14th Nov 2005 17:04
Primary Health Properties PLC14 November 2005 Primary Health Properties PLC 14 November 2005 PRIMARY HEALTH PROPERTIES PLC Modern accommodation for the Provision of Primary Health Care Services Adoption of International Financial Reporting Standards ('IFRS') Impact on the Consolidated Results of the Group for the year ended 30 June 2005 The Board of Directors of Primary Health Properties PLC ("PHP", the "Group" orthe "Company") have decided that, in the light of a number of changes inaccounting standards which the Group will be required to implement in thecurrent accounting year, it is important that shareholders be given an interimexplanation of how these changes affect the Group's balance sheet. Introduction On 22 September 2005 Primary Health Properties PLC reported its consolidatedfinancial results for the year ended 30 June 2005, prepared for the last timeunder UK Generally Accepted Accounting Practice ("UK GAAP"). In future theGroup will prepare its consolidated financial statements in accordance with IFRSas required for all European Union listed companies for accounting periodscommencing on or after 1 January 2005. The Group's first IFRS results willtherefore be for the six months to 31 December 2005 and the Group's first annualreport under IFRS will be for the year ending 30 June 2006. The new accounting standards represent a fundamental change in accounting andreporting. The following unaudited financial information based on the Group'sreported balance sheet at 30 June 2005 describes for shareholders the keyimpacts of the conversion from UK GAAP to IFRS and explains the changes inaccounting policies that have been brought about as a result of the conversionto IFRS. The pro-forma accounting policies that will apply to the Group'sconsolidated financial statements under IFRS are also set out in full below. The application of IFRS will not affect the underlying performance of the Groupor its cash flows. In addition the dividend policy of the Group is not affected by the introductionof IFRS. International Financial Reporting Standards Basis of preparation The figures have been restated on the basis of the Group's interpretation ofall IFRS currently applicable, and are unaudited. It is possible that thisinterpretation may evolve as IFRS is subject to ongoing amendment; accordingly,the amounts disclosed in this announcement may be subject to revision. The principal areas where IFRS differs from UK GAAP that will affect theconsolidated results of the Group are considered below. Investment Properties (IAS 40) Under IAS 40 the Group must decide, on a property by property basis, whetherinterests held under operating leases are to be classified as investmentproperties or as leases under IAS 17. The Group expects that all of itsleasehold properties held under operating leases will continue to be classifiedas investment properties under IFRS and will continue to be revalued every sixmonths. IAS 40 requires that property revaluation movements are recorded in the profitand loss account (or income statement as it will become) under IFRS. Currentlyunder UK GAAP they are treated as a movement in reserves. Reported profits willtherefore be subject to greater volatility. On 30 June 2005 the accumulated net revaluation reserve of £46,905,000 wasre-classified into retained earnings. Tax (IAS 12) IAS 12 requires full deferred tax provisions to be made for all temporarydifferences between base cost values for tax purposes and for accounting values.UK GAAP on the other hand allows certain exemptions from this requirement. Inparticular UK GAAP does not require any provision to be made where there is nobinding agreement to dispose of the related property. UK GAAP also allowsdeferred tax to be calculated on a discounted basis. Therefore there will be animpact on the deferred tax position due to the inability to discount under IFRS. For the Group the most significant difference between base cost values for taxpurposes and for accounting values comes from the revaluation of investmentproperties. As a result net assets are expected to decrease under IFRSaccounting. The Group will potentially suffer a payment of tax only if it sellsthese investments. The amount of tax then to be paid will reflect the saleprice achieved, the structure of the sale transaction, and any other allowancesfor tax that may be available at that time. Therefore, the deferred taxprovision that the Group will be required to provide within its opening balancesheet reserves under IFRS, and the subsequent provision movements arising onfuture valuation changes in its income statement, will not represent an amountof tax that the Group expects to suffer at a future date. In addition, the use of discounting in the assessment of the deferred taxliability relating to accelerated capital allowances under UK GAAP results in noprovision being required. Under IFRS discounting will not be allowed and adeferred tax liability will need to be recorded in respect of acceleratedcapital allowances. On 30 June 2005, there will be a deferred tax provision in the balance sheet of£17,860,000, comprising deferred tax on revaluation gains (£13,299,000) anddeferred tax on accelerated capital allowances (£4,561,000), that was notpreviously required under UK GAAP. The effects of these deferred tax adjustmentsare shown in the reconciliation below. Derivatives (IAS 32/39) IAS 32 and IAS 39 address the accounting for financial instruments. IAS 32 covers disclosure and presentation whilst IAS39 covers recognition and measurement. The Group has entered into a number of interest rate swap contracts to manage its risk exposure to changes in interest rates charged on its floating rate loan facilities. UK GAAP, as it applied to the Group's previous financial year, did not require these derivatives, when used as a hedge, to be valued in the balance sheet. Under this policy, gains and losses on these hedges were deferred until the underlying hedged item was recognised in the profit and loss account. IAS39 requires all derivatives, whether cash flow hedges or fair value hedges, to be carried at their fair values in the balance sheet. The hedge accounting provisions of IFRS provide for changes in the value of these interest rate swap contracts to be recorded as a movement in reserves, thus reducing the sensitivity of the income statement to their fair value movements. IFRS requires the effectiveness of these hedges to be regularly tested, with ineffective portions of the hedges not treated as a reserve movement but as a charge to the income statement. The Group expects all of its interest rate swap contracts to be fully effective and to account for them as cash flow hedges. The Group will adopt IAS 32 and IAS 39 from 1 July 2005 as permitted by the transition arrangements in IFRS 1. Therefore, on 1 July 2005, the fair value of the interest rate swaps (£1,846,000) at that date will be shown as an opening adjustment to reserves, rather than restating the prior year's balance sheet comparatives. This is shown in the reconciliation between the balance sheet at 30 June 2005 and at 1 July below as an adjustment between retained earnings and a separate hedging reserve. Dividends (IAS 37) IFRS requires final dividends that must be approved by shareholders in general meeting to be recorded in the accounting period in which they are approved. UK GAAP, prior to its convergence with IFRS, required proposed final dividends to be accrued. Therefore, an increase in net asset value of £1,359,000 will result from this change at 30 June 2005, equivalent to the net cost of the proposed dividend (see reconciliation below). The individual company financial statements of Primary Health Properties PLC ("PHP") and each of its subsidiary undertakings will continue to be prepared under UK GAAP, so that the introduction of IFRS will not affect PHP's distributable reserves. Accordingly the dividend policy of the Group is not affected by the introduction of IFRS. Share Based Payments (IFRS 2) The Group has incentivised its Joint Managers with the granting of options to subscribe for a fixed number of ordinary shares at a fixed price, exercisable at any time between 31 March 2006 and 31 March 2013 subject to the achievement of performance criteria. Under UK GAAP, these share options were accounted for prospectively. The fully diluted net asset value assumes that the options are exercised, the Ordinary Shares issued and the monies arising on the exercise of the options have been received. IFRS 2 requires the options granted to be measured by their fair value, with an equivalent amount charged over the vesting period to the income statement. For options outstanding at 1 July 2004, IFRS 2 must be applied retrospectively, with an adjustment to the opening balance of retained earnings. At 30 June 2005, the cumulativecharge relating to the options was £437,000, and is shown in the reconciliation below as an adjustment between retained earnings and a newly created share options reserve. RECONCILIATION OF CONSOLIDATED EQUITY (UNAUDITED) as at 30 June 2005 UK GAAP at IAS 37 IAS 12 IFRS 2 IAS 40 IFRS at 30 IAS 32/39 IFRS at 1 30 June Provisions Income Property June 2005 July 2005* 2005 (as Tax Share revaluation Financial previously based Instru-ments reported) payment £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000Non-current Assets Investment 164,621 - - - - 164,621 - 164,621properties 164,621 - - - - 164,621 - 164,621Current assetsDebtors 1,655 - - - - 1,655 - 1,655Net investment infinance leases-amounts falling 19 - - - - 19 - 19due within oneyear-amounts falling 2,504 - - - - 2,504 - 2,504due after morethan one yearCash at bank 1,112 - - - - 1,112 - 1,112 5,290 - - - - 5,290 - 5,290Creditors: amounts (7,539) 1,359 - - - (6,180) - (6,180)falling due withinone year Net current (2,249) 1,359 - - - (890) - (890)liabilities Total assets less 162,372 1,359 - - - 163,731 - 163,731currentliabilities Creditors: amountsfalling due aftermore than one year Bank loans (88,800) - - - - (88,800) - (88,800)Deferred tax - - (17,860) - - (17,860) - (17,860)liabilities (88,800) - (17,860) - - (108,506) - (108,506)Net Assets 73,572 1,359 (17,860) - - 57,071 - 57,071 Capital andreserves Called up share 11,326 11,326 - 11,326capitalShare premium 11,952 11,952 - 11,952accountCapital reserve 1,618 1,618 - 1,618Revaluation 46,905 (46,905) - - -reserveCash flow hedging - - (1,846) (1,846)reserveShare based - 437 437 - 437payments reserveRetained earnings 1,771 1,359 (17,860) (437) 46,905 31,738 1,846 33,584 Equity 73,572 1,359 (17,860) - - 57,071 - 57,071shareholders'funds Net asset value 324.80p 251.96pper share -basic - 314.60p 246.56pdiluted * The column above has been shown to demonstrate the impact on the openingbalance sheet as at 1 July 2005 of the adoption of IAS 32/39. Pro forma Accounting Policies Primary Health Properties PLC is a public limited company incorporated inEngland and Wales under the Companies Act 1985. The consolidated financialstatements of the Company (for the year ending 30 June 2006) comprise theCompany and its subsidiaries (the "Group"). Basis of preparation/Statement of compliance The consolidated financial statements of the Group have been prepared inconformity with International Financial Reporting Standards ("IFRS") issued bythe International Accounting Standards Board (as adopted by the EU),interpretations issued by the International Financial Reporting InterpretationsCommittee, and applicable requirements of United Kingdom company law, andreflect the following policies which have been adopted and applied consistently. (These are the Group's first consolidated financial statements prepared inconformity with IFRS and IFRS 1: First Time Adoption has been applied. An explanation of how the transition to IFRS has affected the reported financialposition, financial performance and cash flows of the Group will be shown in thenotes to the Group's financial statements.) Convention The financial statements are presented in Sterling rounded to the nearestthousand. The financial statements have been prepared on a historical costbasis, except for the measurement at fair value of investment properties andfinancial instruments. Basis of Consolidation The Group's financial statements consolidate the financial statements of PrimaryHealth Properties PLC, its wholly owned subsidiary undertakings and its interestin the joint venture as at 30 June each year. The financial statements of thesubsidiary undertakings are prepared for the accounting reference period ending30 June each year using consistent accounting policies. Investment in subsidiary undertakings and interest in joint venture The Group's interest in its joint venture is accounted for applying the equityaccounting concept, recognising the Group's interest in the gross assets andliabilities on the face of the balance sheet and in the income statement, theGroup's share of the joint venture's turnover is noted. The carrying value of investments in subsidiary undertakings and the interest inthe joint venture is reviewed for impairment if events or changes incircumstances indicate that the carrying value may not be recoverable. Investment properties All the Group's completed properties are held for long-term investment.Initially, investment properties are measured at cost including transactioncosts. Subsequent to initial recognition investment properties are stated atfair value. Gains or losses arising from changes in the fair value ofinvestment properties are included in the income statement in the year in whichthey arise. Investment properties cease to be recognised for accounting purposes when theyhave been disposed of. Any gains and losses arising are recognised in theincome statement in the year of disposal. Development loans The Group has entered into development loan agreements with third partydevelopers in respect of certain primary health properties under development.These loans are repayable at the option of the developer at any time. The Grouphas entered into contracts to purchase the properties under development whenthey are completed in accordance with the terms of the contracts. The loans arerepayable by the developers in the event that the building work is not completedin accordance with the purchase contracts. Interest is charged under the termsdetailed in the respective development agreements and taken to the incomestatement in the year in which it accrues. Properties held for, or in the course of, development Properties held for, or in the course of development, are included in theconsolidated balance sheet at cost or, on redevelopment if originally held as aninvestment property, at the previous valuation together with subsequent costs. Provision is made, if necessary, to reduce the carrying value of properties heldfor development and in the course of development to the recoverable amount. Segmental reporting The Directors are of the opinion that the Group is engaged in a single segmentof business, being investment in primary health care property in the UnitedKingdom leased principally to GPs, NHS Trusts, Health Authorities and otherassociated health care users. Income Rental income is included in these financial statements on a receivable basis. Interest receivable on short-term deposits is accounted for on an accrualsbasis. Cash and cash equivalents Cash in hand and in banks and short-term deposits, which are held to maturityare carried at cost. Cash and cash equivalents are defined as cash in hand,demand deposits and short-term, highly liquid investments readily convertible toknown amounts of cash and subject to insignificant risk of changes in value.Bank overdrafts that are repayable on demand which form an integral part of theGroup's cash management are included as a component of cash and cash equivalentsfor the purpose of the statement of cash flows. Bank loans and borrowings All bank loans and borrowings are initially recognised at cost, being the fairvalue of the consideration received, less issue costs where applicable. Afterinitial recognition, all interest-bearing loans and borrowings are subsequentlymeasured at amortised cost. With any difference between cost and redemptionvalue being recognised in the income statement over the period of the borrowingson an effective interest basis. Taxation Taxation on the profit or loss for the year comprises current and deferred tax.Taxation is recognised in the income statement except to the extent that itrelates to items recognised as direct movements in equity, in which case it isalso recognised as a direct movement in equity. Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantially enacted at the balance sheet date, andany adjustment to tax payable in respect of previous years. The tax effect ofdifferent items of expenditure is allocated between revenue and capital on thesame basis as the particular item to which it relates, using the Group'seffective rate of tax, as applied to those items allocated to revenue, for theaccounting year. Deferred income tax is provided, using the liability method, on all temporarydifferences at the balance sheet date between the tax basis of assets andliabilities and their carrying amount for financial reporting purposes. Deferredincome tax liabilities are measured at the tax rates that are expected to applyto the period when the liability is settled, based on tax rates (and tax laws)that have been enacted or substantially enacted at the balance sheet date. Dividends payable to shareholders Dividends proposed by the Board of Directors and unpaid at the period end arenot recognised in the financial statements until they have been approved byshareholders at the Annual General Meeting. Financial instruments The Group uses interest rate swaps to hedge its risks associated with exposureto interest rate fluctuations and the resulting variability in cash flows. The Group criteria for adopting hedge accounting for interest rate swaps are: (i) the instrument must be related to a liability; and (ii) it must change the character of the interest rate by converting avariable rate to a fixed rate or vice versa. Interest differentials are recognised by accruing the net interest payable. (As from 1 July 2005 the Group has adopted IAS32 and IAS 39 under which interestrate swap contracts are accounted for as cash flow hedges with their fair valuestated in the Group's balance sheet at the year-end. Fair value is determined byreference to market values for similar instruments. The portion of the gain orloss on the hedging instrument that is determined to be an effective hedge isrecognised directly in equity through the statement of changes in equity and theineffective portion is recognised in the income statement. If they areterminated early, any cumulative gain or loss recognised in equity is kept inequity and is spread over the remaining term of the original instrument.) Finance leases Finance lease income is allocated to accounting periods so as to give a constantrate of return on the net cash investment in the lease. The total net investmentin finance leases included in the balance sheet represents total lease paymentsreceivable net of finance lease income relating to future accounting periods. Share based payments Share based payments are measured at fair value at the date of grant with anequivalent amount charged over the vesting period to the income statement. Thefair value has been calculated using a derivative pricing model known asBlack-Scholes formula using assumptions deemed to be consistent with the pricethat one might expect the incentive to have if it were traded in the markets. G A Elliot Chairman 14 November 2005 Enquiries: Bell Pottinger Financial David Rydell/Zoe Sanders Tel: 020 7861 3232 Primary Health Properties PLC Harry Hyman Managing Director Tel: 01483 306912 / 07973 344768 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Primary Health