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 costand 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 thebalance sheet as available-for-sale investments under non-current assets.Movements in fair value are taken directly to equity and recycled through theincome statement when the investments are realised. 8. SIC-15 - Operating leases - incentives The cost of rent free periods and other incentives given to tenants underoperating leases must be spread over the term of the lease rather than, as underUK GAAP, to the first review to market rents. Further, there are no transitionalprovisions so that incentives granted before the UK standard came into effecthave now been brought back into account. This will change the timing but not theaggregate amount recognised in relation to lease incentives. 9. IFRS 3 - Business combinations Goodwill arising on acquisitions is not amortised under IFRS, but is subject toimpairment review at each reporting date. Slough's acquisition of net assets in the exchange of properties with LandSecurities Group plc has been treated as an acquisition of assets rather than ofa business. Adjustments have therefore been made to remove the negative goodwillof £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-basedremuneration to employees and directors to be recognised through the incomestatement. Slough has used the Black-Scholes option valuation model and theresulting fair value will be charged through the income statement over thevesting period of the options. Fair value should take account of the likelihoodof the options becoming 'in the money' in the future. This results in a creditto the income statement in the year of £0.4m, which is net of provisionspreviously made by the Group in respect of the cost of certain of theshare-based compensation arrangements. Only share based transactions after 7November 2002 that had not vested by 1 January 2005 have been restated, aspermitted by the Standard. Other considerations As permitted by the standard, Slough has elected to adopt IAS 32 and 39 from 1January 2005. The Group has decided to take advantage of the exemption in IFRS1in relation to defined benefit schemes and not to adopt the corridor approachand 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 beapplied to: the opening IFRS balance sheet as at 1 January 2004, the date of transition toIFRS, and the IFRS balance sheet as at 31 December 2004 and income statement forthe year then ended attached to this announcement and which will be presented ascomparative information in the Group's first IFRS Financial Statements. Basis of preparation The income statement and balance sheet have been prepared, in accordance withapplicable International Accounting Standards (IAS) and International FinancialReporting Standards (IFRS) issued by the International Accounting StandardsBoard (IASB) and on the basis that all such standards will be endorsed by theEuropean Union ("the EU"). These standards are also collectively referred to asIFRS. Although there is a now a fairly stable platform, standards continue to evolveand those currently in issue and endorsed by the EU are subject tointerpretation by the International Financial Reporting InterpretationsCommittee ("IFRIC") and further standards may be issued and endorsed by the EUbefore 31 December 2005. These uncertainties could result in the need to changethe basis of accounting or presentation of certain financial information fromthat applied in the preparation of this document. Slough is required to apply its IFRS accounting policies retrospectively todetermine its opening IFRS balance sheet at the transition date of 1 January2004 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 useof estimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Although these estimates arebased on management's best knowledge of the amount, event or actions, actualresults may ultimately differ from those estimates. Basis of consolidation The consolidated financial statements of the Group include the financialstatements of Slough Estates plc ("the Company") its subsidiaries and theGroup's share of profits and losses and net assets of joint ventures andassociate made up to 31 December. Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies used into line with those used byother members of the Group. Intra-group balances and any unrealised gains and losses arising fromintra-group transactions are eliminated in preparing the consolidated financialstatements. Unrealised gains arising from transactions with joint ventures areeliminated 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 thatthere is no evidence of impairment. Investments in associates An associate is an entity over which the Group is in a position to exercisesignificant influence, but not control, through participation in the financialand operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in thesefinancial statements using the equity method of accounting. Investments inassociates are carried in the balance sheet at cost as adjusted bypost-acquisition changes in the Group's share of the net assets of theassociate, less any impairment in the value of individual investments. Where a group entity transacts with an associate of the Group, unrealisedprofits and losses are eliminated to the extent of the Group's interest in therelevant associate, except to the extent that unrealised losses provide evidenceof an impairment of the asset transferred. Investments in joint ventures A joint venture is a contractual arrangement whereby the Group and other partiesundertake an economic activity that is subject to joint control. Where a group company undertakes its activities under joint venture arrangementsdirectly, the Group's share of jointly controlled assets and any liabilitiesincurred jointly with other ventures are recognised in the financial statementsof the Group and classified according to their nature. Liabilities and expensesincurred directly in respect of interests in jointly controlled assets areaccounted for on an accrual basis. Joint venture arrangements which involve the establishment of a separate entityin which each venturer has an interest are referred to as jointly controlledentities. The Group reports its interests in jointly controlled entities usingequity accounting. Investments in joint ventures are carried in the balancesheet at cost as adjusted by post-acquisition changes in the Group's share ofthe net assets of the joint venture, less any impairment in the value ofindividual investments. Where the Group transacts with its jointly controlled entities, unrealisedprofits and losses are eliminated to the extent of the Group's interest in thejoint venture, except to the extent that unrealised losses provide evidence ofan impairment of the asset transferred. On disposal of a subsidiary, associate or jointly controlled entity, theattributable amount of unamortised goodwill is included in the determination ofthe profit or loss on disposal. Goodwill On acquisition, the assets and liabilities of a subsidiary, joint venture orassociate are measured at their fair value at the date of acquisition. Anyexcess (deficiency) of the joint ventures or associate cost of acquisition over(below) the fair values of the identifiable net assets acquired is recognised asgoodwill (negative goodwill). Goodwill is carried in the balance sheet at costless any accumulated impairment losses. Negative goodwill is immediatelyrecognised in the income statement. Derivative financial instruments ("derivatives") The Group uses derivatives, particularly interest rate swaps, to help manage itsinterest rate risk. The Group does not hold or issue derivatives for tradingpurposes. Derivatives are recognised initially at cost. Subsequent to initial recognition,derivatives are stated at fair value. The gain or loss on re-measurement to fairvalue is recognised immediately in income unless the derivatives qualify forhedge accounting, in which case recognition depends on the nature of the itembeing hedged. Where a derivative is designated as a hedge of the variability of a highlyprobable forecasted transaction, ie an interest payment, the element of the gainor loss on the derivative that is an effective hedge is recognised directly inequity. When the hedge of a forecasted transaction subsequently results in therecognition of a financial asset or a financial liability, the associated gainsor losses that were recognised directly in equity are reclassified into profitor loss in the same period or periods during which the asset acquired orliability assumed affects profit or loss, ie when interest income or expense isrecognised. The ineffective part of any gain or loss is recognised in the incomestatement immediately. Foreign currencies Transactions in currencies other than sterling are initially recorded at therates of exchange prevailing on the dates of the transactions. Monetary assetsand liabilities denominated in such currencies are retranslated at the ratesprevailing on the balance sheet date. Profits and losses arising on exchange areincluded in income for the period, unless the UK foreign currency denominatedloans are designated as a hedge of the Group's investment in its overseassubsidiaries. In this case the exchange difference is taken to equity until therealisation of the overseas investment and then it is transferred to income aspart of the profit or loss on realisation. On consolidation, the assets and liabilities of the Group's overseas operationsare translated at exchange rates prevailing on the balance sheet date. Incomeand expense items are translated at the average exchange rates for the period.Exchange differences arising, if any, are classified as equity and transferredto the Group's translation reserve. Such translation differences are recognisedas 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 orfor capital appreciation or both. In addition, properties held under operatingleases are accounted for as investment properties when the rest of thedefinition of an investment property is met. In such cases, the operating leasesconcerned are accounted for as if they were finance leases. Valuation surplus and deficit arising in the period are included in the incomestatement. Redevelopment of existing investment properties for the purpose of earningfuture rental income continue to be accounted for as investment properties. Investment properties are measured initially at cost, including relatedtransaction costs. After initial recognition at cost, investment properties arecarried at their fair values based on a professional valuation made as of eachreporting date. Properties are treated as acquired at the point when the Groupassumes the significant risks and returns of ownership and as disposed whenthese are transferred to the buyer. Additions to investment properties consistof costs of a capital nature and, in the case of investment properties underdevelopment, capitalised interest. Certain internal staff and associated costsdirectly attributable to the management of the developments under constructionare also capitalised. When the Group begins to redevelop an existing investment property with a viewto sale, the property is transferred to trading properties and held as a currentasset. The property is re-measured to fair value as at the date of the transferwith any gain or loss being taken to profit or loss. The re-measured amountbecomes the deemed cost at which the property is then carried in tradingproperties. Property that is being constructed or developed for future use as an investmentproperty, but which has not previously been classified as such, is classified asinvestment property under development within property, plant and equipment. Thisis recognised initially at cost but is subsequently re-measured to fair value ateach reporting date. Any gain or loss on re-measurement is taken direct toequity unless the loss in the period exceeds the net cumulative gain previouslyrecognised in equity. In the latter case, the amount by which the loss in theperiod exceeds the net cumulative gain previously recognised is taken to profitor loss. On completion, the property is transferred to investment property withany final difference on re-measurement accounted for in accordance with theforegoing policy. The gain or loss arising on the disposal of a property is determined as thedifference between the sales proceeds and the carrying amount of the asset atthe beginning of the period and is recognised in income. Valuations The Group's completed investment properties and development propertiesclassified as property plant and equipment were externally valued as at 31December 2004 by Insignia Richard Ellis or Colliers Conrad Ritblat Erdman or CBHillier Parker in the United Kingdom, in the USA by Walden-Marling Inc(previously Realty Services International, Inc), in Canada by Altus Group inBelgium by De Crombrugghe & Partners s.a. and in France by Insignia BourdaisExpertises s.a. C B Hillier Parker and Insignia Richard Ellis have valued part of the portfoliosince 1986 and Colliers Conrad Ritblat Erdman since 1989. CB Hillier Parker andInsignia Richard Ellis also undertake some professional and letting work onbehalf of the Group, although this activity is limited in relation to theactivities of the Group as a whole. All three companies advise us that the totalfees paid by the Group represent less than 5% of their total revenue in any yearand 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 bythe group companies. They are fair valued on the same basis as investmentproperties. Surpluses and deficits arising on the revaluation of such land and buildings iscredited to the properties revaluation reserve, except to the extent that itreverses a revaluation decrease for the same asset previously recognised inincome, in which case the increase is credited to the income statement to theextent of the decrease previously charged. A decrease in carrying amount arisingon the revaluation of such land and buildings is charged as an expense to theextent that it exceeds the balance, if any, held in the properties revaluationreserve relating to a previous revaluation of that asset. Depreciation on revalued buildings is charged to income. On the subsequent saleor retirement of a revalued property, the attributable revaluation surplusremaining in the properties revaluation reserve is transferred directly toaccumulated profits. The gain or loss arising on the disposal or retirement of an asset is determinedas the difference between the sales proceeds and the carrying amount of theasset 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 andequipment, computers, motor vehicles, furniture, fixtures and fittings, andimprovements to Group offices. These assets are stated at cost less accumulateddepreciation and are depreciated on a straight-line basis over their estimateduseful lives. The residual values and useful lives of all property, plant and equipment arereviewed, and adjusted if appropriate, at the end of each financial year-end. Leases Group company as lesseea) Operating lease - leases in which substantially all risks and rewards ofownership are retained by another party, the lessor, are classified as operatingleases. Payments, including prepayments, made under operating leases (net of anyincentives received from the lessor) are charged to the income statement on astraight-line basis over the period of the lease. b) Finance lease - leases of assets where the Group has substantially all therisks and rewards of ownership are classified as finance leases. Finance leasesare capitalised at the lease's commencement at the lower of the fair value ofthe property and the present value of the minimum lease payments. Each leasepayment is allocated between the liability and finance charges so as to achievea constant rate on the finance balance outstanding. The corresponding rentalobligations, net of finance charges, are included in current and non-currentborrowings. The finance charges are charged to the income statement over thelease period so as to produce a constant periodic rate of interest on theremaining balance of the liability for each period. The investment propertiesacquired under finance leases are carried at their fair value. A group company as lessora) Operating lease - properties leased out to tenants under operating leases areincluded in investment properties in the balance sheet.b) Finance lease - when assets are leased out under a finance lease, the presentvalue of the minimum lease payments is recognised as a receivable. Thedifference between the gross receivable and the present value of the receivableis recognised as unearned finance income. Lease income is recognised over theterm of the lease using the net investment method before tax, which reflects aconstant periodic rate of return. Where only the buildings element of a propertylease is classified as a finance lease, the land element is shown withinoperating leases. Trading properties and longer term pre-sold construction contractsProperties developed and held for sale are classified as trading properties andare shown at the lower of cost and net realisable value. Cost includes directexpenditure and interest capitalised during the development period. Thedevelopment period ends when the property is available for its intended sale. Profit from pre-sold trading developments is recognised according to the stagereached in the contract by reference to the value of work completed using thepercentage of completion method. An appropriate estimate of the profitattributable to work completed is recognised once the outcome of the contractcan be estimated reliably. The gross amount due from customers for contract workis shown as a receivable. The gross amount due comprises costs incurred plusrecognised profits less the sum of recognised losses and progress billings.Where the sum of recognised losses and progress billings exceeds costs incurredplus recognised profits, the amount is shown as a liability. Stocks Stocks (utilities and oil and gas) are stated at the lower of cost and netrealisable value. Cost comprises direct materials and, where applicable, directlabour costs and those overheads that have been incurred in bringing theinventories to their present location and condition. Cost is calculated usingthe weighted average method. Net realisable value represents the estimatedselling price less all estimated costs of completion and costs to be incurred inmarketing, selling and distribution. Trade and other receivablesTrade and other receivables are recognised initially at fair value. A provisionfor impairment of trade receivables is established where there is objectiveevidence that the Group will not be able to collect all amounts due according tothe original terms of the receivables concerned. Available-for-sale investments Available-for-sale investments are non-derivative financial assets that aredesignated as available for sale. These represent mainly the investments inCharterhouse USA, Candover and certain warrants in US companies which aretenants 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 lossthat had been recognised directly in equity is removed from equity andrecognised in the income statement even though the asset has not beenderecognised. The amount removed from equity and recognised in the income statement, is thedifference between the acquisition cost (net of any principal repayment andamortisation) and current fair value, less any impairment loss on that financialasset previously recognised in income. Impairment losses recognised in the income statement are not reversed throughincome. Cash and cash equivalents Cash and cash equivalents comprises cash balances, deposits held at call withbanks and other short-term highly liquid investments with original maturities ofthree months or less. Bank overdrafts that are repayable on demand and form anintegral part of the Group's cash management are included as a component of cashRelated Shares:
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