23rd Jun 2005 09:15
Land Securities Group Plc23 June 2005 23 June 2005 LAND SECURITIES GROUP PLC ("Land Securities") Land Securities Group PLC ("Land Securities" / "the Group")Adoption of International Financial Reporting Standards (IFRS)2004/05 Income statement and balance sheet Introduction Land Securities has today released information showing the effect of adoptingIFRS on its income statement and balance sheet for the year ended 31 March 2005in preparation for the adoption of IFRS. Overview • The introduction of IFRS affects accounting only. There is no impacton the underlying business or cash flows. • The main IFRS adjustments impacting the Group's financial statementsare: • to recognise revaluation surpluses and deficits in the incomestatement (IAS 40) • to provide in full for deferred tax on revaluations and to chargemovements on this provision through the income statement (IAS 12) • to restate the financial effects of the November 2004 debtrefinancing (IAS 39) • to show the Group's share of the profit after tax and net assets ofall its joint ventures and joint arrangements (JANEs) as single lines in theincome statement and balance sheet respectively (IAS 31) • to recognise the final dividend only after its approval at theGroup's Annual General Meeting. • Financial effect 2004/05 UK GAAP£m (as reported) IFRS ------------ ------------Gross property income 1,865.7 1,617.0(Loss)/profit before tax (155.8) 1,331.4(Loss)/profit after tax (35.8) 1,121.2Net asset value 6,636.6 6,082.3 ------------ ------------ Notes "UK GAAP" means generally accepted accounting principles in the United Kingdom.References to "IFRS" throughout this document refer to the application ofInternational Financial Reporting Standards, including International AccountingStandards ("IAS") and interpretations of those standards issued by theInternational Accounting Standards Board ("IASB") and its Committees. For further information, please contact: Land Securities Andrew Macfarlane/David Holt/Emma Denne Tel: 020 7413 9000 Adoption of International Financial Reporting Standards (IFRS) Pro-forma 2004/05 Income Statement and Balance Sheet CONTENTS 1.0 Introduction2.0 Transition to International Financial Reporting Standards2.1 Main changes in accounting under IFRS 2.1.1 IAS 40 - Investment property 2.1.2 IAS 12 - Income taxes 2.1.3 IAS 39 - Financial instruments: recognition and measurement (a) Impact on debt refinancing (b) Interest rate hedges 2.1.4 IAS 31 - Interests in joint ventures 2.1.5 IAS 10 - Events after the balance sheet date2.2 Other areas of changes 2.2.1 IAS 17 - Leases 2.2.2 SIC-15 Operating leases - incentives 2.2.3 IFRS 3 - Business combinations 2.2.4 IAS 19 - Employee benefits 2.2.5 IFRS 2 - Share-based payment2.3 Presentation of the financial statements under IFRS2.4 Other first time adoption considerations3.0 Financial Statements4.0 IFRS accounting policies4.1 Basis of preparation4.2 Basis of consolidation4.3 Details of accounting policies (a) Goodwill (b) Derivative financial instruments ("derivatives") (c) Investment properties (d) Property, plant and equipment (e) Leases (f) Trading properties (g) Long-term construction contracts (h) Trade and other receivables (i) Cash and cash equivalents (j) Impairment (k) Share capital (l) Borrowings (m) Pensions (n) Provisions (o) Trade and other payables (p) Revenue (q) Expenses (r) Income tax 1.0 Introduction The purpose of this document is to • Set out the principal accounting policy differences between UK GAAPand IFRS as they affect Land Securities; • Indicate the effect of the adoption of IFRS on the income statementand balance sheet for the year ended on 31 March 2005; • State the Group's principal accounting policies under IFRS. Although the IASB adopted a "stable platform" in 2004, IFRS has continued, andwill continue, to evolve through the development and adoption of new Standardsand Interpretations as well as through the practical experience gained from theapplication of IFRS by reporting entities and their auditors. As a result, thefinancial information contained in this release may be amended before it ispresented as comparative figures in the IFRS accounts to be issued by the Groupfor the six months ending 30 September 2005 as well as for the year ending 31March 2006. Furthermore, the financial information contained in this releasedoes not constitute a complete set of financial statements (includingcomparative figures and all relevant and required notes) and therefore does notpurport to show a true and fair view of the Group's financial position andresults of operations in accordance with IFRS for the year to 31 March 2005. 2.0 Transition to International Financial Reporting Standards Under European legislation, companies listed on Exchanges within the EuropeanUnion are required to adopt IFRS for accounting periods beginning on or after 1January 2005. As a result, IFRS applies to Land Securities from 1 April 2005and the Group will present its consolidated interim and full year financialresults for the year ending 31 March 2006 in accordance with IFRS, together withIFRS comparatives and reconciliations of certain key figures to UK GAAP. The transition date for the adoption of IFRS by Land Securities is 1 April 2004,which has been determined in accordance with IFRS 1, "First-time adoption ofInternational Financial Reporting Standards". For the past 18 months, Land Securities has been working towards theimplementation of IFRS. This project has involved: • the analysis of each Standard to identify the differences between theGroup's existing accounting policies under UK GAAP and those which it will adoptunder IFRS • the collection of additional data required to restate the Group'sresults in accordance with IFRS with effect from the transition date • the on-going modification of the Group's reporting and consolidationsystems to meet IFRS requirements. The results of the IFRS project have been reported on regularly to the Group'sAudit Committee. The Group's current assessment of the impact of the transition to IFRS is basedon all International Financial Reporting Standards, including InternationalAccounting Standards and interpretations issued by the IASB and its Committees,published by 31 March 2005. These are subject to on-going review and amendmentby the IASB and subsequent endorsement by the European Commission, and maytherefore change. Further standards and interpretations may also be issued thatwill become applicable for the Group's financial year ending 31 March 2006. TheIFRS in force at the time when the Group prepares its first IFRS financialstatements may, therefore, require different accounting policies from thoseapplied in preparing the financial information set out in this Announcement. Inparticular, the Group has assumed that the European Commission will endorse therecent amendment to IAS 19 (Employee Benefits - actuarial gains and losses,group plans and disclosures) which allows actuarial gains or losses to be takendirectly to reserves as permitted under UK GAAP by FRS 17, "Retirement benefits". 2.1 Main changes in accounting under IFRS The differences between UK GAAP and IFRS that have the most significant effecton the Group's reported results and their presentation are summarised below. 2.1.1 IAS 40 - Investment property IAS 40 requires that revaluation gains and losses on investment propertiesshould be recognised in the income statement rather than taken to reserves as isthe case under UK GAAP. As a result, the revaluation reserve is no longerreported as a separate component of equity in the balance sheet and accumulatedrevaluation surpluses as at the transition date have been reallocated toretained earnings. This treatment does not, however, have any impact on thedistributable profits of Land Securities Group PLC (the company) nor of itsindividual subsidiaries, as these will continue to be determined by theapplication of UK GAAP and the Companies Act 1985. 2.1.2 IAS 12 - Income taxes IAS 12 requires that full provision is made for the deferred tax liabilityassociated with the revaluation of investment properties. UK GAAP explicitlyprohibited the recognition of such a deferred tax liability. This means thatthe movement in deferred tax associated with the revaluation in the year willnow be charged (or credited) to the income statement as a component of the taxcharge. Under IAS 12, there is also a requirement that the provision established fordeferred tax should have regard to the manner in which the revaluation surpluswill be realised. There is as yet no consensus on how this requirement shouldbe applied in practice in the real estate sector. Land Securities' approach,which is acceptable to its auditors in the absence of a consensus view, isoutlined below. Due to the lack of consensus, as well as differences inindividual circumstances, other companies in the sector may well take differentapproaches. The Group also understands that the IASB may, at some time in thefuture, re-visit these provisions of IAS 12. This area will remain underreview and the Group may change its accounting treatment if a consensus emergeswhich it believes is consistent with the Standard. There appear to be three approaches available: • to provide on the basis of the latent tax on capital gains that wouldbe payable had the whole investment portfolio been sold for its carrying valueat 31 March 2005, or • to provide on the basis of the notional corporation tax that would bepayable on the revaluation surplus on the assumption that it represents futurenet rents, or • to apply a mixture of the two methods. On a strict interpretation of the Standard, and applying it to the businesscircumstances of the Group, it is our opinion that it would only be permissibleto apply the latent tax approach if it was expected that the whole portfoliowould be turned over in the short to medium term. This is not the Group'sstrategy. Further, the mixed approach has been rejected as being impractical andtoo subjective as it would require forecasts to be made of the eventual date ofsale of every asset in the Group's portfolio. We are of the opinion that valuewill more typically be realised from future rents, as opposed to sales. We havetherefore concluded that, by default, and in the absence of definitive guidance,that the approach that more closely complies with the Standard, in the Group'scase, is to provide on the basis of the notional corporation tax that would bepayable on the revaluation surplus. That is, to provide deferred tax at 30% onthe full amount of the surplus. The latent tax on capital gains, assuming the sale of individual assets with nomitigation, would have been £626.0m, whereas the notional corporation taxpayable on the revaluation surplus amounts to £1,107.7m. As an exception to this general principle, where investment properties areclassified as "held for sale" under IFRS 5, "Non-current assets held for saleand discontinued operations", deferred tax is provided on a capital gains basis. The carrying value of such assets at 31 March 2005 was £274.2m. 2.1.3 IAS 39 - Financial Instruments: recognition and measurement IAS 39 has two principal effects on the Group. The first of these, the impacton the manner in which the debt refinancing (which was effective as fromNovember 2004) is reported, is the more significant. The Group has chosen notto take the exemption permitted under IFRS 1 from applying IAS 32 and 39 in theyear ended 31 March 2005. (a) Impact on debt refinancing In November 2004, the Group replaced existing bonds and debentures with anominal amount outstanding of £1.8bn and an average coupon rate of 8.5% with newstructured debt with a nominal amount outstanding of £2.3bn and an averageinterest rate of 5.35%. Although the former debt has legally been fullydischarged by the issue of new debt, the terms of the new debt are not deemed tobe "substantially different" for accounting purposes from those of the old debtand so, under IAS 39, the old debt cannot be de-recognised in the financialstatements. As a result, under IFRS the Group is required to treat thetransaction as a rollover of the old debt in its balance sheet (although it hasbeen repaid) and amortise its book value up to the new, higher, maturity amountof the new debt over the life of each series of bonds. The amortisation will beeffected by charging additional, notional, interest through the incomestatement. This means that the Group's IFRS balance sheet at 31 March 2005 (and subsequentperiod ends) will not reflect the actual financial liabilities of the Group andthe interest charge reported in the income statement will significantly exceedthe actual cash interest paid by the Group. The amortisation amount charged to the income statement will increase year onyear as it will be calculated so as to give a constant effective interest rateon the carrying value of the bonds as the difference between the book andredemption amounts of the debt amortises. The restatement of the Group's accounts under IFRS will not change the taxtreatment of the debt exchange. This continues to be driven by UK GAAP.Therefore, while the debt exchange has extinguished the Group's current taxliability for the year to 31 March 2005 and generated Corporation Tax losses tobe carried forward, an equivalent exceptional loss is not being recognised inthe IFRS financial statements. Differences are dealt with through deferred taxand a liability of £169.3m has been set up on the difference between the balancesheet value of the debt and its value for tax purposes. (b) Interest rate hedges The second difference in treatment under IAS 39 concerns the Group's interestrate hedges. The general interest rate hedge portfolio does not meet thecriteria set out in the standard for hedge accounting. Although the Group issatisfied that, economically, all of the Group's interest rate hedges do indeedoffset interest rate exposures, the practical difficulty in forecastingaccurately the amount and timing of cash receipts and payments associated withinvestment portfolio transactions means that the IAS 39 tests on hedgeeffectiveness may not be met. In addition, in many cases, the length of thehedge could exceed the remaining term of the Group's committed bank facilities. Although it is very likely that committed bank facilities will always form acore part of the Group's funding strategy, the intention to renew maturing bankfacilities in the future is not sufficient to permit application of the hedgeaccounting rules to all of the interest rate derivative portfolio. The Grouphas decided, therefore, in the interests of consistency, to mark all its generalinterest rate derivatives to market and report changes in the value of theportfolio as a component of net interest in the income statement. Under UKGAAP, the Group's interest rate hedges were treated as effective and the annualnet payment or receipt under the hedges was taken in the profit and loss accountas incurred. An exception to this general rule will be in respect of interest rate swapslinked to specific floating rate project finance or bank facilities. Inparticular, the swaps relating to the DWP project finance loan (£210m nominal at31 March 2005) will meet the hedge recognition criteria from 1 April 2005. 2.1.4 IAS 31 - Interests in joint ventures Under UK GAAP, the Group was required to maintain a distinction between "jointventures" and "joint arrangements that are not entities" ("JANEs") and followdifferent accounting treatments for these investments. UK GAAP required theGroup to recognise its share of the profit and loss account of joint ventures,with disclosure of the amounts so accounted for on the face of the profit andloss account. The Group's aggregate share of the gross assets and grossliabilities of the joint ventures were shown separately on the balance sheet.In the case of JANEs, the Group was required to consolidate its proportion ofthe income, expenditure, assets and liabilities of each JANE, line by line, inits profit and loss account and balance sheet, without separate disclosure.Under IFRS, there is no equivalent distinction between joint ventures and JANEsand all such jointly controlled investments are treated in the same way. IAS 31 permits companies to make a one-time choice as to whether joint ventureswill be accounted under the equity method or proportionally consolidated. Underthe equity method, the Group's share of its joint ventures' profit after tax isshown as a single line in the income statement and its share of the net assetsas a single line in the balance sheet. Many of the Group's partnerships arefinanced with stand-alone, secured, non-recourse debt and, as a result, theGroup has no direct access to the assets or cash flows of the joint ventures.For this reason, the Group has elected to account for all joint ventures underthe equity method, although additional disclosures will be made of theunderlying income, expenditure, assets and liabilities for the joint ventures,together with supplemental notes. On adoption of IFRS, therefore, thedisclosure of the Group's interests in joint ventures (including thosepreviously treated as JANEs) in the income statement and balance sheet has beenmodified in line with the requirements of IAS 31. Under IAS 31, an investing entity must cease consolidating its share of a jointventure's results if the venture's net assets fall below zero, even if the jointventure remains solvent and profitable. This is the case with Telereal, whichwill now be carried at nil value in the Group balance sheet with distributionsreceived, rather than the Group's share of profits earned, passed through theincome statement. Consolidation would resume if Telereal were to have positivenet assets at some point in the future. 2.1.5 IAS 10 - Events after the balance sheet date IAS 10 states that only liabilities actually existing at the balance sheet dateare to be provided for. Final dividends payable do not meet this definition asthey are subject to approval at the Annual General Meeting. As a result the2005 proposed final dividend of £153.7m is excluded from the IFRS balance sheetand written back to retained earnings. 2.2 Other areas of change 2.2.1 IAS 17 - Leases Under UK GAAP, leases to occupational tenants were almost invariably treated asoperating leases, because the risk and reward in the underlying freehold wereusually assessed as remaining with the landlord. However, while IAS 17 is basedon a similar principle, it lists a number of situations that individually or incombination would require a lease to be classified as a finance lease and, inparticular, it requires an entity to consider land and buildings separately,even if the occupational lease is of the property as a whole and does not makesuch a distinction. This means that it is more likely that a lease term couldbe viewed as being for the major part of the economic life of an asset,resulting in finance lease classification of the building element. The Grouphas carefully reviewed each of its leases and has concluded that, at 31 March2005, only 21 leases (out of some 3,500 leases) with current passing rent of£14.2m should be classified as finance leases under IAS 17. The determination of whether a lease is an operating or finance lease is made atthe inception of the lease, and is not re-assessed over the life of the leaseunless the lease terms are significantly varied. IAS 17 also indicates that,because land will typically have an indefinite economic life, a lease of land(as opposed to buildings) would typically be an operating lease. On adoption ofIAS 17, therefore, the Group is required to make an allocation of the carryingvalue of properties between land and buildings and, where the deemed lease ofthe building falls to be treated as a finance lease, the Group has established afinance lease debtor in relation to the lease of the building, while continuingto carry the land as an investment property asset. The consequences of thisare: • To establish the capital value of the finance leases as a long-termreceivable (£151.1m at 31 March 2005) and derecognise the value of the buildingselement (£138.9m). The initial passing rent will be allocated each year betweennotional interest on the finance lease receivable and an amount treated as arepayment of the deemed long-term loan to the tenant. (For 2005, rental incomehas been reduced by £10.8m and interest income increased by £8.6m); • To treat increases in rent as a result of rent reviews since the startof the leases as rent in the income statement as under UK GAAP; • To treat the land element as an investment property in the normal wayand to revalue it through the income statement as required by IAS 40. 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 held subject to a head or groundlease,that headlease must be treated as if it was a finance lease and accounted foraccordingly. In addition, certain of the Group's operating properties are heldunder finance leases. In total, some 50 properties are affected, leading to therecognition of a finance lease liability of £116.1m at 31 March 2005 and anincrease in the carrying value of the Group's properties by £106.2m, thedifference being attributable to additional amortisation charged on thecapitalised leases. 2.2.2 SIC-15 - Operating leases - incentives Under SIC-15, the cost of incentives given by landlords 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 notransitional provisions so that incentives granted before the UK standard cameinto effect have now been brought back into account. For the investmentproperty business, the changes amount to a minor reclassification between rentand revaluation surpluses in the income statement and, in the balance sheet,between investment properties and receivables. There is a small net impact onthe property outsourcing business, where properties are carried at depreciatedcost, reflecting the spreading of lease incentives received. The minor changesin the income statement will also affect adjusted earnings per share. 2.2.3 IFRS 3 - Business combinations Under IFRS 3, goodwill on acquisition is not amortised, but is subject to reviewfor impairment at each reporting date. The goodwill arising on the acquisitionof Trillium has therefore been frozen at its 31 March 2004 value of £34.3m andthe amortisation in the year of £2.4m written back. Under IFRS, the acquisition of net assets in the exchange of properties withSlough Estates plc has been treated as, in substance, an acquisition of assetsrather than of a business. Adjustments have therefore been made to remove thenegative goodwill and deferred tax created under UK GAAP. 2.2.4 IAS 19 - Employee benefits This standard requires the Group to adopt a method of accounting for definedbenefit pension schemes that is very similar to that required under the UKstandard, FRS 17. The Group has been making the required disclosures under FRS17 for the last three years. The net effect for the year ended 31 March 2005 isto increase profit before tax by £2.7m. In addition, the prepayment recognisedunder UK GAAP in respect of additional contributions (£14.5m at 31 March 2005)is not recognised under IAS 19, while the net actuarial deficit of £10.9m isrecognised in full. Service costs, the expected return on pension scheme assetsand interest 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. 2.2.5 IFRS 2 - Share-based payment The main effect of this standard is to require the Group to recognise the costof granting share options and other share-based remuneration to employees anddirectors through the income statement. The Group has used the Black-Scholesoption valuation model and the resulting value will be amortised through theincome statement over the vesting period of the options. This results in anadditional charge to the income statement in the year of £0.9m, which is net ofprovisions previously made by the Group in respect of the cost of certain of theshare-based compensation arrangements. 2.3 Presentation of the financial statements under IFRS With effect from 1 April 2005, the Group will prepare its financial statementsin accordance with IAS 1, "Presentation of financial statements". Where IAS 1does not provide definitive guidance on presentation, for example in relation toaspects of the Income Statement, the Group proposes to adopt a formatconsistent, where possible, with UK GAAP requirements. The presentation of the balance sheet under IFRS differs from the requirementsunder UK GAAP in a number of respects. These include requirements to analyseall assets and liabilities, including provisions, between current andnon-current items, and present deferred tax assets separately from deferred taxliabilities, rather than as a single net amount. The summary balance sheet,which does not contain all the line items required under IFRS, reflects thesechanged requirements to the extent necessary. 2.4 Other first time adoption considerations The Group has elected to adopt IFRS 5, "Non-current assets held for sale anddiscontinued operations" with effect from 1 April 2004 and is also adopting IAS39 from the same date. The Group will, however, take advantage of the optionalexemption under IFRS 1 in relation to employee benefits in that the approach toaccounting for actuarial gains and losses on the Group's pension schemes underIFRS will be consistent with UK GAAP (FRS 17). The corridor approach will notbe applied and gains and losses will be recognised in full through the Statementof Recognised Income and Expenses. 3.0 Financial Statements Land Securities Group PLC - Reconciliation of Profit Previously IAS 40 IAS 39 IAS 31 IAS 17 SIC-15 IFRS 3 IAS 19 IFRS 2 reported Interests Operating Share- Restated under UK Investment Financial in joint leases - Business Employee based underFor the yearended GAAP property instruments ventures Leases incentives combinations benefits payment Other IFRS31 March 2005 £m £m £m £m £m £m £m £m £m £m £m _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ Gross property income 1,865.7 (249.1) (10.8) 11.2 1,617.0Interest income fromfinanceleases - 8.6 8.6 _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ Revenue 1,865.7 - - (249.1) (2.2) 11.2 - - - - 1,625.6 Costs (1,217.3) 92.5 2.6 (4.5) 2.4 3.0 (1.3) (1,122.6) _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______Operating profit before net profitoninvestment 648.4 - - (156.6) 0.4 6.7 2.4 3.0 (1.3) - 503.0properties _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______Profit on disposal ofinvestmentproperties 125.2 (10.5) 0.5 (3.2) 112.0Net gain on valuationofinvestment - 800.3 - 29.9 (7.7) 12.7 835.2properties _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______Net profit on 125.2 800.3 - (10.5) 30.4 (10.9) 12.7 - - - 947.2investment properties _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______Net operating profit 773.6 800.3 - (167.1) 30.8 (4.2) 15.1 3.0 (1.3) - 1,450.2Net financing costs (247.3) (11.2) 70.7 (6.9) (0.3) (0.1) (195.1)Net financing costs - (682.1) 616.7 (65.4)exceptionalShare of the profitsof associates and joint ventures - - 141.7 141.7 _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______(Loss) profit before (155.8) 800.3 605.5 45.3 23.9 (4.2) 15.1 2.7 (1.3) (0.1) 1,331.4income taxIncome tax credit/ 120.0 (162.3) (181.7) 26.5 (7.2) 1.3 (6.4) (0.8) 0.4 (210.2)(expense) _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______(Loss) profit for the (35.8) 638.0 423.8 71.8 16.7 (2.9) 8.7 1.9 (0.9) (0.1) 1,121.2financial year ====== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== Notes IFRS 3 - Cessation of goodwill amortisation IAS 31 - Equity accounting for all joint ventures IAS 17 - Finance lease accounting for certain tenant lease and all investmentproperty headleases SIC-15 - Lease incentives amortised over term of lease IAS 40 - Investment property revaluations and tax thereon taken through incomestatement IAS 39 - Bonds reinstated at historical amounts and hedges marked to market IAS 19 - Pensions accounted on different basis IFRS 2 - Cost of share-based payments taken through income statement Land Securities Group PLC - Reconciliation of Equity IAS40 IAS 12 IAS 39 IAS 31 IAS 10 Events after the Interests balance Investment Income Financial in joint sheetAt 31 March 2005 GAAP property taxes instruments Ventures date ________ ________ ________ ________ ________ ________ASSETSNon-current assetsInvestment property 8,737.1 (402.0)Property, plant and equipment Operating properties 546.3 Other property, plant and 57.9equipment ________ ________ ________ ________ ________ ________ 9,341.3 - - - (402.0) - ________ ________ ________ ________ ________ ________Goodwill 31.9Negative goodwill (6.3)Net investment in finance leases -Pre-paid operating lease payments -Investments in joint ventures 437.5 429.3Assets held for disposal - ________ ________ ________ ________ ________ ________ 9,804.4 - - - 27.3 - ________ ________ ________ ________ ________ ________Current assetsInventories 150.9Trade and other receivables 529.6 (10.3)Short term investments 2.8 (2.8)Cash and cash equivalents 8.3 (3.3) ________ ________ ________ ________ ________ ________ 691.6 - - - (16.4) - ________ ________ ________ ________ ________ ________TOTAL ASSETS 10,496.0 - - - 10.9 - ====== ====== ====== ====== ====== ======LIABILITIESCurrent liabilitiesShort term borrowings and (77.3) (3.3)overdraftsTrade and other payables (744.8) 7.8 153.7Provisions - ________ ________ ________ ________ ________ ________ (822.1) - - (3.3) 7.8 153.7Non-current liabilitiesBorrowings including finance (2,856.9) 564.3leasesEmployee benefits -Trade and other payables (46.8)Deferred tax liabilities (115.9) (1,107.7) (168.4)Provisions (17.7) ________ ________ ________ ________ ________ ________ (3,037.3) - (1,107.7) 395.9 - - ________ ________ ________ ________ ________ ________TOTAL LIABILITIES (3,859.4) - (1,107.7) 392.6 7.8 153.7 ====== ====== ====== ====== ====== ======NET ASSETS 6,636.6 - (1,107.7) 392.6 18.7 153.7 ====== ====== ====== ====== ====== ====== Land Securities Group PLC - Reconciliation of Equity (continued)... IAS 17 SIC-15 IFRS 3 IAS 19 IFRS2 IFRS5 Operating Share Assets Restated leases- Business- Employee based held for underAt 31 March 2005 Leases Incentives combinations Benefits payment Disposal IFRS ________ ________ ________ ________ ________ _______ _______ASSETSNon-current assetsInvestment property (69.0) (38.7) (274.2) 7,953.2Property, plant and equipment Operating properties 36.3 (0.8) 581.8 Other property, plant and 57.9equipment ________ ________ ________ ________ ________ _______ _______ (32.7) (38.7) - - (275.0) 8,592.9 ________ ________ ________ ________ ________ _______ _______Goodwill 2.4 34.3Negative goodwill 6.3 -Net investment in finance leases 151.1 151.1Pre-paid operating lease payments -Investments in joint ventures 866.8Assets held for disposal 275.0 275.0 ________ ________ ________ ________ ________ _______ _______ 118.4 (38.7) 8.7 - - - 9,920.1 ________ ________ ________ ________ ________ _______ _______Current assetsInventories 150.9Trade and other receivables 39.6 (14.5) 544.4Short term investments -Cash and cash equivalents 5.0 ________ ________ ________ ________ ________ _______ _______ - 39.6 - (14.5) - - 700.3 ________ ________ ________ ________ ________ _______ _______TOTAL ASSETS 118.4 0.9 8.7 (14.5) - - 10,620.4 ====== ====== ======= ======= ====== ====== ======LIABILITIESCurrent liabilitiesShort term borrowings and (80.6)overdraftsTrade and other payables (11.2) (0.9) (595.4)Provisions - ________ ________ ________ ________ ________ _______ _______ - (11.2) - - (0.9) - (676.0) ________ ________ ________ ________ ________ _______ _______Non-current liabilitiesBorrowings including finance (116.1) (2,408.7)leasesEmployee benefits (10.9) (10.9)Trade and other payables 2.9 (43.9)Deferred tax liabilities (0.7) 3.1 7.7 1.0 (1,380.9)Provisions (17.7) ________ ________ ________ ________ ________ _______ _______ (116.8) 3.1 - (3.2) 3.9 - (3,862.1) ________ ________ ________ ________ ________ _______ _______TOTAL LIABILITIES (116.8) (8.1) - (3.2) 3.0 - (4,538.1) ====== ====== ====== ====== ====== ====== ======NET ASSETS 1.6 (7.2) 8.7 (17.7) 3.0 - 6,082.3 ====== ====== ====== ====== ====== ====== ====== 4.0 IFRS accounting policies The principal accounting policies that it is anticipated that Land Securitieswill adopt, under IFRS, for its accounts for the year to 31 March 2006 are setout below. These policies have been applied in preparing: • The opening IFRS balance sheet as at 1 April 2004, the date oftransition to IFRS, and • The summary IFRS balance sheet as at 31 March 2005 and incomestatement for the year then ended attached to this announcement and which willbe presented as comparative information in the Group's first IFRS FinancialStatements. It has been assumed that the European Commission will endorse the recentamendment to IAS 19 (Employee Benefits - actuarial gains and losses, group plansand disclosures) which allows actuarial gains or losses to be taken directly toreserves as permitted under UK GAAP by FRS 17, "Retirement benefits". 4.1 Basis of preparation The summary income statement and balance sheet have been prepared, in so far asapplicable in the summary format, as to measurement and presentation inaccordance with International Accounting Standards (IAS) and InternationalFinancial Reporting Standards (IFRS) issued by the International AccountingStandards Board (IASB) and on the basis that all such standards will be endorsedby the European Union ("the EU"). These standards are also collectivelyreferred to as IFRS. At this stage in its development, matters such as the interpretation andapplication of IFRS are continuing to evolve. In addition, standards currentlyin issue and endorsed by the EU are subject to interpretation by theInternational Financial Reporting Interpretations Committee ("IFRIC") andfurther standards may be issued and endorsed by the EU before 31 March 2006.These uncertainties could result in the need to change the basis of accountingor presentation of certain financial information from that applied in thepreparation of this document. As a general rule, the Group is required to establish its IFRS accountingpolicies for the year ended 31 March 2006 and apply these retrospectively todetermine its opening IFRS balance sheet at the transition date of 1 April 2004and the comparative information for the year ended 31 March 2005. However,advantage has been taken of certain exemptions afforded by IFRS 1, "First-timeadoption of IFRS" as follows: • Business combinations prior to 1 April 2004 and, in particular, theacquisition of Trillium have not been restated to comply with IFRS 3, "BusinessCombinations". • The Group has applied IFRS 2, "Share-based payment", retrospectivelyonly 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. 4.2 Basis of consolidation The consolidated financial statements of the Group include the financialstatements of Land Securities Group PLC ("the Company") and its subsidiariesmade up to 31 March 2005. Subsidiaries are those entities controlled by theCompany. Control exists when the Company has the power, directly or indirectly,to govern the financial and operating policies of an entity so as to obtainbenefits from its activities. The financial statements of subsidiaries areincluded in the consolidated financial statements from the date that controlcommences until the date control ceases. Joint ventures are those entities over whose activities the Group has jointcontrol, established by contractual agreement. Interests in joint ventures areaccounted for using the equity method of accounting as permitted by IAS 31 "Interests in joint ventures" and following the procedures for this method setout in IAS 28 "Investments in associates". The equity method requires theGroup's share of the joint venture's profit or loss for the period to bepresented separately in the income statement and the Group's share of the jointventure's net assets to be presented separately in the balance sheet. Joint ventures with net liabilities are carried at zero value in the balancesheet and any distributions received are included in the consolidated profit forthe year. 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. 4.3 Details of Accounting Policies (a) Goodwill At the date of the Group's transition to IFRS, 1 April 2004, the goodwill in theGroup balance sheet represented that arising on the acquisition of Trillium lessamortisation to that date. In accordance with IFRS 1 "First-time adoption ofIFRS", this amount has been adopted as the carrying amount of the goodwill forIFRS accounting purposes and the goodwill was reviewed for impairment at both 31March 2004 and 31 March 2005. In accordance with IFRS 3 "Business combinations", the goodwill is not amortised but is reviewed for impairment at eachreporting date. The Group's policy on impairment is set out in (j) below. (b) Derivative financial instruments ("derivatives") The Group uses derivatives, particularly interest rate swaps, to help manage itsinterest rate risk. In accordance with its treasury policy, the Group does nothold or issue derivatives for trading purposes. Derivatives are recognised initially at cost. Subsequent to initialrecognition, derivatives are stated at fair value. The gain or loss onre-measurement to fair value is recognised immediately in profit or loss unlessthe derivatives qualify for hedge accounting, in which case recognition dependson the nature of the item being 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 theincome statement immediately. (c) Investment properties Investment properties are those properties, either owned by the Group or wherethe Group is a lessee under a finance lease, that are held either to earn rentalincome or for capital appreciation or both. In addition, properties held underoperating leases are accounted for as investment properties when the rest of thedefinition of an investment property is met. In such cases, the operatingleases concerned are accounted for as if they were finance leases. 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. Investment property is measured on initialrecognition at cost, including related transaction costs. Additions toinvestment properties consist of costs of a capital nature and, in the case ofinvestment properties under development, capitalised interest. Certain internalstaff and associated costs directly attributable to the management of majorschemes during the construction phase are also capitalised. The difference between the fair value of an investment property at the reportingdate and its carrying amount prior to re-measurement is included in the incomestatement as a valuation gain or loss. When the Group begins to redevelop an existing investment property for continuedfuture use as an investment property, the property remains an investmentproperty and is accounted for as such. 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.This is recognised initially at cost but is subsequently re-measured to fairvalue at each reporting date. Any gain or loss on re-measurement is takendirect to equity unless the loss in the period exceeds the net cumulative gainpreviously recognised in equity. In the latter case, the amount by which theloss in the period exceeds the net cumulative gain previously recognised istaken to profit or loss. On completion, the property is transferred toinvestment property with any final difference on re-measurement accounted for inaccordance with the foregoing policy. Gross borrowing costs associated with direct expenditure on properties underdevelopment or undergoing major refurbishment are capitalised. The interestcapitalised is calculated using the Group's weighted average cost of borrowingsafter adjusting for borrowings associated with specific developments. Whereborrowings are associated with specific developments, the amount capitalised isthe gross interest incurred on those borrowings less any investment incomearising on their temporary investment. Interest is capitalised as from thecommencement of the development work until the date of practical completion.The capitalisation of finance costs is suspended if there are prolonged periodswhen development activity is interrupted. Interest is also capitalised on thepurchase cost of a site or property acquired specifically for redevelopment inthe short term but only where activities necessary to prepare the asset forredevelopment are in progress. (d) Property, plant and equipment Operating properties These are properties owned and managed by Land Securities Trillium, the Group'sproperty outsourcing business, and which do not satisfy the definition of aninvestment property. Operating properties are stated at cost less accumulateddepreciation. Depreciation is charged to the income statement on astraight-line basis over the estimated useful lives of the properties concerned. The estimated useful lives are as follows: Freehold land - Not depreciatedFreehold buildings - Up to 50 yearsLeasehold properties - Shorter of the unexpired lease term and 50 years Other property, plant and expenditure This category comprises computers, motor vehicles, furniture, fixtures andfittings, and improvements to Group offices. These assets are stated at costless accumulated depreciation and are depreciated on a straight-line basis overtheir estimated useful lives of between two and five years. The residual values and useful lives of all property, plant and equipment arereviewed, and adjusted if appropriate, at least at each financial year-end. (e) Leases A group company is the lessee i) 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. ii) 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 is the lessor i) Operating lease - properties leased out to tenants under operating leases areincluded in investment properties in the balance sheet. ii) Finance lease - when assets are leased out under a finance lease, thepresent value 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. (f) Trading properties Trading properties are those properties held as inventory and are shown at thelower of cost and net realisable value. (g) Long-term construction contracts Revenue on long-term contracts is recognised according to the stage reached inthe contract by reference to the value of work completed using the percentage ofcompletion method. An appropriate estimate of the profit attributable to workcompleted is recognised once the outcome of the contract can be estimatedreliably. The gross amount due from customers for contract work is shown as areceivable. The gross amount due comprises costs incurred plus recognisedprofits less the sum of recognised losses and progress billings. Where the sumof recognised losses and progress billings exceeds costs incurred plusrecognised profits, the amount is shown as a liability. (h) Trade and other receivables Trade 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. (i) 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 cashand cash equivalents for the purpose of the statement of cash flows. (j) Impairment The carrying amounts of the Group's non-financial assets, other than investmentproperty (see (c) above), are reviewed at each reporting date to determinewhether there is any indication of impairment. If any such indication exists,the asset's recoverable amount is estimated (see below). An impairment loss isrecognised in profit or loss whenever the carrying amount of an asset exceedsits recoverable amount. For the purposes of assessing impairment, assets aregrouped together at the lowest levels for which there are separatelyidentifiable cash flows. The recoverable amount of an asset is the greater of its net selling price andits value in use. The value in use is determined as the net present value ofthe future cash flows expected to be derived from the asset, discounted using apre-tax discount rate that reflects current market assessments of the time valueof money and the risks specific to the asset. An impairment loss is reversed if there has been a change in the estimates usedto determine the recoverable amount. An impairment loss is reversed only to theextent that the asset's carrying amount after the reversal does not exceed theRelated Shares:
Land Securities