IFRS TRANSITION REPORT

15th Sep 2005 06:00

Embargoed: 0700hrs 15 September 2005 CLS Holdings PLC (`CLS' or the `Group') Adoption of International Financial Reporting Standards (`IFRS') 2004 Income Statement and Balance SheetCLS is today presenting information to illustrate the effect ofadopting IFRS on its Income Statement and Balance Sheet for the year ended 31December 2004 in preparation for the adoption of IFRS for the year ended 31December 2005.An extract of the Group's accounting policies under IFRS isincluded within this report and explains the basis under which the Group'sInterim results have been prepared.The adoption of IFRS has no effect on the fundamental operatingbasis of the Group, its strategy or management, or on the cash flows derivedfrom the business.Effect of adoption of IFRS on 2004 results: UK GAAP IFRSAdjusted Net Asset Value per 516.6p 521.3pshare*Statutory Net Asset Value per 508.5p 385.1pshareShareholders' funds ‚£426.4m ‚£323.0mDeferred tax liability* ‚£6.8m ‚£114.1mNet rental income ‚£67.5m ‚£67.6mProfit before tax ‚£18.8m ‚£55.8mRetained profit ‚£18.1m ‚£40.3mBasic earnings per share 21.1p 46.7p* In accordance with industry practice, Adjusted Net Asset Valueper share is shown excluding any deferred tax liability. In practice CLS willnot pay this theoretical maximum deferred tax liability that it is obliged toaccount for under IFRS. This provision takes no account of the way in whichthe Group would intend to sell its properties and does not allow for thededuction of indexation relief which is available on the disposal of UKproperties.In common with other companies in the real estate sector, the mainchanges to the Income Statement and Balance Sheet are: - Revaluation gains and losses on Investment Property are now shown in the Income Statement rather than being shown as a movement in reserves.- Deferred tax is charged on a balance sheet basis on all differences between the tax base cost and the carrying value of properties, this means that an additional deferred tax provision is made on the cumulative revaluation surpluses. - Joint Ventures have been consolidated proportionately on a line-by-line basis. Under UK GAAP they were shown as a single line entry in the Profit and Loss and Balance Sheet. - The Cash Flow Statement now includes movement on cash equivalents (previously shown as liquid resources) and reconciles directly to the Balance Sheet.For more detailed explanations of the above adjustments, pleaserefer to the full text attached to this press release or contact:Steven Board, Chief Operating OfficerCLS Holdings plcwww.clsholdings.comTel. +44 (0)20 7582 7766 -ends-1- IFRS transition reportIntroductionTo date, CLS Holdings ('the Group') has prepared its financialstatements under UK Generally Accepted Accounting Principles ('UK GAAP').Under European legislation, all companies listed in the European Union (`EU')are required to prepare consolidated financial statements under InternationalFinancial Reporting Standards ('IFRS') for financial periods beginning on orafter 1 January 2005. As a result the Group will be required to prepare itsconsolidated financial statements in accordance with IFRS as adopted by theEU. CLS Holdings' first IFRS results will be its interim results for the halfyear 2005. The Group's first Annual Report under IFRS will be for the yearended 31 December 2005.This report presents CLS Holdings' results, restated in accordancewith IFRS, for the year ended 31 December 2004, and includes the consolidatedincome statement, consolidated balance sheet, consolidated statement ofchanges in equity, consolidated statement of cash flows and selected notesthereto, together with, where appropriate, reconciliations between the figurespresented under UK GAAP and those under IFRS. These results are unaudited.The purpose of this paper is to: - State the principal accounting policies of the Group under IFRS, and those applicable from the 1st January 2005, these are set out in section 5. - Indicate the effect of the adoption of IFRS on the consolidated income statement and consolidated balance sheet for the year ended 31 December 2004. - Set out the principal accounting policy differences between UK GAAP and IFRS as they affect the Group.Basis of preparationThe financial information has been prepared in accordance with thebasis of accounting described in section 5.This financial information has been prepared on the basis of ourinterpretation of IFRS currently, and expected to be applicable at 31 December2005, and is unaudited. It is possible that conventions which differ from ourcurrent interpretation will evolve within the property sector, and IFRS aresubject to ongoing amendment; accordingly, the amounts disclosed in this papermay be subject to revision.Presentation of financial statements under IFRSUnder IFRS, with effect from 1 January 2005, the Group will prepareits financial statements in accordance with IAS 1 - 'Presentation of financialstatements'. Where IAS 1 does not provide definitive guidance on presentation,for example in relation to aspects of the income statements, the Groupproposes to adopt a format consistent, where possible, with UK GAAP.Accordingly the presentation of the primary statements set out in section 3are likely to develop over time through industry practice.Key changes include: - The 'profit and loss account' is renamed the 'income statement'. - All assets and liabilities are required to be analysed between current and non-current items. - Deferred tax assets to be presented separately from deferred tax liabilities. - A 'statement of changes in equity' will replace the 'statement of group total recognised gains and losses', 'reconciliation of group historical cost profits and losses', and the 'reconciliation of movements in group shareholders' funds'. - UK GAAP comparative information has been reformatted to reflect IFRS reporting requirements.Transition arrangementsThe rules for first time adoption of IFRS are set out in IFRS 1 -'First-time Adoption of International Financial Reporting Standards'. Thestandard allows a number of exceptions and exemptions, both optional andmandatory, to the principle that an entity's opening IFRS balance sheet shallcomply with each IFRS, these are further explained in section 3 of thisreport.As the Group publishes comparative information for one year in itsAnnual Report, the date of transition to IFRS is 1 January 2004, being thestart of the earliest period of comparative information. This has beendetermined in accordance with IFRS 1.For the past 12 months, the Group has been working towards theimplementation of IFRS. The transition to IFRS has required the analysis ofeach standard to identify the differences between the Group's existingaccounting policies under UK GAAP, and those which it will adopt under IFRS;the collection of additional data required to restate the Group's results inaccordance with IFRS with effect from the transition date; and the on-goingmodification of the Group's operational, reporting, and consolidation systemsto meet IFRS requirements.Overview of impactThe principal changes arising from the adoption of IFRS for thefinancial statements under review are: - Property revaluations - surpluses and deficits on investment properties are shown in the income statement, rather than as a movement in reserves. - Deferred tax - is provided in respect of property valuation surpluses and is accrued as a deferred tax liability. Under UK GAAP no deferred tax provision was made in respect of property revaluation surpluses. - Joint ventures - are accounted for using the proportional consolidation method, under UK GAAP the equity accounting method was used. - Share based payments - the fair value of share options and other share based payments is recognised as an expense through the income statement over the vesting period. - Goodwill - positive goodwill is no longer amortised, it is now subject to impairment review. Negative goodwill has been written off to retained earnings or the income statement, as appropriate. - Head leases - have been capitalised and shown as a liability on the balance sheet. - Lease incentives - are amortised over the term of the lease, in each case typically longer than under UK GAAP, which was to the first rent review.Main changes in accounting under IFRSIAS 40 - Investment propertyUnder this standard, investment property will be recognised in theaccounts at fair value, with revaluation gains and losses being taken directlyto the income statement rather than to the revaluation reserve as was the caseunder UK GAAP.Accumulated revaluation surpluses relating to the investmentproperties at the date of transition to IFRS have been reallocated to retainedearnings. This treatment does not, however, have any impact on thedistributable profits.Full provision for tax on the valuation movements has been providedunder IAS 12.IAS 12 - Income taxesThis standard requires full provision to be made for deferredincome tax on temporary differences. The main difference compared to thedeferred tax provided under UK GAAP is that provision has been made in fullfor the deferred income tax arising from the revaluation of investmentproperties. The deferred income tax has been calculated on the basis that thegain (or loss) on the properties will be realised through the income generatedby holding the properties. The tax base for each property in its localcurrency has been compared to the valuation for that property.Since the deferred income tax liabilities have been calculated onthe basis of continued use of the properties no account has been taken of theway in which properties may be sold or of the tax which the Group would expectto be payable on the sale of the properties. Indexation allowance which wouldbe available to further reduce the taxable capital gains when propertiessubject to UK corporation tax are sold has similarly not been taken intoaccount.Deferred income tax is provided as appropriate on the otheradjustments which have been made to convert the UK GAAP accounts to IFRS.IAS 31 - Financial reporting of interests in joint venturesUnder UK GAAP, the Group accounted for interests in joint venturesunder the equity accounting method. Under IFRS, IAS 31 allows companies tomake a one-time choice as to whether joint ventures will be accounted underthe equity method or proportionally consolidated.The Group has opted for proportional consolidation of joint ventureassets and liabilities as this more closely reflects the substance of theGroup's joint venture arrangements, therefore the Group's share of individualassets and liabilities of the joint venture are included within thecorresponding line of the balance sheet. Similarly, the Group's share ofoperating profit of joint ventures is reanalysed to the corresponding lines ofthe income statement.Other changes in accounting under IFRSIFRS 2 - Share based paymentsUnder IFRS 2, the fair value of share options and other share basedpayments is recognised as an expense through the income statement over thevesting period.The Group has elected to apply the IFRS 1, share-based paymentexemption, therefore the Group has applied IFRS 2 from 1 January 2004 to thoseoptions that were issued after 7 November 2002 but have not vested by 1January 2005.IFRS 3 - Business combinationsUnder IFRS 3, goodwill on acquisition is no longer amortised, butis held at its UK GAAP carrying value at the transition date, or acquisitiondate, as appropriate, and is then subject to impairment review at eachreporting date.IFRS 3 uses a different term for 'negative goodwill' and requiresit to be taken to the income statement in the year of acquisition. Previouslyrecognised negative goodwill has been derecognised at the date of transition,with a corresponding adjustment to opening retained earnings.Under IFRS, the acquisition of properties, whether by outrightpurchase or by corporate acquisition, are carefully considered on a case bycase basis to determine whether they are, in substance, an acquisition ofassets or a business.The Group has elected to apply the IFRS 1, business combinationexemption, therefore the Group has not applied IFRS 3 retrospectively to pastbusiness combinations. In the light of IFRS 3, a portfolio acquired during2004 has been reclassified as a business combination rather than as a purchaseof assets.IAS 17 - LeasesUnder UK GAAP, leases to occupational tenants were almostinvariably treated as operating leases, because the risks and rewards in theunderlying freehold were usually assessed as remaining with the landlord.However, while IAS 17 is based on a similar principle, it lists a number ofsituations that individually or in combination would require a lease to beclassified as a finance lease and, in particular, it requires an entity toconsider land and buildings separately, even if the occupational lease is ofthe property as a whole and does not make such a distinction. This means thatit is more likely that a lease term could be viewed as being for the majorpart of the economic life of an asset, resulting in finance leaseclassification of the building element.The Group has carefully reviewed each of its leases and hasconcluded that the lease classification and treatment under UK GAAP isconsistent with IFRS.Where an investment property is itself subject to a head or groundlease, that head lease must be treated as if it were a finance lease andaccounted for accordingly. In total only two properties are affected, leadingto the recognition of a finance lease liability and an increase in thecarrying value of the Group's investment properties.SIC 15 - Operating lease incentivesUnder SIC 15, the cost of rent free periods and other incentivesgiven to tenants under operating leases must be spread over the term of thelease rather than, as under UK GAAP, to the first review to market rents.Further, there are no transitional provisions so that incentivesgranted before the UK standard came into effect have now been brought backinto account. This will therefore change the timing but not the aggregateamount recognised in relation to lease incentives.For the investment property business, the changes amount to a minorreclassification between rent and revaluation surpluses in the incomestatement and, in the balance sheet, between investment properties andreceivables.IAS 32 and IAS 39 - Implications for 2005The Group has taken advantage of the IFRS 1 exemption to notrestate comparatives for 2004 under IAS 32 and IAS 39. The impact of IAS 32and IAS 39 is therefore effective for the accounting period commencing on 1January 2005. The proposed accounting policy to be adopted from 1 January 2005is included in section 5.3. There are a number of effects on the Group whichwill apply from 1 January 2005.Hedge accountingHedging instruments such as interest rate swaps and forward foreignexchange contracts will be included in the balance sheet at fair value.Movements in fair value of these hedging instruments will be recognised in theincome statement or in equity, as appropriate. To the extent that suchinstruments are ineffective hedges, they will be included in the balance sheetat fair value with changes in fair value being recognised in the incomestatement.InvestmentsInvestments will be carried at fair value on the balance sheet,with changes in the fair value being recognised either in the income statementor in equity and recycled through the income statement when the investmentsare realised, as appropriate. Under UK GAAP these investments were carried atthe lower of cost and market value.Other financial instrumentsMovements in the fair value of those derivative financialinstruments which are not accounted for as hedging instruments are recognisedin the income statement and not by way of a note, as is the case under UKGAAP.BorrowingsThe version of IAS 39 adopted by the European Union prohibits theoption to carry borrowings at their fair values, and consequently the Groupwill continue to include borrowings in the balance sheet at amortised cost.The fair value of borrowings will be disclosed under IAS 32, as is the caseunder UK GAAP.The IFRS balance sheet at 31 December 2004 will be restated at 1January 2005 for the adoption of IAS 32 and IAS 39, and a reconciliation ofthis will be included within the published Interim Statement.2 - Primary StatementsConsolidated IFRS income statement(all amounts in GBP thousands unless otherwise stated) Year ended 31 December 2004 Revenue 86,913 _________ Rental and similar income 74,489Service charge and similar income 6,900Service charge expense and similar charges (13,772) _________Net rental income 67,617 Turnover from non-property activities 5,524Cost of sales from non-property activities (4,076) _________Net income non-property activities 1,448 Other operating gains/(losses) - net 2,651Administrative expenses (15,003)Net property expenses (3,902) _________Operating profit before net gain oninvestment properties 52,811 Net gain from fair value adjustment on 36,988investment propertyProfit/(loss) from sale of investment 464property _________Operating profit 90,263 Finance income 1,801Finance expense (36,050)Share of (loss)/profit of associates - post (201)tax _________Profit before income tax 55,813 Taxation - current (596)Taxation - deferred (16,042) _________ (16,638) _________Profit for the year 39,175 _________ Attributable to:Equity holders of the parent 40,253Minority interest (1,078) _________ 39,175 _________Earnings per share for profit attributable tothe equity holders of the Company during theyear (expressed in pence per share)- basic 46.7 _________- diluted 46.5 _________Please refer to section 3 of this report for a full reconciliationof UK GAAP to IFRS financial information.Consolidated IFRS balance sheet(all amounts in GBP thousands unless otherwise stated) As at 31 December 2004 ASSETSNon-current assetsInvestment properties 1,022,539Property, plant and equipment 10,710Intangible assets 2,944Investments in associates 3,010Investments 171Deferred income tax assets 13,813Trade and other receivables 3,163 _________ 1,056,350 Current assetsTrade and other receivables 11,261Investments 10,492Cash and cash equivalents 57,371 _________ 79,124 _________Total assets 1,135,474 _________ LIABILITIESNon-current liabilitiesTrade and other payables 1,279Deferred income tax liabilities 127,951Borrowings, including finance leases 620,508Provisions for other liabilities and charges 301 _________ 750,039 Current liabilitiesTrade and other payables 44,128Current income tax liabilities 902Borrowings, including finance leases 17,447 _________ 62,477 _________Total liabilities 812,516 _________Net assets 322,958 _________ EQUITYCapital and reserves attributable to thecompany's equity holdersShare capital 21,374Other reserves 122,070Retained earnings 181,492 _________ 324,936 Minority interest (1,978) _________Total equity 322,958 _________ Please refer to section 3 of this report for a full reconciliationof UK GAAP to IFRS financial information.Consolidated IFRS statement of changes in equity(all amounts in GBP thousands unless otherwise stated) Attributable to equity Minority Total holders of the company interest Share Other Retained capital reserves earnings Balance at 31 December 2003as previously reported underUK GAAP 21,911 330,739 33,224 (900) 384,974Changes to the accountingpolicy relating to firsttime adoption of IFRS - (210,129) 123,810 - (86,319) ______ _______ _______ _______ _______Balance at 1 January 2004 asrestated under IFRS 21,911 120,610 157,034 (900) 298,655 _______ _______ _______ _______ _______Arising in the year:-Currency translationdifferences on foreigncurrency net investments - 485 (1) - 484Expenses of shareissue/purchase of own shares - - (118) - (118)Purchase of own shares - - (15,676) - (15,676)Issue of shares 72 356 - - 428Cancellation of shares (609) 609 - - - _______ _______ _______ _______ _______Net gains/(losses)recognised directly inequity (537) 1,450 (15,795) - (14,882)Employee share option scheme - 10 - - 10Profit for the year - - 40,253 (1,078) 39,175 _______ _______ _______ _______ _______Total increase/(decrease) inequity for the year (537) 1,460 24,458 (1,078) 24,303 _______ _______ _______ _______ _______At 31 December 2004 asrestated under IFRS 21,374 122,070 181,492 (1,978) 322,958 _______ _______ _______ _______ _______ Please refer to section 3 of this report for a full reconciliationof UK GAAP to IFRS financial information.Consolidated IFRS statement of cash flows(all amounts in GBP thousands unless otherwise stated) Year ended 31 December 2004 Cash flows from operating activitiesCash generated from operations 52,257Interest paid (33,326)Income tax paid (539) ________Net cash inflow from operating activities 18,392 ________ Cash flows from investing activitiesPurchase of investment property (38,249)Capital expenditure on investment property (31,177)Proceeds from sale of investment property 8,486Purchases of property, plant and equipment (PPE) (1,545)Proceeds from sale of PPE 2,029Purchase of available-for-sale financial assets (6,529)Purchase of interests in associates (1,486)Interest received 1,715 ________Net cash outflow from investing activities (66,756) ________ Cash flows from financing activitiesIssue of shares 428Purchase of own shares (15,795)New loans 112,938Issue costs of new loans (2,018)Interest rate caps purchased (1,234)Repayment of loans (45,814) ________Net cash inflow from financing activities 48,505 ________ Net increase in cash and cash equivalents 141Cash and cash equivalents at beginning of year 57,230 ________Cash and cash equivalents at end of year 57,371 ________ Please refer to section 3 of this report for a full reconciliationof UK GAAP to IFRS financial information.3 - Explanation of transition to IFRS3.1 Application of IFRS 1In 2005 the Group will adopt International Financial ReportingStandards ('IFRS') for the first time. Previously the Group reported under UKGenerally Accepted Accounting Principles ('UK GAAP').The Group has applied IFRS 1 - 'First-time Adoption ofInternational Financial Reporting Standards' ('IFRS') to provide a startingpoint for reporting under IFRS. The date of transition to IFRS is 1 January2004 and all information in these financial statements has been restated toreflect the Group's adoption of IFRS.The adoption of International Financial Reporting and AccountingStandards has resulted in changes to the Group's accounting policies, asstated in section 5.In preparing its opening IFRS balance sheet, the Group has adjustedamounts reported previously in financial statements prepared in accordancewith its old basis of accounting (UK GAAP). An explanation of how thetransition from UK GAAP to IFRS has affected the Group's financial positionand financial performance is set out in the following notes, reconciliationsand notes to the reconciliations.In preparing this restatement report in accordance with IFRS 1, theGroup has applied the mandatory exceptions and certain of the optionalexemptions from full retrospective application of IFRS.3.2 Exemptions from full retrospective applicationThe Group has applied the following optional exemptions fromretrospective application;(a)Business combinations exemptionThe Group has applied the business combinations exemption in IFRS1. It has not restated business combinations that took place prior to the 1January 2004 transition date.(b)Exemption from restatement of comparatives for IAS 32 and IAS 39The Group elected to apply this exemption. It applies previous GAAPrules to derivatives, financial assets and financial liabilities and tohedging relationships for the 2004 comparative information. The adjustmentsrequired for differences between UK GAAP and IAS 32 and IAS 39 are determinedand recognised at 1 January 2005. The application of this exemption will takeeffect in the opening balance sheet at 1 January 2005.(c)Share based payment transaction exemptionThe Group has elected to apply this exemption. The Group hasapplied IFRS 2 from 1 January 2004 to those options that were issued after 7November 2002 but that have not vested by 1 January 2005.(d)Designation of previously recognised financial instrumentsThe Group has elected to apply this exemption. Therefore financialinstruments will be designated at the date of transition as at fair valuethrough profit or loss or as available-for-sale. The application of thisexemption will take effect in the opening balance sheet at 1 January 2005, asthis is the IAS 32 and IAS 39 transition date.The Group has not applied the following optional exemptions fromretrospective applications;(e) Fair value as deemed cost exemption(f) Cumulative translation difference exemption The following optional exemptions from retrospective applicationare not applicable to the Group;(g) Employee benefits exemption(h) Compound financial instruments(i) Assets and liabilities of subsidiaries, associates and jointventures exemption(j) Insurance contracts exemption(k) Decommissioning liabilities included in the cost of property,plant and equipment exemption(l) Fair value measurement of financial assets or liabilities atinitial recognition3.3 Exceptions from full retrospective applicationThe Group has applied the following mandatory exceptions fromretrospective application;(a) Derecognition of financial assets and liabilities exceptionFinancial assets and liabilities derecognised before 1 January 2004are not re-recognised under IFRS. The application of the exception fromrestating comparatives for IAS 32 and IAS 39 means that the Group recognisedfrom 1 January 2005 any financial assets and financial liabilitiesderecognised since 1 January 2004 that do not meet the IAS 39 derecognitioncriteria. Management did not choose to apply the IAS 39 derecognition criteriato an earlier date.(b) Hedge accounting exceptionManagement has claimed hedge accounting from 1 January 2005 only ifthe hedge relationship meets all the hedge accounting criteria under IAS 39.(c) Estimates exceptionEstimates under IFRS at 1 January 2004 should be consistent withestimates made for the same date under previous GAAP, unless there is evidencethat those estimates were in error.(d) Assets held for sale and discontinued operations exceptionManagement has applied IFRS 5 from 1 January 2004. Any assets heldfor sale or discontinued operations are recognised in accordance with IFRS 5from 1 January 2004. The Group did not have any assets that met theheld-for-sale or discontinued operations criteria during the period presented.3.4 Reconciliations between IFRS and GAAP3.4.1 Reconciliation of consolidated IFRS balance sheet at 1January 2004(all amounts in GBP thousands unless otherwise stated) Inter- ests Prev- Oper- Invest- in iously Share Busin- ating For- ments joint Impair- Invest- Re- report- Based ess lease eign in vent- ment ment Total stated ed pay- combin- Income incent exch- asso- ures of prop- adjust- under under ments ations taxes Leases ives ange ciates assets erty ments IFRS UK GAAP* IFRS 2 IFRS 3 IAS 12 IAS 17 SIC 15 IAS 21 IAS 28 IAS 31 IAS 36 IAS 40 ASSETSNon-currentassetsInvest-mentproperties 882,442 - - - 146 - - - 36,133 - - 36,279 918,721Property,plantand 6,847 - - - - - - - 2,117 - - 2,117 8,964equipmentIntangible - - - - - - - - - - - - -assetsInvestmentsinassociates 3,225 - - - - - - - - - - - 3,225Investmentsin jointventures 8,499 - - - - - - - (8,499) - - (8,499) -Investments 171 - - - - - - - - - - - 171Deferredincome taxassets - - - 14,458 - - - - - - - 14,458 14,458Trade andotherreceivables 3,695 - - - - - - - 71 - - 71 3,766 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 904,879 - - 14,458 146 - - - 29,822 - - 44,426 949,305CurrentassetsTrade andotherreceivables 7,976 - - - - 135 - - 749 - - 884 8,860Investments 3,963 - - - - - - - - - - - 3,963Cash andcashequivalents 56,693 - - - - - - - 537 - - 537 57,230 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 68,632 - - - - 135 - - 1,286 - - 1,421 70,053 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Total assets 973,511 - - 14,458 146 135 - - 31,108 - - 45,847 1,019,358 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ LIABILITIESNon-currentliabilitiesTrade andotherpayables 5,960 - - - - - - - - - - - 5,960Deferredincome taxliabilities 5,680 - - 102,117 - - - - - - - 102,117 107,797Borrowings,includingfinanceleases 523,615 - - - 146 - - - 27,038 - - 27,184 550,799Provisionsfor otherliabilitiesand charges 33 - - - - - - - - - - - 33 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 535,288 - - 102,117 146 - - - 27,038 - - 129,301 664,589 CurrentliabilitiesTrade andotherpayables 35,257 - - - - - - - 2,365 - - 2,365 37,622Currentincome taxliabilities 1,149 - - - - - - - - - - - 1,149Borrowings,includingfinanceleases 16,843 - - - - - - - 500 - - 500 17,343 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 53,249 - - - - - - - 2,865 - - 2,865 56,114 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Total 588,537 - - 102,117 146 - - - 29,903 - - 132,166 720,703liabilities _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Net assets 384,974 - - (87,659) - 135 - - 1,205 - - (86,319) 298,655 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ EQUITYCapital andreservesattributableto thecompany'sequityholdersShare 21,911 - - - - - - - - - - - 21,911capitalOther 330,739 5 - - - - 11,888 - - - (222,022) (210,129) 120,610reservesRetained 33,224 (5) - (87,659) - 135 (11,888) - 1,205 - 222,022 123,810 157,034earnings _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 385,874 - - (87,659) - 135 - - 1,205 - - (86,319) 299,555 Minority (900) - - - - - - - - - - - (900)interest _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Total equity 384,974 - - (87,659) - 135 - - 1,205 - - (86,319) 298,655 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Notes -refer tosection a. b. c. d. e. f. g. h. i. j.3.4.5* Reformatted to reflect IFRS reporting requirements3.4.2 Reconciliation of consolidated IFRS balance sheet at 31December 2004(all amounts in GBP thousands unless otherwise stated) Inter- ests Prev- Oper- Invest- in joint iously Share Busin- ating For- ments vent- Impair- Invest- Re- report- Based ess lease eign in ures ment ment Total stated ed pay- combin- Income incent exch- asso- of prop- adjust- under under ments ations taxes Leases ives ange ciates assets erty ments IFRS UK GAAP* IFRS 2 IFRS 3 IAS 12 IAS 17 SIC 15 IAS 21 IAS 28 IAS 31 IAS 36 IAS 40 ASSETSNon-currentassetsInvestmentproperties 981,560 - - - 146 - - - 40,833 - - 40,979 1,022,539Property,plant andequipment 5,040 - - - - - - - 5,670 - - 5,670 10,710Intangible - - 2,509 - - - - - 435 - - 2,944 2,944assetsInvestmentsinassociates 3,010 - - - - - - (143) - 143 - - 3,010Investmentsin jointventures 13,848 - - - - - - - (13,848) - - (13,848) -Investments 171 - - - - - - - - - - - 171Deferredincome taxassets - - - 13,813 - - - - - - - 13,813 13,813Trade andotherreceivables 3,096 - - - - - - - 67 - - 67 3,163 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 1,006,725 - 2,509 13,813 146 - - (143) 33,157 143 - 49,625 1,056,350CurrentassetsTrade andotherreceivables 10,480 - - - - 223 - - 558 - - 781 11,261Investments 10,492 - - - - - - - - - - - 10,492Cash andcashequivalents 56,680 - - - - - - - 691 - - 691 57,371 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 77,652 - - - - 223 - - 1,249 - - 1,472 79,124 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Total assets 1,084,377 - 2,509 13,813 146 223 - (143) 34,406 143 - 51,097 1,135,474 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ LIABILITIESNon-currentliabilitiesTrade andotherpayables 1,279 - - - - - - - - - - - 1,279Deferredincome taxliabilities 6,777 - - 121,174 - - - - - - - 121,174 127,951Borrowings,includingfinanceleases 592,439 - - - 146 - - - 27,923 - - 28,069 620,508Provisionsfor otherliabilitiesand charges 301 - - - - - - - - - - - 301 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 600,796 - - 121,174 146 - - - 27,923 - - 149,243 750,039 CurrentliabilitiesTrade andotherpayables 39,472 - - - - - - - 4,656 - - 4,656 44,128Currentincome taxliabilities 902 - - - - - - - - - - - 902Borrowings,includingfinanceleases 16,825 - - - - - - - 622 - - 622 17,447 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 57,199 - - - - - - - 5,278 - - 5,278 62,477 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Total 657,995 - - 121,174 146 - - - 33,201 - - 154,521 812,516liabilities _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Net assets 426,382 - 2,509 (107,361) - 223 - (143) 1,205 143 - (103,424) 322,958 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ EQUITYCapital andreservesattributableto thecompany'sequityholdersShare 21,374 - - - - - - - - - - - 21,374capitalOther 374,592 15 97 (951) - - 13,096 - - - (264,779) (252,522) 122,070reservesRetained 32,394 (15) 2,412 (106,410) - 223 (13,096) (143) 1,205 143 264,779 149,098 181,492earnings _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 428,360 - 2,509 (107,361) - 223 - (143) 1,205 143 - (103,424) 324,936 Minority (1,978) - - - - - - - - - - - (1,978)interest _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Total equity 426,382 - 2,509 (107,361) - 223 - (143) 1,205 143 - (103,424) 322,958 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Notes -refer tosection a. b. c. d. e. f. g. h. i. j.3.4.5* Reformatted to reflect IFRS reporting requirements3.4.3 Reconciliation of consolidated IFRS income statement for yearended 31 December 2004(all amounts in GBP thousands unless otherwise stated) Inter- ests Prev- Oper- Invest- in joint iously Share Busin- ating For- ments vent- Impair- Invest- Re- report- Based ess lease eign in ures ment ment Total stated ed pay- combin- Income incent exch- asso- of prop- adjust- under under ments ations taxes Leases ives ange ciates assets erty ments IFRS UK GAAP* IFRS 2 IFRS 3 IAS 12 IAS 17 SIC 15 IAS 21 IAS 28 IAS 31 IAS 36 IAS 40 Rental andsimilar income 71,787 - - - - 83 - - 2,619 - - 2,702 74,489Service chargeand similarincome 6,401 - - - - - - - 499 - - 499 6,900Service chargeexpense andsimilarcharges (13,293) - - - - - - - (479) - - (479) (13,772) _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Net rental 64,895 - - - - 83 - - 2,639 - - 2,722 67,617income Turnover fromnon-propertyactivities 5,524 - - - - - - - - - - - 5,524Cost of salesofnon-propertyactivities (4,076) - - - - - - - - - - - (4,076) _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Net incomenon-propertyactivities 1,448 - - - - - - - - - - - 1,448 Otheroperatinggains/(losses) 2,651 - - - - - - - - - - - 2,651- netAdministrativeexpenses (14,845) (10) - - - - - - (148) - - (158) (15,003)Net propertyexpenses (3,911) - - - 9 - - - - - - 9 (3,902) _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Operatingprofit beforenet gain oninvestmentproperties 50,238 (10) - - 9 83 - - 2,491 - - 2,573 52,811 Net gain fromfair valueadjustment oninvestmentproperty - - (1,394) - - 5 - - - - 38,377 36,988 36,988Profit on saleof investmentproperties 464 - - - - - - - - - - - 464 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Operating 50,702 (10) (1,394) - 9 88 - - 2,491 - 38,377 39,561 90,263profit Finance income 1,801 - - - - - - - - - - - 1,801Finance (36,041) - - - (9) - - - - - - (9) (36,050)expenseShare of(loss)/profitof associates (201) - - - - - - 143 - (143) - - (201)Share of(loss)/profitof JVs 2,491 - - - - - - - (2,491) - - (2,491) - _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Profit beforeincome tax 18,752 (10) (1,394) - - 88 - 143 - (143) 38,377 37,061 55,813 Taxation - (596) - - - - - - - - - - - (596)currentTaxation - (1,097) - 3,806 (18,751) - - - - - - - (14,945) (16,042)deferred _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Profit for 17,059 (10) 2,412 (18,751) - 88 - 143 - (143) 38,377 22,116 39,175year _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Attributableto:Equity holdersof the parent 18,137 (10) 2,412 (18,751) - 88 - 143 - (143) 38,377 22,116 40,253Minority (1,078) - - - - - - - - - - - (1,078)interest _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 17,059 (10) 2,412 (18,751) - 88 - 143 - (143) 38,377 22,116 39,175 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Notes - referto section3.4.5 a. b. c. d. e. f. g. h. i. j.* Reformatted to reflect IFRS reporting requirements3.4.4. Notes to the consolidated IFRS statement of cash flows for year ended31 December 2004The transition to IFRS will not affect the cash flows of thebusiness. The presentation of the cash flow statement for the Group does notdiffer significantly from that under UK GAAP, except for the inclusion ofshort term deposits within the definition of cash and cash equivalents.Previously these were shown separately from cash as liquid resources.From 1 January 2005, due to the classification of investments as'available-for-sale' financial assets, the movement in investments will now beshown in the cash flow statement under cash flows from investing activitiesrather than in cash generated from operations.There are no other material differences between the cash flowstatement presented under IFRS and the cash flow statement presented under UKGAAP.3.4.5. Notes to IFRS reconciliationsa. IFRS 2 - Share-based paymentsShare option plans are fair valued at the date of grant and costs taken to theincome statement over the vesting period. IFRS 1 transitional exemptionapplied. A corresponding release from equity means that there is no effect onthe balance sheet or NAV.b. IFRS 3 - Business combinationsIn the light of IFRS 3, a portfolio acquired during 2004 has been reclassifiedas a business combination rather than as a purchase of assets.c. IAS 12 - Income taxesProvision is now made for the deferred tax liability associated with therevaluation of investment properties, this was not required under UK GAAP.d. IAS 17 - LeasesInvestment property head leases are capitalised and shown as a correspondinglease liability.e. SIC 15 - Operating lease incentivesLease incentives are now amortised over the period of the lease, rather thanto the first rent review.f. IAS 21 - The effects of changes in foreign exchange ratesUnder UK GAAP revaluation movements on overseas assets were booked at theclosing rate and retranslated at each reporting period. Since the revaluationmovements are now posted to the income statement, they are translated at theaverage rate. On transition to IFRS, all previous exchange gains held withinthe revaluation reserve have been transferred back to the cumulativetranslation reserve.g. IAS 28 - Investments in associatesCessation of goodwill amortisation. Negative goodwill eliminated.h. IAS 31 - Interests in joint venturesProportional consolidation for all joint ventures. The net investment line isnow eliminated and joint ventures are shown gross on a line-by-line basis.Cessation of goodwill amortisation. Negative goodwill eliminated.i. IAS 36 - Impairment of assetsCertain assets are reviewed for impairment. An impairment loss is recognisedfor the amount by which the assets' carrying amount exceeds its recoverableamount.j. IAS 40 - Investment propertyInvestment property revaluations and tax thereon taken through the incomestatement.4 - Selected notes - extracts4.1 Investment property(all amounts in GBP thousands unless otherwise stated) Year ended 31 December 2004 At beginning of year 918,721Net exchange differences 6,179Additions 69,007Disposal (8,351)Other (5)Net gain from fair value adjustments on investment property 36,988 ________At end of year 1,022,539 ________ The investment properties were revalued at 31 December 2004 totheir fair value, valuations were based on current prices in an active marketfor all properties. The property valuations were carried out by Allsop & Co(for the UK and Swedish properties) and DTZ Debenham Tie Leung (forContinental European properties), who are independent, professionallyqualified valuers.4.2 Deferred tax(all amounts in GBP thousands unless otherwise stated)Deferred tax assets and liabilities are offset when there is alegally enforceable right to offset current tax assets against current taxliabilities and when the deferred taxes relate to the same fiscal authority.The offset amounts are as follows: Year ended 31 December 2004 Deferred tax assets: (13,813) ________ (13,813) Deferred tax liabilities: 127,951 ________ 127,951 ________ 114,138 ________ The gross movement on the deferred income tax account is asfollows: Year ended 31 December 2004 Beginning of the year 93,339Income statement charge 16,042Acquisition of subsidiaries 3,806Exchange differences 951 ________End of year 114,138 ________ The movement in deferred tax assets and liabilities during theyear, without taking into consideration the offsetting of balances within thesame tax jurisdiction, is as follows:Deferred tax assets: Tax losses Other Total At 1 January 2004 (8,131) (6,327) (14,458)Charged /(credited) to the income statement 428 217 645 ________ ________ ________At 31 December 2004 (7,703) (6,110) (13,813) ________ ________ ________ Deferred tax liabilities: Tax on fair value Deduction for UK adjustments to capital allowances investment properties Other Total At 1 January 2004 14,631 93,166 - 107,797Charged/(credited) to the income 928 14,447 22 15,397statementAcquisition of subsidiary - 3,806 - 3,806Exchange differences - 951 - 951 ________ ________ ________ ________At 31 December 2004 15,559 112,370 22 127,951 ________ ________ ________ ________ ________ 114,138 ________Deferred income tax assets are recognised for tax losscarry-forwards to the extent that the realisation of the related tax benefitthrough the future taxable profits is probable. At 31 December 2004 the Groupdid not recognise deferred income tax assets of ‚£1,072 in respect of lossesamounting to ‚£3,478 that can be carried forward against future taxable incomeor gains in those entities.4.3 Income tax expense(all amounts in GBP thousands unless otherwise stated) Year ended 31 December 2004 Current tax (596)Deferred tax (16,042) ________ (16,638) ________ The tax on the Group's profit before tax differs from thetheoretical amount that would arise using the weighted average tax rateapplicable to profits of the consolidated companies as follows: Year ended 31 December 2004 Profit before tax 55,813 _______Tax calculated at domestic tax rates applicable to profits in the respective 17,375countries Expenses not deductible for tax purposes 1,950Income not subject to tax (74)Utilisation of previously unrecognised tax losses (2,054)Losses used through consortium relief by minorities 234Adjustment in respect of prior periods (793) _______Tax charge 16,638 _________ The weighted average applicable tax rate was 31.13%5. Significant accounting policies5.1 General informationCLS Holdings PLC ('the Company') and its subsidiaries (together'CLS Holdings' or 'the Group') are an investment property group which isprincipally involved in the investment, development and management ofcommercial properties. The Group's principal operations are carried out in theUnited Kingdom, Sweden and Continental Europe.The Company is registered in the UK, registration number 2714781,of registered address: One Citadel Place, Tinworth Street, London SE11 5EF.The Company has its primary listing on the London Stock Exchange.5.1.1 Basis of preparationThis transition report (the 'report') restates the 2004 financialresults and provides the opening balance sheet as at 1 January 2004 underInternational Financial Reporting Standards ('IFRS'). This report is preparedin accordance with the transitional provisions set out in IFRS 1 - 'First-timeAdoption of IFRS'.The Group's first IFRS financial statements will be for the yearended 31 December 2005.The policies set out below have been consistently applied to allthe years presented except for those relating to the classification andmeasurement of financial instruments. In accordance with the transitionalprovisions set out in IFRS 1, and other relevant standards, the Group hasapplied IFRS expected to be in force as at 31 December 2005 in its financialreporting with effect from 1 January 2004, however the Group has made use ofthe exemption available under IFRS 1 to only apply IAS 32 and IAS 39 from 1January 2005. The policies applied to financial instruments for 2004 and 2005are disclosed separately below.This transition report has been prepared in accordance with thoseIFRS standards and IFRIC interpretations issued and effective or issued andearly adopted as at the time of preparing this report. The IFRS standards andIFRIC interpretations that will be applicable at 31 December 2005, includingthose that will be applicable on an optional basis, are not known withcertainty at the time of preparing this report, as further standards andinterpretations may be issued that could be applicable for financial yearsbeginning on or after 1 January 2005 or that are applicable to lateraccounting periods but with the option for companies to adopt for earlierperiods.The Group's first annual financial statements prepared under IFRSmay, therefore, be prepared in accordance with different accounting policiesto those used in the preparation of the financial information in thisdocument. In addition, IFRS is currently being applied in the European Unionand other countries for the first time and contains many new and revisedstandards. Therefore practice on which to draw in applying the standards maydevelop. At this preliminary stage, before the Group's first annual financialstatements prepared under IFRS are completed, it should be noted that thefinancial information in this document could be subject to change.CLS Holdings' consolidated financial statements were prepared inaccordance with UK Generally Accepted Accounting Principles ('GAAP') until 31December 2004. GAAP differs in some areas from IFRS. In preparing thistransition report, management has amended certain accounting, valuation andconsolidation methods applied in the GAAP financial statements to comply withIFRS.Reconciliations and descriptions of the effect of the transitionfrom GAAP to IFRS on the Group's equity and its net income and cash flows areprovided in section 3.This transition report has been prepared in accordance withInternational Financial Reporting Standards ('IFRS') for the first time. Theconsolidated financial statements have been prepared under the historical costconvention, as modified by the revaluation of investment property, which iscarried at fair value.The preparation of financial statements in conformity with IFRSrequires the use of certain critical accounting estimates. It also requiresmanagement to exercise judgement in the process of applying the Group'saccounting policies. Although these estimates are based on management's bestknowledge of the amount, events or actions, actual results ultimately maydiffer from those estimates.The financial information contained in this document does notconstitute statutory accounts as defined in section 240 of the Companies Act1985. The auditors have issued an unqualified opinion on the Group's UK GAAPfinancial statements for the year ended 31 December 2004.5.1.2 Early adoption of standardsWhen preparing this transition report, and in accordance with IFRS1, the Group has adopted the following standards which are effective from 1January 2005:IAS 1 (revised 2004) Presentation of Financial StatementsIAS 2 (revised 2003) InventoriesIAS 8 (revised 2003) Accounting Policies, Changes in AccountingEstimates and ErrorsIAS 10 (revised 2004) Events after Balance Sheet DateIAS 16 (revised 2004) Property, Plant and EquipmentIAS 17 (revised 2004) LeasesIAS 21 (revised 2003) The Effects of Changes in Foreign ExchangeRatesIAS 24 (revised 2003) Related Party DisclosuresIAS 27 (revised 2004) Consolidated and Separate FinancialStatementsIAS 28 (revised 2003) Investments in AssociatesIAS 33 (revised 2004) Earnings per ShareIAS 36 (revised 2004) Impairment of AssetsIAS 38 (revised 2004) Intangible AssetsIAS 40 (revised 2003) Investment PropertyIFRS 2 (issued 2004) Share-based PaymentsIFRS 3 (issued 2004) Business CombinationsIFRS 5 (issued 2004) Non-current Assets Held for Sale andDiscontinued Operations5.2 Summary of significant accounting policiesThe principal accounting policies applied in the preparation ofthese consolidated financial statements are set out below. These policies havebeen consistently applied to all the years presented, unless otherwise stated.5.2.1 Consolidation(a) SubsidiariesSubsidiaries are all entities (including special purpose entities)over which the Group has the power to govern the financial and operatingpolicies generally accompanying a shareholding of more than one half of thevoting rights. The existence and effect of potential voting rights that arecurrently exercisable or convertible are considered when assessing whether theGroup controls another entity. Subsidiaries are fully consolidated from thedate on which control is transferred to the Group. They are de-consolidatedfrom the date control ceases.The purchase method of accounting is used to account for theacquisition of subsidiaries by the Group. The cost of an acquisition ismeasured as the fair value of the assets given, equity instruments issued andliabilities incurred or assumed at the date of exchange, plus costs directlyattributable to the acquisition. Identifiable assets acquired and liabilitiesand contingent liabilities assumed in a business combination are measuredinitially at their fair values at the date, irrespective of the extent of anyminority interest. The excess of the cost of the acquisition over the fairvalue of the Group's share of the identifiable net assets acquired is recordedas goodwill. If the cost of the acquisition is less than the fair value of thenet assets of the subsidiary acquired, the difference is recognised directlyin the income statement.Inter-company transactions, balances and unrealised gains ontransactions between group companies are eliminated. Unrealised losses arealso eliminated unless the transaction provides evidence of an impairment ofthe asset transferred.(b) Joint venturesThe Group's interests in jointly controlled entities are accountedfor by proportionate consolidation. The Group combines its share of the jointventures' individual income and expenses, assets and liabilities and cashflows on a line-by-line basis with similar items in the Group financialstatements.The Group recognises the portion of gains or losses on the sale ofassets by the Group to the joint venture that is attributable to the otherventurers. The Group does not recognise its share of the profits or lossesfrom the joint venture that result from the Group's purchase of assets fromthe joint venture until it resells the assets to an independent party.However, a loss on the transaction is recognised immediately if the lossprovides evidence of a reduction in the net realisable value of the currentassets, or an impairment loss.(c) AssociatesAssociates are all entities over which the Group has significantinfluence but not control, generally accompanying a shareholding of between20% and 50% of the voting rights. Investments in associates are accounted forby the equity method of accounting and are initially recognised at cost. TheGroup's investment in associates includes goodwill (net of any accumulatedimpairment loss) identified on acquisition.The Group's share of its associates' post-acquisition profits orlosses is recognised in the income statement, and its share ofpost-acquisition movements in reserves is recognised in reserves. Thecumulative post-acquisition movements are adjusted against the carrying amountof the investment. When the Group's share of losses in an associate equals orexceeds its interest in the associate, including any other unsecuredreceivables, the Group does not recognise further losses, unless it hasincurred obligations or made payments on behalf of the associate.Unrealised gains on transactions between the Group and itsassociates are eliminated to the extent of the Group's interest in theassociates. Unrealised losses are also eliminated unless the transactionprovides evidence of an impairment of the asset transferred.5.2.2 Segment reportingA geographical segment is engaged in providing products or serviceswithin a particular economic environment that are subject to risks and returnsthat are different from those of segments operating in other economicenvironments.A business segment is a group of assets and operations engaged inproviding products or services that are subject to risks and returns that aredifferent from those of other business segments.5.2.3 Foreign currency translation(a) Functional and presentation currencyItems included in the financial statements of each of the Group'sentities are measured using the currency of the primary economic environmentin which the entity operates ('the functional currency'). The consolidatedfinancial statements are presented in pounds sterling, which is the Company'sfunctional and presentation currency.(b) Transactions and balancesForeign currency transactions are translated into the functionalcurrency using the exchange rates prevailing at the dates of the transactions.Foreign exchange gains and losses resulting from the settlement of suchtransactions and from the translation at year-end exchange rates of monetaryassets and liabilities denominated in foreign currencies are recognised in theincome statement, except when deferred in equity as qualifying cash flowhedges and qualifying net investment hedges.Translation differences on non-monetary items, such as equitiesheld at fair value through profit and loss, are reported as part of the fairvalue gain or loss. Translation differences on non-monetary items, such asequities classified as available-for-sale financial assets, will be includedin the fair value reserve in equity from 1 January 2005.(c) Group companiesThe results and financial position of all the Group entities (noneof which has the currency of a hyperinflationary economy) that have afunctional currency different from the presentation currency are translatedinto the presentation currency as follows:(i) assets and liabilities for each balance sheet presented aretranslated at the closing rate at the date of the balance sheet;(ii) income and expenses for each income statement are translatedat the average exchange rates (unless this average is not a reasonableapproximation of the cumulative effect of the rates prevailing on thetransaction dates, in which case income and expenses are translated at thedates of the transactions); and(iii) all resulting exchange differences are recognised as aseparate component of equity (cumulative translation adjustment).On consolidation, exchange differences arising from the translationof the net investment in foreign entities, and of borrowings and othercurrency instruments designated as hedges of such investments, are taken toshareholders' equity. When a foreign operation is sold, such exchangedifferences are recognised in the income statement as part of the gain or losson sale.Goodwill and fair value adjustments arising on the acquisition of aforeign entity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate.5.2.4 Property, plant and equipmentProperty, plant and equipment is stated at historical cost lesssubsequent depreciation and impairment. Cost includes expenditure that isdirectly attributable to the acquisition of the items.Subsequent costs are included in the assets' carrying amount orrecognised as a separate asset, as appropriate, only when it is probable thatthe future economic benefits associated with the item will flow to the Groupand the cost of the item can be measured reliably. All other repairs andmaintenance are charged to the income statement during the financial period inwhich they are incurred.Land is not depreciated. Depreciation on property, plant andequipment is calculated using the straight-line method to allocate their costto their residual values over their estimated useful lives, as follows:Land: NilProperty, plant and equipment: 4 - 15 yearsThe assets' residual values and useful lives are reviewed, andadjusted if appropriate, at each balance sheet date.5.2.5 Intangible assets(a) GoodwillGoodwill represents the excess of the cost of an acquisition overthe fair value of the Group's share of net identifiable assets includingintangible assets of the acquired subsidiary/associate at the date ofacquisition. Goodwill on acquisitions of subsidiaries and joint ventures isincluded in intangible assets. Goodwill on acquisitions of associates isincluded in investments in associates. Goodwill is tested annually forimpairment and carried at cost less accumulated impairment losses. Gains andlosses on the disposal of an entity include the carrying amount of goodwillrelating to the entity sold.Goodwill is allocated to cash-generating units for the purpose ofimpairment testing. Each of those cash-generating units represents the Group'sinvestment in each country of operation by each primary reporting segment.5.2.6 Impairment of assetsAssets that have an indefinite useful life are not subject toamortisation and are tested annually for impairment. Assets that are subjectto amortisation are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. Animpairment loss is recognised for the amount by which the asset's carryingamount exceeds its recoverable amount. The recoverable amount is the higher ofan asset's fair value less costs to sell and value in use. For the purposes ofassessing impairment, assets are grouped at the lowest levels for which thereare separately identifiable cash flows (cash-generating units).5.2.7 Investment propertyProperty that is held for long-term rental yields or for capitalappreciation or both, and that is not occupied by the companies in theconsolidated Group, is classified as investment property.Investment property comprises freehold land, freehold buildings,land held under operating leases and buildings held under finance leases.Land held under operating leases is classified and accounted for asinvestment property when the rest of the definition of investment property ismet. The operating lease is accounted for as if it were a finance lease.Investment property is measured initially at its cost, includingrelated transaction costs.After initial recognition, investment property is carried at fairvalue. Fair value is based on active market prices, adjusted, if necessary,for any difference in the nature, location or condition of the specifiedasset. If this information is not available, the Group uses alternatevaluation methods such as recent prices on less active markets or discountedcash flow projections. These valuations are performed in accordance with theguidance issued by the International Valuation Standards Committee. Thesevaluations are reviewed annually by external valuers. Investment property thatis being redeveloped for continuing use as investment property, or for whichthe market has become less active, continues to be measured at fair value.The fair value of investment property reflects, among other things,rental income from current leases and assumptions about rental income fromfuture leases in the light of current market conditions.The fair value also reflects, on a similar basis, any cash outflowsthat could be expected in respect of the property. Some of those outflows arerecognised as a liability, including finance lease liabilities in respect ofland classified as investment property; others, including contingent rentpayments, are not recognised in the financial statements.Subsequent expenditure is charged to the asset's carrying amountonly when it is probable that future economic benefit associated with the itemwill flow to the Group and the cost of the item can be measured reliably. Allother repairs and maintenance costs are charged to the income statement duringthe financial period in which they are incurred.Changes in fair values are recorded in the income statement.If an investment property becomes owner-occupied, it isreclassified as property, plant and equipment, and its fair value at the dateof reclassification becomes its cost for accounting purposes. Property that isbeing constructed or developed for future use as investment property isclassified as property, plant and equipment and stated at cost untilconstruction or development is complete, at which time it is reclassified andsubsequently accounted for as investment property.If an item of property, plant and equipment becomes an investmentproperty because its use has changed, any differences resulting between thecarrying amount and the fair value of this item at the date of transfer isrecognised in equity as a revaluation of property, plant and equipment underIAS 16. However, if a fair value gain reverses a previous impairment loss, thegain is recognised in the income statement.Hotel buildings held by the Group are not owner occupied. The Grouprents the buildings to third-party operators who run the hotels.5.2.8 InventoriesProperties that are being developed for future sales arereclassified as inventories at their deemed cost, which is the carrying amountat the date of reclassification. They are subsequently carried at the lower ofcost and net realisable value. Net realisable value is the estimated sellingprice in the ordinary course of business less cost to complete redevelopmentand selling expenses.5.2.9 Cash and cash equivalentsCash and cash equivalents includes cash in hand, deposits held atcall with banks, other short-term highly liquid investments with originalmaturities of three months or less, and bank overdrafts.5.2.10 Deferred income taxDeferred income tax is provided using the balance sheet liabilitymethod. Provision is made for temporary differences between the carrying valueof assets and liabilities in the consolidated financial statements and thevalues used for tax purposes. Temporary differences are not provided for whenthey arise from initial recognition of assets and liabilities that do notaffect accounting or taxable profit.The amount of deferred tax provided is based on the expected mannerof realisation or settlement of the carrying amount of assets and liabilitiesand is calculated using rates enacted or substantially enacted at the balancesheet date in the tax jurisdiction in which the temporary differences arise.Deferred income tax assets are recognised only to the extent thatit is probable that future taxable profits will be available against which theassets can be used. The deferred income tax assets and liabilities are onlyoffset if there is a legally enforceable right of set off.When distributions are controlled by the Group, and it is probablethe temporary difference will not reverse in the foreseeable future, deferredtax which would arise on the distribution of profits realised in subsidiaries,associates and joint ventures is provided in the same period as the liabilityto pay the distribution is recognised in the financial statements.5.2.11 Employee benefits(a) Pension obligationsThe Group operates various defined contribution plans. The Grouppays contributions to publicly or privately administered pension insuranceplans on a mandatory, contractual or voluntary basis. The Group has no furtherpayment obligations once the contributions have been paid. The contributionsare recognised as employee benefit expense when they are due. Prepaidcontributions are recognised as an asset to the extent that a cash refund or areduction in future payments is available.In Sweden, the total pension benefits are a combination, with someparts being defined contribution plans and others defined benefit plans.Defined benefit plans relate to the Swedish ITP pension plan which isadministered by Alecta.The Swedish Financial Accounting Standards Council'sinterpretations committee defined this plan as a multi-employer definedbenefit plan. The Group did not have access to information from Alecta thatwould have made it possible for this plan to be reported as a benefit plan.Therefore, the plan has been reported for the year ended 31 December 2004 as adefined contribution plan. This treatment is consistent with other Swedishcompanies investing in similar pension plans.(b) Share-based compensationThe Group operated an equity-settled, share-based compensationplan. The fair value of the employee services received in exchange for thegrant of the options is recognised as an expense. The total amount to beexpensed over the vesting period is determined by reference to the fair valueof the options granted, excluding the impact of any non-market vestingconditions (for example, profitability and sales growth targets). Non-marketvesting conditions are included in assumptions about the number of optionsthat are expected to become exercisable. At each balance sheet date, theentity revises its estimates of the number of options that are expected tobecome exercisable. It recognises the impact of original estimates, if any, inthe income statement, and a corresponding adjustment to equity over theremaining vesting period.The proceeds received net of any directly attributable transactioncosts, are credited to share capital (nominal value) and share premium whenthe options are exercised.5.2.12 ProvisionsProvisions for legal claims are recognised when the Group has apresent legal or constructive obligation as a result of past events, it ismore likely than not that an outflow of resources will be required to settlethe obligation, and the amount has been reliably estimated.Where the Group, as lessee, is contractually required to restore aleased property to an agreed condition, prior to release by a lessor,provision is made for such costs as they are identified.5.2.13 Revenue recognitionRevenue is measured at the fair value of the consideration receivedor receivable and is stated net of sales taxes and value added taxes. Revenueincludes 'Rental and similar income', 'Service charge and similar income','Turnover from non-property activities'. Revenue is recognised as follows:(a) Rental and similar incomeRental income from operating lease income is recognised on astraight-line basis over the lease term. When the Group provides incentives toits customers, the cost of incentives are recognised over the lease term, on astraight-line basis, as a reduction of rental income.(b) Service charge and similar incomeService and management charges income is recognised on a grossbasis in the accounting period in which the services are rendered. Where theGroup is acting as an agent, the commission rather than gross income isrecorded as revenue.(c) Income from cable operationsIncome comprises amounts invoiced, excluding trade discounts andintra-Group trading.Other income is accounted for as follows:(d) Income from property tradingProfits or losses arising from the sale of trading and investmentproperties are included in the income statement of the Group where an exchangeof contracts has taken place under which any outstanding conditions areentirely within the control of the Group. Profits or losses arising from thesale of trading and investment properties are calculated by reference to theircarrying value and are included in operating profit.(e) Income from investmentsDividend income from investments is recognised when theshareholders' rights to receive payment have been established.5.2.14 Leases(a) A Group company is the lessee(i) Operating lease - leases in which substantially all risks andrewards of ownership are retained by another party, the lessor, are classifiedas operating leases. Payments, including prepayments, made under operatingleases (net of any incentives received from the lessor) are charged to theincome statement on a straight-line basis over the period of the lease.(ii) Finance lease - leases of assets where the Group hassubstantially all the risks and rewards of ownership are classified as financeleases. Finance leases are capitalised at the lease commencement date at thelower of the fair value of the leased property and the present value of theminimum lease payments. Each lease payment is allocated between the liabilityand finance charges so as to achieve a constant rate on the finance balanceoutstanding.The corresponding rental obligations, net of finance charges, areincluded in current and non-current borrowings. The interest element of thefinance cost is charged to the income statement over the lease period so as toproduce a constant periodic rate of interest on the remaining balance of theliability for each period. The investment properties acquired under financeleases are carried at the fair value.(b) A Group company is the lessor(i) Operating lease - properties leased out under operating leasesare included in investment property in the balance sheet.(ii) Finance lease - when assets are leased out under a financelease, the present value of the lease payments is recognised as a receivable.The difference between the gross receivable and the present value of thereceivable accrues as finance income.Lease income is recognised over the term of the lease using the netinvestment method before tax, which reflects a constant periodic rate ofreturn5.2.15 Tender offer buy-backsIn lieu of paying dividends, a distribution by way of a tenderoffer buy-back is made twice yearly. Shares purchased by way of the tenderoffer are currently retained as treasury shares. Up to 10% of the issued sharecapital can be held as treasury shares.Where the Company purchases its own shares out of free reserves, asum equal to the nominal value of the shares so purchased shall be transferredto the capital redemption reserve account and details of the transferdisclosed in the balance sheet.The total cost of the tender offer buy-back is charged to retainedearnings.5.2.16 Financial instruments (UK GAAP)From 1 January 2004 to 31 December 2004Interest rate capsThe premium paid for interest rate caps used to hedge borrowings isheld within debtors on the balance sheet and amortised over the period of thecap.Shares, warrants & optionsShares, warrants and options are held on the balance sheet at thelower of cost and net realisable value. Net realisable value is determined bythe quoted market price in respect of listed instruments and Directors'valuation regarding non-listed instruments. Profits are only recognised onshares once they are sold and on options when either the maturity date isreached or the exposure on the option is closed out. Income received onoptions which have not yet reached maturity is held as deferred income.Forward foreign exchange contractsWhen forward foreign exchange contracts are entered into to hedgethe Group's net investment in overseas operations, any gains and losses onthose contracts are taken directly to reserves. Any potential losses onforward contracts at the balance sheet date are similarly provided for,although potential profits are deferred until they crystallise.Any premium paid is taken to the profit and loss account in theyear.5.3 Summary of significant additional accounting policies to beadopted from 1 January 20055.3.1 Financial instruments and hedging activitiesDerivativesThe Group uses derivatives to help manage its interest rate andforeign exchange rate risk. In accordance with its treasury policy, the Groupdoes not hold or issue derivatives for trading purposes.Derivatives are recognised initially at cost. Subsequent to initialrecognition, derivatives are stated at fair value. The method of recognisingthe resulting gain or loss depends on whether the derivative is designated asa hedging instrument, and if so, the nature of the item being hedged. TheGroup designates certain derivatives as either: (1) hedges of the fair valueof recognised assets or liabilities or a firm commitment (fair value hedge);(2) hedges of highly probable forecast transactions (cash flow hedges); or (3)hedges of net investments in foreign operations.Hedge accountingWhere a financial instrument is designated as a hedge, the Groupformally documents the relationship between the hedging instrument and thehedged item as well as its risk management objectives and its strategy forundertaking the various hedging transactions. The Group also documents itsassessment, both at hedge inception and on an ongoing basis, of whether thederivatives that are used in the hedging transactions are highly effective inoffsetting the changes in fair values or cash flows of the hedged items.(a) Fair value hedge accountingChanges in fair value of derivatives that qualify and aredesignated as fair value hedges are recorded in the income statement, togetherwith changes in the fair value of the hedged asset or liability that areattributable to the hedged risk.(b) Cash flow hedge accountingFor qualifying cash flow hedges, the fair value gain or lossassociated with the effective portion of the cash flow hedge is recognisedinitially directly in shareholders' equity, and recycled to the incomestatement in the periods when the hedged item will affect profit and loss. Anyineffective portion of the gain or loss on the hedging instrument isrecognised in the income statement immediately.When a hedging instrument expires or is sold, or when a hedge nolonger meets the criteria for hedge accounting, any cumulative gain or lossexisting in equity at that time remains in equity and is recognised when theforecasted transaction is ultimately recognised in the income statement. Whena forecasted transaction is no longer expected to occur, the cumulative gainor loss that was recognised in equity is immediately transferred to the incomestatement.(c) Hedges of net investmentsHedges of net investments in foreign operations are accounted forsimilarly to cash flow hedges. Any gain or loss on the hedging instrumentrelating to the effective portion of the hedge is recognised directly inequity; the gain or loss relating to the ineffective portion of the hedge isrecognised immediately in the income statement.Gains and losses accumulated in equity are recognised in the incomestatement when the foreign operation is disposed of.(d) Derivatives that do not qualify for hedge accountingCertain derivative instruments do not qualify for hedge accounting.Changes in the fair value of any derivative instruments that do not qualifyfor hedge accounting are recognised immediately in the income statement.5.3.2. InvestmentsThe Group classifies its investments in the following categories:financial assets at fair value through profit or loss, loans and receivables,held-to-maturity investments, and available-for-sale financial assets. Theclassification depends on the purpose for which the investments were acquired.Management determines the classification of its investments at initialrecognition and reviews this designation at each reporting date.(a) Financial assets at fair value through profit or lossThis category has two sub-categories: financial assets held fortrading, and those designated at fair value through profit or loss atinception. A financial asset is classified in this category if acquiredprincipally for the purpose of selling in the short term or if so designatedby management. Derivatives are also classified as held for trading unless theyare designated as hedges. Assets in this category are classified as currentassets if they are either held for trading or are expected to be realisedwithin 12 months of the balance sheet date.(b) Loans and receivablesLoans and receivables are non-derivative financial assets withfixed or determinable payments that are not quoted in an active market. Theyarise when the Group provides money, goods or services directly to a debtorwith no intention of trading the receivable. They are included in currentassets, except for maturities greater than 12 months after the balance sheetdate. These are classified as non-current assets. Loans and receivables areincluded in trade and other receivables in the balance sheet.(c) Held-to-maturity investmentsHeld-to-maturity investments are non-derivative financial assetswith fixed or determinable payments and fixed maturities that the Group'smanagement has a positive intention and ability to hold to maturity. Duringthe year, the Group did not hold any investments in this category.(d) Available-for-sale financial assetsAvailable-for-sale financial assets are non-derivatives that areeither designated in this category or not classified in any of the othercategories. They are included in non-current assets unless management intendsto dispose of the investment within 12 months of the balance sheet date.Purchases and sales of investments are recognised on trade-date -the date on which the Group commits to purchase or sell the asset. Investmentsare initially recognised at fair value plus transaction costs for allfinancial assets not carried at fair value through profit or loss. Investmentsare derecognised when the rights to receive cash flows from the investmentshave expired or have been transferred and the Group has transferredsubstantially all risks and rewards of ownership. Available-for-sale financialassets and financial assets at fair value through profit and loss aresubsequently carried at fair value.Loans and receivables and held-to-maturity investments are carriedat amortised cost using the effective interest method. Realised and unrealisedgains and losses arising from changes in the fair value of the 'financialassets at fair value through profit or loss' category are included in theincome statement in the period in which they arise. Unrealised gains andlosses arising from changes in the fair value of non-monetary securitiesclassified as available-for-sale are recognised in equity. When securitiesclassified as available-for-sale are sold or impaired, the accumulated fairvalue adjustments are included in the income statement as gains or losses frominvestment securities.The fair values of quoted investments are based on current bidprices. If the market for a financial asset is not active (and for unlistedsecurities), the Group establishes fair value by using valuation techniques.These include the use of recent arm's length transactions, reference to otherinstruments that are substantially the same, discounted cash flow analysis,and option pricing models refined to reflect the issuer's specificcircumstances.The Group assesses at each balance sheet date whether there isobjective evidence that a financial asset or a group of financial assets isimpaired. In the case of equity securities classified as available-for-sale, asignificant or prolonged decline in the fair value of the security below itscost is considered in determining whether the securities are impaired. If anysuch evidence exists for available-for-sale financial assets, the cumulativeloss - measured as the difference between the acquisition cost and the currentfair value, less any impairment loss on that financial asset previouslyrecognised in profit or loss - is removed from equity and recognised in theincome statement. Impairment losses recognised in the income statement onequity instruments are not reversed through the income statement.5.3.3 Trade receivablesTrade receivables are recognised initially at fair value andsubsequently measured at amortised cost using the effective interest method,less provision for impairment. A provision for impairment in trade receivablesis established when there is objective evidence that the Group will not beable to collect all amounts due according to the original terms ofreceivables. The amount of the provision is the difference between the asset'scarrying amount and the present value of estimated future cash flows,discounted at the effective interest rate. The amount of the provision isrecognised in the income statement.5.3.4 BorrowingsBorrowings are initially recognised at cost, being the fair valueof consideration received, net of transaction costs incurred. Borrowings aresubsequently stated at amortised cost; any difference between the proceeds(net of transaction costs) and the redemption value is recognised in theincome statement over the period of the borrowings using the effectiveinterest method.Borrowings are classified as current liabilities unless the Grouphas an unconditional right to defer settlement of the liability for at least12 months after the balance sheet date.5.3.5 Share capitalOrdinary shares are classified as equity.Incremental costs directly attributable to the issue of new sharesor options are shown in equity as a deduction, net of tax, from the proceeds.Incremental costs directly attributable to the issue of new shares or options,or for the acquisition of a business, are included in the cost of acquisitionas part of the purchase consideration.Where any Group company purchases the Company's equity sharecapital (treasury shares), the consideration paid, including any directlyattributable incremental costs (net of income taxes) is deducted from equityattributable to the Company's equity holders until the shares are cancelled,reissued or disposed of. Where such shares are subsequently sold or reissued,any consideration received, net of any directly attributable incrementaltransaction costs and the related income tax effects, is included in equityattributable to the Company's equity holders.ENDCLS HOLDINGS PLC

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CLS Holdings