Financial Statements
26 First time adoption of International Financial Reporting Standards (IFRS)
When preparing the Group's IFRS balance sheet at 1 April 2004, the date of transition, the following material optional exemptions from full retrospective application of IFRS accounting policies have been adopted:
| (i) | Business combinations - the provisions of IFRS 3 'Business combinations' have been applied prospectively from 1 April 2004. The Group has chosen to not restate business combinations that took place before the date of transition; and |
| (ii) | Employee benefits – the accumulated actuarial gains and losses in respect of employee defined benefit plans have been recognised in full through reserves. |
Reconciliations and explanatory notes on how the transition to IFRS has affected profit and net assets previously reported under UK Generally Accepted Accounting Principles are given below.
Profit and loss account reconciliation for the year ended 31 March 2005
| UK GAAP results in IFRS format £m |
Income taxes IAS 12 £m |
Property, plant and equipment IAS 16 £m |
Leases IAS 17 £m |
Investment property IAS 40 £m |
Operating leases – incentives SIC 15 £m |
Financial instruments IAS 32/39 £m |
Other £m |
IFRS £m |
|
|---|---|---|---|---|---|---|---|---|---|
| Net rental and related income | 504 | 2 | 11 | 517 | |||||
| Administrative expenses | (49) | (49) | |||||||
| Other income | 6 | 2 | 8 | ||||||
| Share of net profit of joint ventures | 32 | (33) | 160 | 1 | (2) | 158 | |||
| Refinancing of Broadgate | (180) | (180) | |||||||
| Net financing costs | (317) | (2) | (7) | (326) | |||||
| Net valuation gains (includes profits on disposals) | 16 | 605 | (11) | 610 | |||||
| Profit on ordinary activities before tax | 12 | (33) | 765 | (6) | 738 | ||||
| Taxation credit (expense) | 46 | (130) | (84) | ||||||
| Profit for the year | 58 | (163) | 765 | (6) | 654 |
Balance sheet reconciliation at 31 March 2005
| UK GAAP balances in IFRS format £m |
Opening balance sheet adjustment £m |
Income taxes IAS 12 £m |
Property, plant and equipment IAS 16 £m |
Leases IAS 17 £m |
Financial instruments IAS 32/39 £m |
Investment property IAS 40 £m |
Business combi- nations IFRS 3 £m |
Other* £m |
IFRS £m |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||||
| Non-current assets | ||||||||||
| Investment properties | 11,037 | (96) | (53) | 6 | (17) | 10,877 | ||||
| Development properties | 156 | 56 | 212 | |||||||
| 11,037 | 60 | 3 | 6 | (17) | 11,089 | |||||
| Other non-current assets | ||||||||||
| Investments in joint ventures | 804 | (71) | (34) | (1) | 4 | (2) | 700 | |||
| Other investments | 153 | 153 | ||||||||
| Goodwill | (18) | 14 | 77 | 73 | ||||||
| 11,976 | 3 | (34) | 3 | 5 | 4 | (17) | 75 | 12,015 | ||
| Current assets | ||||||||||
| Trading properties | 36 | 36 | ||||||||
| Debtors | 67 | 9 | 76 | |||||||
| Cash and short-term deposits | 151 | 151 | ||||||||
| 254 | 9 | 263 | ||||||||
| Total assets | 12,230 | 3 | (34) | 3 | 5 | 13 | (17) | 75 | 12,278 | |
| Liabilities | ||||||||||
| Current liabilities | ||||||||||
| Short-term borrowings and overdrafts | (408) | (408) | ||||||||
| Creditors | (349) | 50 | (59) | 7 | (351) | |||||
| (757) | 50 | (59) | 7 | (759) | ||||||
| Non-current liabilities | ||||||||||
| Debentures and loans | (5,784) | (3) | 33 | (5,754) | ||||||
| Convertible bonds | 69 | (69) | ||||||||
| Other non-current liabilities | (8) | (22) | (6) | (1) | (37) | |||||
| Deferred tax liabilities | (101) | (666) | (105) | (75) | 2 | (945) | ||||
| (5,893) | (622) | (105) | (6) | 33 | (75) | (68) | (6,736) | |||
| Total liabilities | (6,650) | (572) | (105) | (6) | (26) | (75) | (61) | (7,495) | ||
| Net assets | 5,580 | (569) | (139) | 3 | (1) | (13) | (17) | (61) | 4,783 | |
| Equity | ||||||||||
| Share capital | 130 | 130 | ||||||||
| Share premium account | 1,252 | (3) | 1,249 | |||||||
| Other reserves | 3,395 | (2,568) | 24 | 3 | (1) | (5) | (769) | (2) | (65) | 12 |
| Retained earnings | 803 | 1,999 | (163) | (8) | 752 | 2 | 7 | 3,392 | ||
| Total equity shareholders’ funds | 5,580 | (569) | (139) | 3 | (1) | (13) | (17) | (61) | 4,783 |
* Other includes the incremental adjustment for dividends not recognised until approved.
Balance sheet reconciliation at 1 April 2004
| UK GAAP balances in IFRS format £m |
Property, plant and equipment IAS 16 £m |
Investment property IAS 40 £m |
Business combi- nations IFRS 3 £m |
Leases IAS 17 £m |
Events after the balance sheet date IAS 10 £m |
Financial instruments IAS 32/39 £m |
Income taxes IAS 12 £m |
Other £m |
IFRS £m |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||||
| Non-current assets | ||||||||||
| Investment properties | 9,279 | (138) | 20 | 22 | 9,183 | |||||
| Development properties | 156 | 156 | ||||||||
| 9,279 | 18 | 20 | 22 | 9,339 | ||||||
| Other non-current assets | ||||||||||
| Investments in joint ventures | 658 | 19 | (12) | (76) | (2) | 587 | ||||
| Other investments | 3 | 14 | 17 | |||||||
| 9,940 | 18 | 20 | 33 | 22 | (12) | (76) | (2) | 9,943 | ||
| Current assets | ||||||||||
| Trading properties | 42 | 42 | ||||||||
| Debtors | 40 | 40 | ||||||||
| Cash and short-term deposits | 174 | 174 | ||||||||
| 256 | 256 | |||||||||
| Total assets | 10,196 | 18 | 20 | 33 | 22 | (12) | (76) | (2) | 10,199 | |
| Liabilities | ||||||||||
| Current liabilities | ||||||||||
| Short-term borrowings and overdrafts | (485) | (485) | ||||||||
| Creditors | (385) | 49 | 1 | (335) | ||||||
| (870) | 49 | 1 | (820) | |||||||
| Non-current liabilities | ||||||||||
| Debentures and loans | (4,406) | (3) | (4,409) | |||||||
| Convertible bonds | (149) | 69 | (80) | |||||||
| Other non-current liabilities | (22) | (22) | ||||||||
| Deferred tax liabilities | (101) | (666) | (767) | |||||||
| (4,656) | (22) | 66 | (666) | (5,278) | ||||||
| Total liabilities | (5,526) | (22) | 49 | 67 | (666) | (6,098) | ||||
| Net assets | 4,670 | 18 | 20 | 33 | 49 | 55 | (742) | (2) | 4,101 | |
| Equity | ||||||||||
| Share capital | 122 | 122 | ||||||||
| Share premium account | 1,109 | 1,109 | ||||||||
| Other reserves | 2,617 | 71 | (2,668) | 49 | (20) | 49 | ||||
| Retained earnings | 822 | (53) | 2,688 | 33 | 49 | 6 | (722) | (2) | 2,821 | |
| Total equity shareholders’ funds | 4,670 | 18 | 20 | 33 | 49 | 55 | (742) | (2) | 4,101 |
Explanations of the adjustments made to the UKGAAP income statement and balance sheets are as follows:
Income taxes IAS 12
IFRS requires that deferred tax is recognised where assets are held at values greater than their tax base cost (usually historical cost). This deferred tax provision is reversed for the industry proposed performance measures of Adjusted Net Asset Value and underlying earnings per share.
The basis of calculating this provision varies depending on whether value is expected to be achieved through sales or retention in the business. As British Land has a proven record of portfolio recycling through sales and a committed strategy to recycle its capital the deferred tax provision is calculated on the basis that assets will be sold and takes account of available loss relief including indexation, but does not assume any mitigation that could be achieved through tax structuring.
Business combinations IFRS 3
Under IFRS corporate acquisitions are treated as either business combinations or asset acquisitions.
Under business combinations the purchase consideration is compared to the fair value of the assets and liabilities of the company acquired and any excess is recognised as goodwill. In property acquisitions it is from time to time common for less than a full deduction to be made in the purchase price for contingent CGT, in recognition that contingent CGT may not be crystallised for some time, if at all. IFRS prohibits any revision of the deferred tax to its fair value and therefore goodwill may arise on acquisition accounting, equal to the amount of deferred tax provided and not discounted in the purchase price.
Asset acquisitions arise when an asset, or a group of assets, that does not constitute a business is acquired. Under the asset acquisition method the assets and liabilities are treated as though acquired individually even if acquired in a corporate entity. There is no deferred tax relating to revaluations as the assets are treated as acquired at cost. Under this method there is no goodwill.
All corporate acquisitions in prior years and in the year to 31 March 2005 have been treated as business combinations.
Properties and leases IAS 16, IAS 40 and IAS 17
Under IFRS, we are required to distinguish between properties let under operating leases and those let under finance leases. This distinction is made at the inception of the lease and is not reassessed over the life of the lease unless the lease terms are varied significantly. Operating leases continue to be shown as a property interest in the balance sheet, but where a finance lease has been identified, IFRS requires the value of the cash flows related to the buildings to be shown as a debtor and the land as a property interest. Income is shown on the building element on a financial rather than a rental basis.
British Land has worked closely with the British Property Federation (BPF) on guidance notes for the application of IFRS in a UK context (PDF, 108 KB, opens in a new window). A comprehensive review of the terms of each of our leases has been undertaken using the approach recommeded by the BPF, this review has identified only one material finance lease within one joint venture.
Financial instruments IAS 32 and IAS 39
British Land uses derivatives to manage its interest rate risk. Under IFRS all derivatives, including hedges, are held on the balance sheet at fair value. The default treatment under this standard is for movements in the fair value to be recognised in the income statement, where they will impact reported profits. However, if an entity can demonstrate that its derivatives are effective hedges of specific risks it can choose to adopt hedge accounting. The Group has chosen to adopt hedge accounting.
Under the transitional rules for IFRS, companies may elect to commence application of IAS 39 with effect from 1 April 2005. British Land has chosen to apply IAS 39 in full retrospectively and not use this election.
Derivatives which hedge the Group's floating rate bank debt are classified as cash flow hedges and movements in their fair value are recognised in the hedging reserve, which is part of equity reserves.
The mark-to-market adjustment on financial instruments and related taxation effects are reversed in calculating Adjusted Net Asset Value.
Cash flow
The only changes to the cash flow statement are presentational. The UKGAAP decrease in cash of £38m for the year ended 31 March 2005 has been restated as a decrease in cash and cash equivalents of £19m following the reclassification of term deposits as cash and cash equivalents which increased by £19m in the year ended 31 March 2005.