International Financial Reporting Standards

Transcription

1 innovation excellence respect integrity customer service 7 February 2005 International Financial Reporting Standards 1

2 innovation excellence respect integrity customer service Andrew Macfarlane Group Finance Director Introduction 2

3 Agenda Introduction and IFRS overview Investment portfolio Leases, LS Trillium and other issues Derivatives, debt and performance measures Andrew Macfarlane David Holt Robert Fryer Andrew Macfarlane 3

4 Introduction What we will be telling you What we won t be telling you..yet! Health warning seminar based on our current interpretation of IFRS 4

5 What is IFRS? Setting standards 1973 International Accounting Standards Committee (IASC) Issued International Accounting Standards (IAS) Interpretations / Urgent issues Standing Interpretations Committee (SIC) EU Law European Financial Reporting Advisory Group (EFRAG) 2000 International Accounting Standards Board (IASB) Reviewed, improved, adopted existing IAS Issued new International Financial Reporting Standards (IFRS) International Financial Reporting Interpretations Committee (IFRIC) Accounting Regulatory Committee (ARC) US GAAP convergence in the future Recommend adoption (or not) by EU 5

6 Status of IFRS IFRS effectively frozen since April 2004 to allow companies to transition IASB still has a significant agenda which will lead to further changes in the medium term Work underway on contentious issues, including performance reporting leasing derivatives US GAAP convergence So further changes and restatements seem likely 6

7 Timetable February 1 April May June November 2006 May IFRS workshop IFRS effective for Land Securities 2004/05 prelims as normal: current GAAP 2004/05 re-presented under IFRS Reconciliations back to current GAAP 2005/06 interims in IFRS IFRS comparatives Reconciliations back to current GAAP 2005/06 prelims in IFRS IFRS comparatives Last reconciliations to current GAAP 7

8 Format of accounts: income statement Gross property income Interest from finance leases Revenue Costs Operating profit before depreciation Depreciation Operating profit before net profit on investment properties Profit/(loss) on disposal of investment properties Net gain/(loss) on revaluation of investment properties Net profit on investment properties Net operating profit Net finance costs Share of profits of associates and joint ventures (after tax) Profit before income tax Income tax expense (Group only) Profit for financial year Year to 31/03/ m 8

9 Format of accounts: balance sheet Year to 31/03/ m Year to 31/03/ m Non-current assets Non-current liabilities Investment property Borrowings (inc. finance leases payable) Property, plant and equipment Employee benefits Operating properties Deferred tax liabilities Other property, plant and equipment Total non-current liabilities Goodwill Current liabilities Net investment in finance leases Short term borrowings and overdrafts Investments in joint ventures Trade and other payables Total non-current assets Provisions Current assets Total current liabilities Available for sale assets TOTAL LIABILITIES Inventories NET ASSETS Trade and other receivables EQUITY Short-term investments Share capital Cash and cash equivalents Other reserves Total current assets Retained earnings TOTAL ASSETS TOTAL EQUITY 9

10 Format of accounts: cash flow Profit before income tax Add back : non-cash items : net financing costs Increase/(decrease) in current assets Net interest paid Income taxes paid Cash flows generated from operating activities Expenditures on investment property Expenditure on operating properties Capital expenditure on properties Proceeds from sale of investment properties Proceeds from sale of operating properties Net investment expenditure on properties Net expenditure on other property, plant and equipment Cash flows from investing activities Net proceeds from the issue of share capital Repayment of borrowings Payment of finance lease liabilities Net acquisition of short term investments Dividends paid Cash flow from financing activities Net increase / (decrease) in cash and cash equivalents Year to 31/03/ m 10

11 Segmental reporting IAS14 Property investment London portfolio (central London offices and retail) Retail (shopping centres, retail warehousing and other in-town shops) Non-core, including Urban Community Development Property outsourcing Major contracts Income statement and asset information at segment level, including income statements for major LS Trillium contracts Some re-alignment of statistical information to support analysis 11

12 innovation excellence respect integrity customer service David Holt Director of Finance Investment portfolio 12

13 Investment properties IAS 40 Current accounting Investment properties revalued semiannually Surpluses/deficits taken to revaluation reserve Under IFRS Continue to revalue standing investments and all developments semi-annually Revaluation surpluses/deficits through income statement, not reserves Properties acquired for immediate development revalued through reserves 13

14 Tax on revaluation IAS 12 Current accounting Contingent tax arising if properties sold at revalued amounts not provided, but is disclosed At 31 March 2004 : 490m Under IFRS Tax on latent capital gains on revaluations provided in full (undiscounted) on balance sheet Movements go through the income statement Tax actually payable still driven by tax law and UK GAAP 14

15 Investment property leases IAS 17 No finance leases Current accounting Cost of lease incentives spread over period to first rent review Under IFRS A few tenant finance leases in investment property business Headleases of investment properties (relevant rent payable 6m p.a.) have to be finance leases grosses up balance sheet Finance leases rent reclassified partly as interest, partly as deemed capital repayment Cost of lease incentives spread over life of lease, not to first rent review 15

16 Joint ventures IAS 31 Current accounting Classification dependent upon type of business Separate business equity accounting (Telereal, Scottish Retail, Metro) Not separate business proportionate accounting (Birmingham, Bristol) Under IFRS JVs determined by legal form of partnership, not by nature of partnership s business Either equity accounting or proportional consolidation, applied consistently Land Securities to equity account Share of joint venture net assets single line in balance sheet Share of joint venture profit after tax single line in income statement Extensive disclosures to be given 16

17 Held for sale assets IFRS 5 New concept Current accounting Non-current assets Under IFRS Significant disclosures Separate category on balance sheet Highly probable to be sold LS interpretation : publicly marketed and/ or signed heads of terms 17

18 innovation excellence respect integrity customer service Robert Fryer Technical Accounting Director Lease, LS Trillium and other issues 18

19 Operating versus finance lease Tenant Landlord Operating lease Rental expense Property on balance sheet Rental income Investment property revalued Loan to tenant on balance sheet Interest and loan repayments received No revaluations Finance lease (1) Property on balance sheet Loan from landlord Rental expense is deemed to be interest and principal repayments (1) Ignores split treatment of land and buildings 19

20 Operating versus finance lease As tenant As landlord Investment property business Headleases of investment properties treated as finance leases (relevant rent payable 6m per annum) Minimum impact as a few finance leases LS Trillium Some of Telereal s leases with 3 rd party landlords likely to be finance leases Some DWP leases with 3 rd party landlords likely to be finance leases Some of parts of the main Telereal contract with BT likely to be treated as finance leases BBC White City contract likely to be a finance lease 20

21 Finance leases - identification No finance leases Current accounting Tests to be applied: Under IFRS if present value of minimum lease payments amounts to substantially all of the fair value of the asset, then finance lease if term is for major part of economic life of asset, then finance lease other Split accounting for land and buildings 21

22 Finance lease example: Land Securities as tenant Illustrative assumptions: 99 year head lease on a shopping centre Ground rent per annum: 339,000 Land Securities lets building under an operating lease to retailer Value of the lease to retailer Value of head lease payable Current UK GAAP carrying value 100m (5)m 95m Discount rate: 7% 22

23 Finance lease example: Land Securities as tenant Profit and loss Balance Sheet Current accounting Rent payable of 339,000 per annum Investment property of 95m at valuation Income Statement Interest payable under finance lease of 338,000 per annum initially Balance Sheet Under IFRS Investment property of 100m at valuation Finance lease payable of 5m not revalued 23

24 Finance lease example: Land Securities Trillium/Telereal as landlord Illustrative assumptions: Lease to tenant: 25 year lease Economic life: 25 years Value of freehold: 10m Rent receivable per annum: 830,000 Discount rate: 7% 24

25 Finance lease example: Land Securities Trillium/Telereal as landlord Current accounting Profit and loss Rent receivable of 830,000 Depreciation of 400,000 Income Statement Under IFRS Interest on finance lease of 670,000 (year 1) falling to 30,000 (year 25) Balance Sheet Operating property cost 10m, depreciating at 400,000 per annum Balance Sheet Finance lease debtor of 10m (year 0) repaid over 25 years Contingent rents Treatment as before 25

26 Finance lease repayment profile Rent receivable per annum Loan repayment element Interest receivable element Finance lease treatment front-ends profits 26

27 Accounting for goodwill IFRS 3 Current accounting Trillium goodwill amortised over expected useful economic life Book value: 34m at 31 March 2004 Amortisation: 2.4m in year to 31 March 2004 Goodwill frozen at 31 March 2004 book value No amortisation Under IFRS Annual impairment review 27

28 Pensions IAS 19 Current accounting SSAP 24: Spreads expected costs of benefits over employees working lives Actuarial deficit disclosed in notes under FRS 17 Under IFRS 31 March 2004 deficit taken to opening IFRS reserves ( 17m before tax under FRS 17) Future actuarial surpluses and deficits through reserves Regular charge still through Income Statement Effect in year to 31 March 2004 would have been an: - increase in operating profit of 1.3m - additional finance cost of 0.6m 28

29 Share based payments IFRS 2 Current accounting Cost of share options not recognised in accounts when awarded Under IFRS Recognise cost of share options and similar rewards Cost of option fixed on issue using valuation model Cost expensed over vesting periods 2005 impact < 3m 29

30 Dividends payable IAS 10 Current accounting Provided when proposed Under IFRS Provided when approved effectively when paid One off increase in reserves ( 127m using 2004 final dividend) 30

31 innovation excellence respect integrity customer service Andrew Macfarlane Group Finance Director Derivatives, debt and performance measures 31

32 Interest rate hedges IAS 39 Current accounting Differences on derivatives matched with differences on item hedged Derivatives marked to market (MTM) if not deemed part of hedge Under IFRS All derivatives marked to market in balance sheet Tough new criteria for hedge effectiveness Mark to market adjustments on ineffective hedges go to Income Statement Mark to market adjustments on effective hedges go initially to reserves 32

33 Hedge accounting IAS 39 Announced Autumn 2004 that interest rate hedges would be re-worked LS will normally hedge circa 80% of floating rate exposure for up to 5-7 years Bank facilities mature in just under 5 years, but will be renewed Interest rate derivatives with maturity after expiry of current bank facilities cannot be accounted for as hedges. Mark to market through Income Statement Will introduce some volatility to results Whether accounted for as hedges or not, changes in mark to market will always impact NAV because the debt they hedge is NOT marked to market 33

34 Debt Exchange IAS 39 Requires us to: leave old debt on balance sheet amortise debt up to new higher maturity amounts over life of bonds by charging income statement Effect will be to reverse the mark to market loss in 2004/05 and recognise over life of bonds Tax position unchanged Considering presentational options so that we do not misrepresent the actual liabilities and profits of the Group 34

35 Adjusted earnings DRAFT Profits after tax per income statement 1. less: revaluation surpluses (including joint ventures) 2. less: profits on sale of fixed assets (including joint ventures) 3. adjust interest charge to reflect interest actually payable on new bonds 4. remove gains/losses on non-qualifying hedges 5. adjust tax charge in line with 1 4 above 6. adjust tax line to remove deferred tax effect of capital allowances on investment properties ( FRS 19 adjustment ) Adjusted earnings m X (X) (X) X X X X X NEW NEW NEW 35

36 Adjusted NAV DRAFT Net assets per balance sheet 1. Add back: latent CGT on revaluation surpluses 2. Add back: deferred tax on investment property capital allowances ( FRS 19 adjustment ) 3. Increase carrying value of bonds up to amount actually payable and adjust deferred tax provision accordingly 4. Add back negative investment in Telereal 5. Remove mark to market on hedges Adjusted NAV m X (X) (X) (X) X X X NEW NEW NEW 36

37 Remaining differences EPS Profit recognition profile on finance leases SIC15 cost of lease incentives spread over lease life improves short term profits Options and pensions small effects only NAV No provision for final dividend Consequential effects of EPS differences described above 37

38 Final remarks Good Bad Ugly No change to underlying economics or cash flows of the business No change to strategy Many things won t change e.g. revaluing investment properties Some changes unhelpful but dealt with through adjusted EPS and NAV Finance leases IAS 39 38