Warner Estate Holdings PLC 09 December 2005 WARNER ESTATE LIFTS DIVIDEND 9% AS PROPERTY UNDER MANAGEMENT JUMPS TO OVER £2BILLION Warner Estate Holdings PLC ("Warner Estate") the property investment, development and fund management group has announced its interim results for the six months to 30 September 2005. Financial Highlights • Adjusted net asset value per share up 11% to 658p(1) • Net asset value per share up 8% to 583p • Triple net asset value per share up 8% to 597p(2) • Property owned and under management up 95% to £2.1billion • Commercial rent roll under management £135m • Recurring earnings per share 9.5p (September 2004 10.3p restated)(3) • Earnings per share 52.3p (September 2004 48.7 restated) • Interim dividend up 9% to 9.5p Business Highlights • Successful acquisition and integration of Ashtenne Holdings PLC • Group share of goodwill on acquisition of Ashtenne substantially less than anticipated • Launch of £256m Apia Regional Office Fund with Morley Fund Management (1) Adjusted for deferred tax on revaluation gains and other items per TABLE 6 (2) Adjusted as in 1 and for potential deferred tax and fair value of debt per TABLE 6 (3) Adjusted for net gains on investment properties and other items per TABLE 4 Philip Warner, Chairman of Warner Estate commented: " Warner Estate is making very encouraging progress. The integration of Ashtenne has been completed and we now have over £2billion of property under management. " Since the period end, we have accelerated our progress, buying and selling £657 million of property. We have established a fifth fund, the Agora Max Fund, which will focus on owning and adding value to sub regional shopping centres and made its first acquisition, the £152 million Pallasades Shopping Centre in central Birmingham. " I am confident we have the right team in place with the experience and flair to ensure further progress in the current year." -ends- Date: 9 December 2005 For further information contact: Warner Estate Holdings PLC cityProfile Philip Warner, Chairman Simon Courtenay Peter Collins, Finance Director Tel: 020-7488-3244 Richard Moore, Property Director Michael Stevens, Operations Director Tel: 020-7907-5100 Web: www.warnerestate.co.uk Chairman's Statement Growth and activity have continued unabated throughout the first six months to 30 September 2005, producing a very respectable 11% rise in adjusted net asset value (8% rise in NAV). Property assets under management now exceed £2bn and the like for like revaluation uplift on properties (including our share of joint ventures) over the period was 5%. Since 30 September, a further £657m of purchases and sales have been made in respect of both our wholly owned Core portfolio and funds under management. In June 2005, the £256m Apia regional office fund was established with Morley Fund Management and in the same month the purchase of Ashtenne Holdings PLC was completed by Industrial Funds Ltd (IFL), our joint venture with Anglo Irish Bank. In October 2005, the Agora Max Jersey Property Unit Trust, a sub regional shopping centre fund in partnership with Bank of Scotland, was established with the purchase for £152m of The Pallasades shopping centre in Birmingham. In November 2005, as part of a £159m purchase from the Co-operative Insurance Society (CIS), a further seven properties were acquired for the Apia regional office fund for £120m. Also in November 2005, The Square Shopping Centre in Sale was sold by our Agora shopping centre fund for £40m, generating both a profit for the fund and a performance fee for the Group. I am particularly pleased to report that earlier this month we bought Anglo Irish's 50% stake in IFL for £0.35m, thereby completing the integration of Ashtenne several months ahead of plan. IFRS This is the first set of results prepared by the Group under International Financial Reporting Standards (IFRS), as adopted in the EU, and their appearance is very different to those previously reported. This is mainly because unrealised revaluation gains and losses are now shown as profit and loss account items rather than reserve movements with only a balance sheet impact. However, this is purely presentational and has no impact on cash flow. This statement includes a significant number of tables in order to show how these results would have looked if reported as previously, and the section "Reconciliations between IFRS and UK GAAP" includes a description of the main changes. The Group has made a decision in presenting these results not to reconcile back to UK GAAP numbers because the results which management formerly concentrated on were those where adjustments had been made to the UK GAAP figures. These adjusted numbers more accurately reflect management's view of the Group's performance. The results as required under IFRS for the period to 30 September 2005 along with the restatement of the comparatives for the periods to 30 September 2004 and 31 March 2005 have been produced as one document. The restatement of the opening balance sheet for IFRS purposes as at 31 March 2004 and an explanation of the adjustments required under IFRS are also contained in this document. RESULTS In the six months to September, adjusted NAV per share increased by 11% from 592p to 658p with the NAV by 8% from 540p to 583p. Triple net asset value (TNAV), on which the Group assesses its total return, also rose by 8% from 551p to 597p. Although the NAV under IFRS incorporates some of the adjustments we made for previously reported TNAV, there are some fundamental differences. The treatment of deferred tax under IFRS on revaluation gains does not allow mitigation through tax planning. In addition, we have to treat an element of our property portfolio as finance leases, which reduce net asset value. Also dividends are only charged on payment and therefore are no longer accrued. It was reported in June that the post balance sheet effect of the purchase of Ashtenne would leave IFL owning a business costing circa £50m, of which at the time £22m was estimated to be goodwill, being the value attributable to the fund management business. However, we have been able to dispose of surplus Ashtenne assets in the period, which together with the fair valuing of the remaining assets has reduced the total goodwill to circa £7m. Nevertheless, the real value of this business to Warner Estate has been maintained, if not increased, following its successful integration. Pre-tax profits have increased by £5.4m to £35.8m (September 2004: £30.4m). The reason for the large increase in these figures compared to previously reported periods is because under IFRS all unrealised revaluation gains or losses on investment properties and investments are included in the income statement; in addition the change in fair value of derivative financial instruments is included. The share of profit from joint ventures includes their own revaluation gains or losses and fair value adjustments to derivatives, and the Group share of the joint venture results is now shown post tax, which incorporates deferred tax as explained further below. Recurring pre-tax profits, excluding unrealised gains, were £6.4m against £6.8m (as restated) for the comparable period last year; this decrease is mainly due to a reduction in investment income where dividends have been received post 30 September which have previously been received in the first half. Operating profit before net gain on investments which excludes the effect of net finance expense which is broadly similar to the prior period, was £8.7m (September 2004: £11.0m). This fall in profits is mainly as a result of the costs of setting up the Apia regional office fund (£2.4m). Since September transactions have generated capital profits of £4.9m, which have been recognised as unrealised profits in the September results, and some £2m of performance fees arising on certain of these transactions. The Board has increased the interim dividend to 9.50p against 8.75p last year, a 9% increase which reflects our confidence in the underlying performance of the Group and ignores the impact of the one-off items. The dividend is covered 1.0 times by recurring earnings (September 2004: 1.15 times) and will be paid on 24 February 2006 to shareholders on the register at close of business on 25 January 2006. PROPERTY The considerable activity experienced throughout last year has continued across each area of business. Our relationship with Bride Hall has seen development projects commence in shopping centres at Middleton and Folkestone, where we anticipate generating increased income streams, complementing our ongoing active asset management initiatives. We expect our shopping centre extensions at Birkenhead, Preston, Bolton and Middleton (Phase II) to follow. Key Statistics TABLE 1 Total Total under management Wholly owned* 30 September 2005 31 March 2005 30 September 2005 31 March 2005 Capital Value £2,109m £1,077m £325m £327m Annualised rent roll £135.5m £72.8m £21.4m £23.7m Initial Yield 6.1% 6.5% 6.2% 6.9% Average Unexpired 6.0yrs 9.4 yrs 10.3yrs 10.6 yrs Lease Term Void Rate 9% 3% 4% 4% Number of Properties 534 104 70 72 Average Lot Size £3.95m £10.36m £4.64m £4.54m * Investment properties only The breakdown by sector at 30 September 2005 was as follows: TABLE 2 Annual Net No. of Rent initial Properties Value Roll ERV yield Weighting £m £m £m Retail Retail Warehouses 6 24.6 1.8 High Street 10 63.7 3.7 Retail sub total 16 88.3 5.5 5.8 5.27% 27% Offices London 3 9.8 0.8 South East 16 74.0 5.0 Rest of UK 8 32.2 2.3 Offices sub total 27 116.0 8.1 8.8 6.61% 36% Distribution and Industrial London 4 13.4 0.9 South East 9 42.2 3.1 South West 2 7.3 0.6 Midlands and North 11 46.9 3.2 Distribution & Industrial 26 109.8 7.8 8.4 6.86% 34% sub total Development 1 11.0 - - - 3% Total 70 325.1 21.4 23.0 6.28% 100% Trading 4 5.4 0.4 0.8 3.88% Total directly held 74 330.5 21.8 23.8 Funds Agora Shopping Centres 7 400.2 23.5 28.8 5.53% Radial Distribution 10 170.7 11.3 11.6 6.26% Bareway Industrial 4 28.8 2.0 2.1 6.66% Industrial Funds (Ashtenne) 27 39.8 1.7 1.7 4.04% Apia Regional Offices 13 261.4 17.3 19.9 6.21% t3 Trade Parks 32 94.6 5.4 6.3 6.29% Ashtenne Industrial 367 783.3 52.5 64.7 6.34% Total under management 534 2,109.3 135.5 158.9 PROPERTY FUNDS These funds are held as investments either directly by the Group or through the Group's joint ventures. The Ashtenne Industrial Fund (AIF) Value - £783m (Valuers: King Sturge) Rental Income - £52.5m pa Under Mark Ovens' leadership, the AIF team moved into the Group's head office in July and has continued to expand and enhance this fund, which invests in multi-let industrial estates across the country, from regional offices in Glasgow, Newcastle, Preston, Birmingham, Leeds and Cardiff. The Group directly purchased a further £12m of units in this Fund in August. AIF, which runs on a calendar year, has recorded a return to September 2005 of 17.9% and over the 12 months to September 2005 of 27.6%, both healthily over benchmark. In November, AIF purchased the assets in our Bareway industrial joint venture with Barclays for £28.9m and £51.1m of industrial property from our wholly owned Core portfolio. t3 Trade Park Fund Valued at net disposal proceeds £95m Shortly after the acquisition in May of Ashtenne Holdings PLC, the t3 fund was marketed for disposal and in November, sold for £96m on a rent roll of £5.4m pa. APIA Regional Office Fund Value - £261m (DTZ) Rental income - £17.3m pa The properties from our former joint venture with Royal Bank of Scotland (known as the Skipper Fund) were combined with four assets from Morley Fund Management to form the APIA Regional Office Fund which was launched in June as a fully fledged £256m unitised fund. As part of our asset management role, a new letting of 20,000 sq ft was achieved at Norfolk House, Milton Keynes in August. At Kingston, the Night Club was re-geared, extinguishing the tenant's break option in 2010; the entire 16,000 sq ft 3rd floor of Surrey House was let in August to Inside Track; and the 5,140 sq ft Roundhouse redevelopment gained planning consent in August, subsequently starting on site after pre-letting the whole to Singways Furniture in September. In November, £120m of new stock was acquired, the first major step towards the Fund's target of £750m by 2008. PROPERTY JOINT VENTURES AGORA Shopping Centre Fund Value - £400m (DTZ) Rental income - £23.5m pa Following an additional planning consent obtained in June for 17,500 sq ft at Middleton for Phase II, the re-gear of Wilkinsons and Mark One occurred in August with an increase in rent of £265,000 pa. In October, the development of the 45,000 sq ft Phase I began, with three of the four new units pre-let. At Cavern Court, Liverpool, Direct Line's leases on their existing offices were re-geared with a simultaneous new letting of the last vacant floor of 16,032 sq ft to them. Other notable events since 30 September include the disposal of The Square Shopping Centre, Sale, for £40m; and the acquisition into a new Agora Max Fund of the £152m Pallasades Shopping Centre in Birmingham. RADIAL Distribution Fund Value - £171m; £163m (DTZ), £8m (Directors) Rental income - £11.3m pa After a simultaneous rent review and underletting to Morrison's of the Sainsburys unit at Yate, this asset was sold for £18.5m in August. Further rent reviews were settled above our estimates at two of the units at DIRFT Logistics Park, Daventry; and the 313,000 sq ft unit let to Tesco at Weybridge achieved a rent review of over £8 per sq ft in July, again above our estimate. A 126,000 sq ft modern warehouse, let to Panasonic until 2009 and adjacent to their main facility, was purchased at Brackmills Park, Northampton for £8m in July. BAREWAY Industrial Fund Value - £29m (DTZ) Rental income - £2m pa Following the acquisition of Ashtenne and its principal business, the Ashtenne Industrial Fund, Bareway's similar assets were purchased by the fund in November of this year for £28.9m, focusing our industrial investment and management team on a single area. Industrial Funds Limited There remain two portfolios, owned by Ashtenne, which are being marketed for sale, as surplus stock:- • Ash UK - a portfolio of 11 predominantly development land sites, of which 9 have been sold post 30 September 2005. • Ash Europe - 3 industrial properties in Germany and Belgium, which have been sold post 30 September 2005. • Sundry joint venture properties in the UK, and 2 further industrial assets in Holland Wholly-Owned Core and Trading Portfolios Value - Investment - £325m; £312m (C&W H&B), £13m (Directors) Trading - £5m (At cost) The Core portfolio has experienced excellent results. At Hale Leys Shopping Centre, Aylesbury, Zone A rents have advanced from £80 to £91 per sq ft with new lettings to Clinton Cards and Julian Graves. A capital value uplift of £850,000 was recorded at Swift Park, Rugby after a new letting to Volvo Trucks and with over 60% of St John's House, Leicester, now let to the Secretary of State an increase in value of £800,000 was achieved. A retail warehouse at Ham Road, Worthing, let to MFI was sold in June for £8.6m and, as reported above, in November £51.1m of industrial investments were sold to the Ashtenne Industrial Fund. Work started on the new 200,000 sq ft Bouverie Place Shopping Centre in Folkestone with Bride Hall in November. Also in November, the Core acquired The Royals Shopping Centre, Southend, for £46m as part of the purchase from the CIS along with a portfolio of 105 leasehold office properties across the UK formerly occupied by CIS as their local office network. FINANCE The Group measures its performance on a total return that incorporates both realised profits and net revaluation surpluses achieved on shareholders triple net asset funds. Whilst a total return under IFRS is very similar to the Group's previously reported total return calculation there is a fundamental difference in the treatment of deferred tax, finance lease assets and dividends payable as outlined above. TABLE 3 Return: 30.9.2005 30.9.2004 31.3.2005 £m £m £m Profit for the period 27.7 24.5 45.0 (Less) / add back effect of treating investment (0.3) 0.2 0.8 properties as finance leases Add back deferred tax on revaluation gains 11.7 6.8 9.3 (including JVs) Add back fair value adjustments on derivative 2.2 0.1 0.8 financial instruments Add other IFRS adjustments 0.1 0.3 0.2 41.4 31.9 56.1 Deferred tax arising on unrealised gains (8.8) (3.6) (9.5) Change in fair value of debt, net of tax (2.8) 0.8 0.6 Total return for the period 29.8 29.1 47.2 Shareholders' triple net asset funds at start of period 277.7 239.7 239.7 Annualised return on shareholders' triple net asset funds 21.6% 24.3% 19.7% This shows a small decline in total return in the comparable six months. However, as the analysis shows, the contribution from profits has fallen substantially due mainly to the costs of establishing Apia. It should also be noted that the disposal of surplus assets at Ashtenne has reduced the overall purchase cost of this business. The benefits arising from this more than offset the direct costs of integrating Ashtenne. Without these costs the total return would have been similar to the comparable period last year. Furthermore, for the first time in a number of years the fair value of debt has reduced which is a reflection of the fact that LIBOR has come down over the last 12 months by approximately 100 basis points. Results TABLE 4 Profit before tax reconciliation 30.9.2005 30.9.2004 31.3.2005 £'000 £'000 £'000 Recurring profit 6,384 6,789 14,618 Non-recurring revenue (loss) / profit (including (1,570) 1,212 - trading) JV taxation (4,147) (2,868) (3,471) Profit on sale of investment properties & 286 913 7,675 investments (Group & JV) Net gain from fair value adjustment on investment 38,201 24,675 37,798 properties & investments (Group & JV) Change in fair value of derivative financial (3,143) (89) (1,088) instruments (Group & JV) Effect of investment properties treated as finance (143) (135) (274) leases Cost of employee share option schemes (57) (47) (95) Profit before income tax 35,811 30,450 55,163 The above table shows the results reconciled back to our view of recurring profit. This recurring profitability is though somewhat distorted because this year all the investment income that the Group receives from its quoted investments will come in the second half of the year. In addition, the performance fees expected to be earned on Agora which commenced last year will also occur in the second half of the year. In addition, I draw your attention to the unrealised profits now included in the Group's results of which some £4.9m has been realised since 30 September by disposals as described in the post balance sheet events section below. In June of this year, the properties from the Skipper joint venture were combined with four properties from Morley to form the Apia Regional Office Fund. Our units in this fund are treated as an investment on our balance sheet, and any income receivable is treated as distributions receivable from unlisted investments. Any revaluations are taken through the income statement as net gains from fair value adjustments on fixed asset investments. At the end of August we acquired units in the Ashtenne Industrial Fund (AIF), and our 2.86% directly held share is treated as an investment. A summary of the results is shown in the table below: TABLE 5 Unlisted investments Listed investments Apia AIF Total £'000 £'000 £'000 £'000 Income from fixed assets investment per note 6 25 313 53 391 Net gain from fair value adjustment on fixed 3,695 2,617 31 6,343 asset investments per income statement Earnings Per Share Earnings per share were 52p (September 2004 49p), and the recurring earnings per share excluding the unrealised surpluses and one-off profits or losses were 9.5p (September 2004 10.3p restated). Balance Sheet The shareholders' funds of the Group under IFRS are substantially different from UK GAAP although as previously advised not materially different from TNAV. As at 30 September 2005, equity shareholders' funds were £309.0m (March 2005 £272.1m) an increase of 8% in the half year, when the impact of the £13.6m of additional equity raised through the placing is excluded, whilst adjusted shareholders' funds on the same basis (shown in the table below) rose by 12% to £348.4m (March 2005 £298.3m). In terms of the adjusted shareholders' funds, this uplift is after deducting the proposed interim dividend of £5.1m (9.5p per share) which, if included, gives an overall uplift of 13.9% in the half year. In IFRS terms the Group's NAV per share is 583p (March 2005 540p), whilst adjusted NAV per share is 658p (March 2005 592p) and TNAV is 597p (March 2005 551p). TABLE 6 30 September 2005 30 September 2004 31 March 2005 Pence per Pence per Pence per £m share £m share £m share Shareholders' funds under IFRS 309.0 583.3 255.9 507.9 272.1 539.9 Add back deferred tax on revaluation 39.3 74.1 25.1 49.6 27.6 54.7 gains (including JVs) Add back effects of treating 3.3 6.2 3.0 6.0 3.6 7.1 investment properties as finance leases Less proposed dividend (5.1) (9.5) (4.4) (8.7) (4.8) (9.5) Add back / (less) fair value 1.2 2.3 (1.7) (3.4) (1.0) (2.0) adjustments on derivative financial instruments Add other IFRS adjustments 0.7 1.3 0.6 1.2 0.8 1.6 Adjusted shareholders' funds 348.4 657.7 278.5 552.6 298.3 591.8 Less potential deferred tax (24.5) (46.3) (9.8) (19.3) (15.7) (31.1) Less fair value adjustment net of tax (7.7) (14.5) (4.7) (9.4) (4.9) (9.8) on debt Shareholders' triple net asset funds 316.2 596.9 264.0 523.9 277.7 550.9 The majority of the uplift in the period has arisen from revaluation surpluses in the Group and in the joint ventures totalling £38.2m, of which £31.1m relates to investment property and £7.1m to investments. TABLE 7 Total under Share of joint management including Directly held ventures Total funds £m £m £m £m Investment property 326.6 371.2 697.8 1,069.0 Trading property 8.2 - 8.2 8.2 At 31 March 2005 334.8 371.2 706.0 1,077.2 Investment property 314.1 313.8 627.9 2,092.9 Properties under the course of 11.0 - 11.0 11.0 development Trading property 5.4 - 5.4 5.4 At 30 September 2005 330.5 313.8 644.3 2,109.3 Movement in year Revaluation 15.4 16.1 31.5 Net disposals (19.7) (73.5) (93.2) Total (4.3) (57.4) (61.7) Borrowings The presentation of borrowings in the accounts as prepared under IFRS is materially different in that cash previously offset against borrowings is now shown separately, although there has been no actual change in the Group's net debt. The table below shows the breakdown of debt at 30 September 2005 compared to that at 31 March 2005. The key change is that, as advised at March, we were in the process of restructuring the Group debt and so some £57.5m of debt that was shown as short term debt in March has now been restructured as long term debt. In addition, the Group has negotiated a £60m 3-year revolving working capital facility in order to provide greater financial flexibility. TABLE 8 Share of joint On balance sheet ventures Total £m £m £m Net short-term debt 13.9 53.8 67.7 Long-term debt 179.3 227.9 407.2 Total net debt at 30 September 2005 193.2 281.7 474.9 Of which Total net recourse debt 138.5 9.1 147.6 Long-term non-recourse debt 54.7 272.6 327.3 Gearing (on adjusted shareholder' funds) 55% 136% Recourse gearing 40% 43% Total net debt at 31 March 2005 153.0 323.1 476.1 Gearing (on adjusted shareholders' funds) 51% 160% Recourse gearing 33% 35% Cash Flow The cash flow statement is the one area under IFRS which is not materially different, except presentationally, to that previously reported. During the period cash generated from operations was £4.4m (September 2004 £21.0m restated). The reduction in the net cash inflow is largely due to the acquisition of a subsidiary which contained £10m in cash which was offset by movements in debtors and creditors and a fall in receipts from the disposal of trading properties of £5.1m. If this effect is adjusted, the Group generates a net inflow from operating activities during the period of £11.8m (September 2004 £13.0m). This is cash generated excluding any property additions and disposals, to pay interest, tax and dividends. The main flows resulting in the net outflow of £61.8m arose through purchases of investment properties of £11.1m, investments made in Apia and the Ashtenne Industrial Fund of £56.1m, investments in joint ventures of £46.7m offset by sales of investment properties of £28.0m and loans repaid and dividends received from joint ventures of £30.9m. In addition the placing of shares during the period raised £13.6m and restructuring of the Group's debt resulted in an outflow of £22.1m. Since the end of September, the Group and its joint ventures have carried out a series of transactions the net effect of which has been a net outflow of funds to the Group of £30m. The impact of the post balance sheet events has been to increase Group gearing on adjusted shareholders funds to 64%. Post Balance Sheet Events Since 30 September 2005 the Group has continued with its programme of realigning its assets and those of its funds and joint ventures, the most significant of which have been: 1. The purchase of The Pallasades Shopping Centre for £152m in a Jersey Property Unit Trust (JPUT) in October and the transfer of the Agora properties in Birkenhead into JPUTs. 2. We have disposed of the Sale Shopping Centre from our Agora Shopping Centre joint venture for £40m, an uplift on the value at 31 March 2005 of £10m before costs. 3. As a result of the purchase of Ashtenne by IFL, there has been a programme of disposal of non-Core assets continuing after 30 September 2005 which has now largely concluded. This has allowed us to complete the integration of the Ashtenne fund management business into the Group and purchase the remaining half share in IFL not owned by the Group. Also as part of this process because of a non-compete clause in the Ashtenne Industrial Fund (AIF) the assets in the Bareway joint venture and some of the Group's industrial assets were sold for £80m to AIF in late November. 4. The Apia Regional Office Fund has recently exchanged contracts on a portfolio of properties with the Co-operative Insurance Society (CIS) which consists of seven regional office buildings valued at £120m. As a result of this purchase the Apia Fund now has a value of some £380m which is well on the way to its target of £750m of property assets under management by 2008. At the same time the Group purchased from CIS a £46m shopping centre in Southend, seven small freehold office assets for £6m and a leasehold liability portfolio with a value of £13.3m. The impact of these transactions in terms of the total property under management and the mix of that portfolio are shown in the table below: TABLE 9 30 September Post Interim December 2005 Disposals Acquisitions Note 2005 £m £m £m £m Core 331 (51) 52 1 332 Agora 400 (39) - 2 361 Agora Max - - 152 3 152 Apia 261 - 120 4 381 AIF 783 (12) 80 5 851 Ashtenne - t3 95 (95) - 6 - Radial 171 - - - 171 Bareway 29 (29) - 7 - Ashtenne - non core 39 (23) 4 8 20 Total 2,109 (249) 408 2,268 Notes: 1. Core - disposal of 12 industrial assets to AIF and the purchase of The Royals shopping centre, Southend, and 7 office properties from CIS. 2. Agora - disposal of The Square Shopping Centre, Sale. 3. Agora Max - purchase of The Pallasades Shopping Centre, Birmingham. 4. Apia - purchase of 7 office properties from CIS. 5. AIF - disposal of a portfolio of North West properties. Purchase of 12 industrial properties from Warner core and the 4 from the Bareway Industrial Fund. 6. Ashtenne t3 - disposal of all assets. 7. Bareway - disposal of all assets to AIF. 8. Ashtenne non core - purchase of Hazeldonk 6710, Breda. Disposal of 9 UK, 1 JV and 3 European properties. Prospects Property continues to perform well, doubtless aided by the quarter point cut in interest rates in August. Demand from investors remains strong, as much for funds as for direct property, and returns from property have maintained their favourable comparison with other asset classes. Although in June I sounded a note of caution about yields, they continue to harden and I now direct that caution towards 2006. The Chancellor's reference to Real Estate Investment Trusts (REITS) in his Pre-budget Statement was encouraging, although we continue to await further details, particularly of conversion costs. We seek to build and to add value to our funds and our attention is directed at the U.K. However, although we are disposing of the European assets which we acquired through the purchase of Ashtenne, a move towards Europe in the future has not been ruled out. Despite a weakening economy, I am confident that our focus on asset management combined with a positive property market will ensure further progress in the current year. SIGNIFICANT EVENTS DURING SIX MONTH PERIOD TO 30 SEPTEMBER 2004 Warner Estate Holdings PLC Key Highlights Date Detail Category April 2005 5% placing of shares in Warner Estate Holdings PLC to part finance the Core acquisition of Ashtenne Holdings PLC April 2005 Purchase of Townsend Farm Industrial Estate, Dunstable by Bareway Joint venture Industrial joint venture for £5.5m May 2005 Offer to acquire Ashtenne Holdings PLC is declared unconditional Joint venture June 2005 £256m APIA Regional Office Fund established in conjunction with Morley Funds Asset Management which combined the Skipper Offices properties and Westgate, Bristol from the Core Portfolio with Morley's existing £63m portfolio of offices. Warner has 34.83% investment in the Fund. June 2005 Sale of 120 Ham Road, Worthing for £8.6m Core Investment Property July 2005 Completion of acquisition of Ashtenne Holdings PLC by Industrial Funds Joint venture Ltd August 2005 Purchase of "Immanis" at Brackmills Distribution Park, Northampton by Joint venture Radial Distribution joint venture for £8m August 2005 Purchase of 7,993,098 units in Ashtenne Industrial Fund for £12m, Core Investment representing 2.69% of the Fund to add to 5.168% owned by Ashtenne September 2005 Sale of Great Western Business Park, Yate by Radial Distribution joint Joint venture venture for £18.55m Post 30 September 2005 Date Details Category October 2005 Establishment of Agora Max Shopping Centre Fund and the purchase of Joint venture The Pallasades Shopping Centre via a Jersey Unit Trust for £152m October 2005 Sale of land at Pollards Lane, Leeds by Industrial Funds Ltd for £7.2m Joint venture November 2005 Sale of all industrial properties owned by t3, in which Industrial Joint venture Funds Ltd had a 17% stake, for £96m November 2005 Sale of The Square Shopping Centre, Sale by Agora Shopping Centres Joint venture joint venture for £40m November 2005 Consideration of £14m received in settlement of offer by Kellen Core Investment Acquisitions Ltd for shares in East Surrey Holdings plc November 2005 Sale of all industrial properties owned by Bareway Industrial joint Joint venture venture to Ashtenne Industrial Fund for £29m November 2005 Sale of industrial portfolio to Ashtenne Industrial Fund for £51m Core Investment Property November 2005 Purchase of The Royals Shopping Centre in Southend with lease Core Investment liabilities for a net £33m Property November 2005 Purchase of a portfolio of seven regional office buildings by APIA Funds Regional Office Fund for £120m November 2005 Sale of three industrial buildings in Europe by Industrial Funds Ltd Joint venture for £12.7m (€18.4m) December 2005 Sale of a portfolio of buildings and land by Industrial Funds Ltd for Joint venture £9.7m December 2005 Purchase of remaining 50% stake in Industrial Funds Ltd from Anglo Core Investment Irish Bank for £0.35m UNAUDITED CONSOLIDATED INCOME STATEMENT For the six months ended 30 September 2005 Notes 6 months 6 months Year ended ended ended 30.9.2005 30.9.2004 31.3.2005 £'000 £'000 £'000 Revenue 2 18,520 25,897 45,052 Rental and similar income 12,176 13,285 26,521 Turnover from property trading activities 3,424 10,575 12,446 Cost of sales of property trading activities (2,969) (9,242) (10,788) Service charge and similar income 1,490 1,031 2,170 Service charge expense and similar charges (1,723) (1,316) (2,773) Net rental and trading income 3 12,398 14,333 27,576 Turnover from asset management activities 1,430 1,006 3,915 Cost of sales of asset management activities (776) (519) (1,437) Net income from asset management activities 3 654 487 2,478 Administrative expenses (1,099) (917) (1,755) Property expenses (3,225) (2,866) (4,453) Operating profit before net gains on investments 3 8,728 11,037 23,846 Net gain from fair value adjustments on 15,301 15,006 21,871 investment properties Net gain / (loss) from fair value adjustment on 6,343 (136) 2,397 investments Profit on sale of investment properties 5 37 660 2,260 Operating profit 30,409 26,567 50,374 Finance income 6 3,091 3,554 6,698 Finance expense 7 (6,665) (6,691) (14,948) Change in fair value of derivative financial (157) 251 315 instruments Share of joint ventures' post tax profits 9,133 6,769 12,724 Profit before income tax 35,811 30,450 55,163 Taxation - current 8 (1,397) (1,941) (4,098) Taxation - deferred 8 (6,689) (3,992) (6,109) Profit for the period 27,725 24,517 44,956 Attributable to: Equity holders 27,721 24,517 44,954 Minority interests 4 - 2 p p p Earnings per share 9 52.34 48.73 89.20 Fully diluted earnings per share 9 52.03 48.58 88.59 UNAUDITED CONSOLIDATED BALANCE SHEET Notes 30.9.2005 30.9.2004 31.3.2005 £'000 £'000 £'000 ASSETS Non-current assets Investment properties 10 315,141 349,369 327,737 Properties under the course of development 10 11,000 - - Plant and equipment 422 387 347 Investments in joint ventures 11 127,490 110,866 102,517 Investments in listed and unlisted shares 12 78,003 12,985 15,518 Investments in associates 13 5,327 5,000 5,327 Deferred income tax assets 14 509 510 450 Derivative financial assets 1 83 11 Trade and other receivables 496 272 350 538,389 479,472 452,257 Current assets Inventories 5,363 9,525 8,235 Trade and other receivables 12,106 9,880 9,051 Cash and cash equivalents 98,240 85,987 109,366 115,709 105,392 126,652 Total assets 654,098 584,864 578,909 LIABILITIES Non-current liabilities Borrowings, including finance leases (270,230) (156,818) (195,638) Derivative financial liabilities (1,378) (1,229) (1,162) Deferred income tax liabilities 14 (26,864) (18,060) (20,112) Retirement benefit obligations 4 (321) (470) (336) Provisions for other liabilities and charges (185) (80) (128) (298,978) (176,657) (217,376) Current liabilities Borrowings, including finance leases (22,700) (132,260) (68,269) Trade and other payables (21,517) (16,841) (18,791) Current income tax liabilities (1,946) (3,206) (2,118) (46,163) (152,307) (89,178) Total liabilities (345,141) (328,964) (306,554) Net assets 308,957 255,900 272,355 EQUITY Capital and reserves attributable to the Company's equity holders Share capital 16 2,675 2,548 2,548 Reserves 16 307,345 255,105 271,222 Investment in own shares 16 (1,063) (1,753) (1,667) Equity shareholders' funds 308,957 255,900 272,103 Minority interest - - 252 Total equity 308,957 255,900 272,355 UNAUDITED CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the six months ended 30 September 2005 6 months 6 months ended ended Year ended 30.09.2005 30.09.2004 31.03.2005 £000 £000 £000 Profit for the period 27,721 24,517 44,954 Actuarial (losses) / profits on retirement benefit obligations (21) (53) 50 Deferred tax arising on retirement benefit obligations (5) 7 (33) Total recognised income and expense for the period 27,695 24,471 44,971 UNAUDITED RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS For the six months ended 30 September 2005 6 months 6 months ended ended Year ended 30.09.2005 30.09.2004 31.03.2005 £000 £000 £000 Opening equity in shareholders' funds As previously reported 272,103 246,251 246,251 Effect of adopting IFRS - (10,300) (10,300) As restated 272,103 235,951 235,951 Shares issued 13,620 - - Acquisition of investment in own shares (76) (150) (169) Disposal of investment in own shares 680 86 191 286,327 235,887 235,973 Total recognised income and expense for the period 27,695 24,471 44,971 Dividend paid in period (5,065) (4,458) (8,841) Closing equity shareholders funds 308,957 255,900 272,103 UNAUDITED CONSOLIDATED CASH FLOW STATEMENT For the six months ended 30 September 2005 Notes 30 September 30 September 31 March 2005 2004 2005 £'000 £'000 £'000 Cash flows from operating activities Cash generated from operations 17 4,407 21,036 34,195 Interest paid (6,559) (6,787) (14,097) Interest received 905 809 6,735 UK Corporation tax paid (2,149) (1,408) (3,209) Net cash (outflow) / inflow from operating (3,396) 13,650 23,624 activities Cash flows from investing activities Purchase of investment properties and related (11,128) (30,470) (30,963) capital expenditure Sale of investment properties 28,062 18,296 46,179 Purchase of plant and equipment (137) (19) - Purchase of investments in listed and unlisted (56,142) - - shares Purchase of investments in associates - (5,000) (5,327) Net cash acquired from purchase of shares in 9,815 - 250 subsidiary company Purchase of shares in joint ventures (275) - (4,175) Sale of shares in joint ventures 100 - 205 Loans to joint ventures (46,708) (17,568) (22,440) Loans repaid by joint ventures 29,916 - 23,276 Dividends received from listed investments 25 342 533 Dividends received from joint ventures 1,000 - - Net cash (outflow) / inflow from investing (45,472) (34,419) 7,538 activities Cash flows from financing activities Issue of shares 13,620 - - Purchase of own shares for AESOP scheme (119) (64) (169) Disposal of own shares for share option scheme 681 - - Dividends paid (5,065) (4,418) (8,841) Increase in bank loans 36,390 - - Repayment of bank loans (1,125) (1,150) (2,250) Repayment of mortgages and other loans (57,346) (373) (794) Net cash outflow from financing activities (12,964) (6,005) (12,054) Net (decrease) / increase in cash and cash (61,832) (26,774) 19,108 equivalents* Cash and cash equivalents at beginning of period 2,653 (16,455) (16,455) Cash and cash equivalents at end of period (59,179) (43,229) 2,653 * Includes overdraft facility balances shown in borrowings UNAUDITED NOTES TO THE FINANCIAL STATEMENTS 1. TRANSITION TO IFRS In previous periods, Warner Estate Holdings PLC ('Warner Estate' or the 'Group') has prepared its financial statements under UK Generally Accepted Accounting Principles ('UK GAAP'). Under European legislation, all companies listed in the European Union ('EU') are required to prepare consolidated financial statements under International Financial Reporting Standards as adopted by the EU ('IFRS') for financial periods beginning on or after 1 January 2005. As a result the Group is required to prepare its consolidated financial statements in accordance with IFRS. The Group's first full financial statements under IFRS will be for the year ending 31 March 2006. This report is prepared in accordance with the transitional provisions set out in IFRS 1 - 'First-time Adoption of International Financial Reporting Standards' in order to provide a starting point for reporting under IFRS. The date of transition to IFRS is 1 April 2004 and all information in these financial statements has been restated to reflect the Group's adoption of IFRS. The Group has also adopted International Accounting Standards (IAS) 32 " Financial Instruments: Disclosure and Presentation" and IAS 39 "Financial Instruments: Recognition and Measurement" from 1 April 2004. Advantage has been taken of certain exemptions afforded by IFRS 1 "First-time adoption of International Financial Reporting Standards" as follows: • Business combinations prior to 1 April 2004; and • The Group has applied IFRS 2 "Share-based Payment" retrospectively only to awards made after 23 June 2003 that had not vested at the balance sheet date. Details with respect to the Group's transition from UK GAAP to IFRS, including accounting policies used, reconciliations and descriptions of the effect of the transition on the Group's net income, equity and cash flows are provided in the section "Reconciliations between IFRS and UK GAAP". 2. ACCOUNTING POLICIES Basis of preparation The interim consolidated financial statements of the Group for the six months to 30 September 2005 are prepared in accordance with the accounting policies set out below. At this stage in the development of IFRS, matters such as the interpretation and application of IFRS are continuing to evolve. Standards currently in issue and endorsed by the EU are subject to interpretation by the International Financial Reporting Interpretations Committee ('IFRIC') and further 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 accounting or presentation of certain financial information from that applied in the preparation of this document. Additionally, IFRS is being applied in the United Kingdom and in a large number of countries simultaneously for the first time. Furthermore, due to a number of new and revised standards included within the body of standards that comprise IFRS, there is not yet a significant body of established practice on which to draw in forming options regarding interpretation and application. Accordingly, practice is continuing to evolve. At this preliminary stage, therefore, the full effect of reporting under IFRS as it will be applied and reported on in the Company's first IFRS Financial Statements for the year ended 31 March 2006 may be subject to change. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain assets and liabilities, which are carried at fair value, and in accordance with those IFRS standards and IFRIC interpretations issued and effective or issued and early adopted as at the time of preparing these accounts. These Interim Financial Statements do not comprise statutory accounts within the meaning of Section 240 of the Companies Act 1985. The statutory accounts for the year ended 31 March 2005 have been delivered to the Registrar of Companies and include an audit report which was unqualified and did not contain a statement under either Section 237(2) or 237(3) of the Companies Act 1985. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group's accounting policies. Although these estimates are based on management's best knowledge of the amount, events or actions, actual results ultimately may differ from those estimates. Consolidation (a) Subsidiary undertakings Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date control ceases. All inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated upon consolidation. (b) Interests in joint ventures Interests in jointly controlled entities are recognised using the equity method. Unrealised gains and losses on transactions between the Group and its joint ventures are eliminated to the extent of the Group's interest in the joint ventures. The Group's share of profit of joint ventures represents the Group's share of the joint venture's profit after tax. (c) Associates Investments in associates are accounted for using the equity method. Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. The Group's share of profit of associates represents the Group's share of the associates profit before tax. The above principles regarding joint ventures are also applicable to associated undertakings. Segment reporting The Group's primary reporting format is business activity, being property investment and asset management. A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. Plant and equipment Plant and equipment is initially measured at cost less subsequent depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that the future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Other tangible assets are depreciated by equal annual instalments over their estimated useful lives of between three and ten years and are carried at historic cost less accumulated depreciation. Where the carrying amount of a fixed asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Recoverable amount is the higher of fair value less costs to sell and value in use and is determined for an individual asset. After initial recognition, the item is carried at its cost less any accumulated depreciation and any accumulated impairment losses. Intangible assets (a) Goodwill Goodwill arising on acquisitions before 1 January 2004, the date of transition to International Financial Reporting Standards, has been retained at the previous UK GAAP amounts, subject to being tested for impairment at that date. The Group's policy up to and including 28 February 1998 was to eliminate goodwill arising upon acquisitions to reserves. Under IFRS 1 and IFRS 3, such goodwill will remain eliminated against reserves and is not included in determining any subsequent profit or loss on disposal. Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary / associate at date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates. Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Investment property (a) Initial recognition Property that is held for long-term rental yields or for capital appreciation or both, and that is not occupied by the Group, is classified as investment property. Investment property comprises freehold land, freehold buildings, land held under operating leases and buildings held under finance leases. When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property remains an investment property and is accounted for as such. When the Group begins to redevelop an existing investment property with a view to sale, the property is transferred to trading properties and held as a current asset. The property is re-measured to fair value as at the date of the transfer with any gain or loss being taken to profit or loss. The re-measured amount becomes the deemed cost at which the property is then carried in trading properties. Property that is being constructed or developed for future use as an investment property, but which has not previously been classified as such, is classified as investment property under development within assets under course of development. This is recognised initially at cost but is subsequently re-measured to fair value at each reporting date. Any gain or loss on re-measurement is taken direct to equity unless any loss in the period exceeds any net cumulative gain previously recognised in equity. In the latter case, the amount by which the loss in the period exceeds the net cumulative gain previously recognised is taken to profit or loss. On completion, the property is transferred to investment property with any final difference on re-measurement accounted for in accordance with the foregoing policy. Land held under operating leases is classified and accounted for as investment property when the rest of the definition of investment property is met. In such cases, the operating lease is accounted for as if it were a finance lease. Investment property is measured initially at its cost, including related transaction costs. (b) Fair value After initial recognition, investment property is carried at fair value. Fair value is based on active market prices, adjusted, if necessary, for any difference in the nature, location or condition of the specified asset. If this information is not available, the Group uses alternate valuation methods such as recent prices on less active markets or discounted cash flow projections. These valuations are performed in accordance with the guidance issued by the International Valuation Standards Committee. These valuations are reviewed at each financial reporting period end by external valuers. Investment property that is being redeveloped for continuing use as investment property, or for which the market has become less active, continues to be measured at fair value. The fair value of investment property reflects, among other things, rental income from current leases and assumptions about rental income from future leases in the light of current market conditions. The fair value also reflects, on a similar basis, any cash outflows that could be expected in respect of the property. Some of those outflows are recognised as a liability, including finance lease liabilities in respect of land classified as investment property; others, including contingent rent payments, are not recognised in the financial statements. (c) Subsequent expenditure Subsequent expenditure is charged to the asset's carrying amount only when it is probable that future economic benefit associated with the item will flow to the Group and the cost of the item can be measured reliably. All repairs and maintenance costs are charged to the income statement during the financial period in which they are incurred. Gross borrowing costs associated with direct expenditure on properties under development or undergoing major refurbishment are capitalised. With specific developments, the amount capitalised is the gross interest incurred on those borrowings less any investment income arising on their temporary investment. Interest is capitalised as from the commencement of the development work until the date of practical completion. The capitalisation of finance costs is suspended if there are prolonged periods when development activity is interrupted. Interest is also capitalised on the purchase cost of a site or property acquired specifically for redevelopment in the short term but only where activities necessary to prepare the asset for redevelopment are in progress. (d) Changes and transfers Changes in fair values are recorded in the income statement for investment properties. If an investment property becomes owner-occupied, it is reclassified as property, plant and equipment, and its fair value at the date of reclassification becomes its cost for accounting purposes. Property that is being constructed or developed for future use as investment property is classified as property, plant and equipment and stated at cost until construction or development is complete, at which time it is reclassified and subsequently accounted for as investment property. If an item of property, plant and equipment becomes an investment property because its use has changed, any differences resulting between the carrying amount and the fair value of this item at the date of transfer is recognised in equity as a revaluation of property, plant and equipment under IAS 16. However, if a fair value gain reverses a previous impairment loss, the gain is recognised in the income statement. Inventories Property inventories are stated at the lower of cost and estimated net realisable value. No interest is capitalised within inventories. Properties that are acquired and subsequently developed for future sales are reclassified as inventories at their deemed cost, which is the carrying amount at the date of reclassification. They are subsequently carried at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less cost to complete redevelopment and selling expenses. Cash and cash equivalents Cash and cash equivalents comprises cash balances, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Employee benefits The Group accounts for pensions under IAS 19 'Employee Benefits'. In respect of defined benefit pension schemes, obligations are measured at discounted present value while scheme assets are measured at their fair value. The operating and financing costs of such plans are recognised separately in the income statement. Service costs are spread systematically over the working lives of the employees concerned with the charge for the period included in operating costs in the income statement. Financing costs are recognised in the periods in which they arise and are included in interest expense. Actuarial gains and losses arising from either experience differing from previous actuarial assumptions or changes to those assumptions are recognised immediately in the statement of recognised income and expense. Contributions to defined contribution schemes are expensed as incurred. Income tax Income tax on the profit for the year comprises current and deferred tax. Current tax is the tax payable on the taxable income for the year and any adjustment in respect of previous years. Deferred income tax is provided using the balance sheet liability method. Provision is made for temporary differences between the carrying value of assets and liabilities in the consolidated financial statements and the values used for tax purposes. Temporary differences are not provided for when they arise from initial recognition of assets and liabilities that do not affect accounting or taxable profit. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities and is calculated using rates enacted or substantially enacted at the balance sheet date in the tax jurisdiction in which the temporary differences arise. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can be used. The deferred income tax assets and liabilities are only offset if there is a legally enforceable right of set off. When distributions are controlled by the Group, and it is probable the temporary difference will not reverse in the foreseeable future, deferred tax which would arise on the distribution of profits realised in subsidiaries, associates and joint ventures is provided in the same period as the liability to pay the distribution is recognised in the financial statements. Provisions Provisions for legal claims are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Where the Group, as lessee, is contractually required to restore a leased property to an agreed condition, prior to release by a lessor, provision is made for such costs as they are identified. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and is stated net of sales taxes and value added taxes. Revenue includes 'Rental and similar income', 'Service charge and similar income', 'Turnover from non-property activities'. Revenue is recognised as follows: (a) Rental and similar income Rental income from operating lease income is recognised on a straight-line basis over the lease term. When the Group provides incentives to its customers, the cost of incentives are recognised over the lease term, on a straight-line basis, as a reduction of rental income. (b) Service charge and similar income Service and management charge income is recognised on a gross basis in the accounting period in which the services are rendered. Where the Group is acting as an agent, the commission rather than gross income is recorded as revenue. (c) Income from investments Dividend income from investments is recognised when the shareholders' rights to receive payment have been established. (d) Income from property trading Profits or losses arising from the sale of trading and investment properties are included in the income statement of the Group where an exchange of contracts has taken place under which any outstanding conditions are entirely within the control of the Group. Profits or losses arising from the sale of trading and investment properties are calculated by reference to their carrying value and are included in operating profit. (e) Income from asset management activities Management fees earned are calculated on an accruals basis. (e) Income from asset management activities Asset management income is recognised in the accounting period in which the services are rendered. Leases (a) A Group company is the lessee (i) Operating lease - leases in which substantially all risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. Payments, including prepayments, made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. (ii) Finance lease - leases of assets where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease commencement date at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in current and non-current borrowings. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The investment properties acquired under finance leases are carried at the fair value. (b) A Group company is the lessor (i) Operating lease - properties leased out under operating leases are included in investment property in the balance sheet. (ii) Finance lease - when assets are leased out under a finance lease, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable accrues as finance income. Lease income is recognised over the term of the lease using the net investment method before tax, which reflects a constant periodic rate of return. Financial instruments and hedging activities Derivatives The Group uses derivatives to help manage its interest rate and foreign exchange rate risk. In accordance with its treasury policy, the Group does not hold or issue derivatives for trading purposes. Derivatives are recognised at fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the hedge relationship. Hedge accounting Where a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument and the hedged item as well as its risk management objectives and its strategy for undertaking the various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in the hedging transactions are highly effective in offsetting the changes in fair values or cash flows of the hedged items. Where hedge accounting requirements were not met, changes in fair value of derivatives are recognised through the income statement. Investments The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and reviews this designation at each reporting date. (a) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the balance sheet date. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are included in trade and other receivables in the balance sheet. Purchases and sales of investments are recognised on trade-date - the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit and loss are subsequently carried at fair value. Realised and unrealised gains and losses arising from changes in the fair value of the 'financial assets at fair value through profit or loss' category are included in the income statement in the period in which they arise. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models refined to reflect the issuer's specific circumstances. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment in trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement. Borrowings Borrowings are initially recognised at cost, being the fair value of consideration received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options, or for the acquisition of a business, are included in the cost of acquisition as part of the purchase consideration. Where any Group company purchases the Company's equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company's equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company's equity holders. Share based payments The cost of granting share options and other share based remuneration to employees and directors is recognised through the income statement. The Group has used the Black-Scholes option valuation model to establish the relevant costs. The resulting values are amortised through the income statement over the vesting period of the options and other grants. The charge is reversed if it appears probable that applicable performance criteria will not be met. Own shares held in connection with employee share plans or other share based payment arrangements are treated as treasury shares and deducted from equity. No profit or loss is recognised in the income statement on their sale, re-issue or cancellation. 3. TURNOVER AND OPERATING PROFIT The Directors believe that the Group operates in two primary segments, namely property investment and asset management. Property Investment Asset Management Group Total £'000 £'000 £'000 6 months to 30 September 2005 Rental and similar income 12,176 - 12,176 Turnover from property trading activities 3,424 - 3,424 Cost of sales of property trading activities (2,969) - (2,969) Service charge and similar income 1,490 - 1,490 Service charge expense and similar charges (1,723) - (1,723) Net rental and trading income 12,398 - 12,398 Turnover from asset management activities - 1,430 1,430 Cost of sales of asset management activities - (776) (776) Administrative expenses (1,099) - (1,099) Property expenses (3,225) - (3,225) Operating profit before net gain on investments 8,074 654 8,728 3. TURNOVER AND OPERATING PROFIT (CONT.) Property Investment Asset Management Group Total £'000 £'000 £'000 6 months to 30 September 2004 Rental and similar income 13,285 - 13,285 Turnover from property trading activities 10,575 - 10,575 Costs of sales of property trading activities (9,242) - (9,242) Service charge and similar income 1,031 - 1,031 Service charge expense and similar charges (1,316) - (1,316) Net rental and trading income 14,333 - 14,333 Turnover from asset management activities - 1,006 1,006 Cost of sales of asset management activities - (519) (519) Administrative expenses (917) - (917) Net property expenses (2,866) - (2,866) Operating profit before net gain on investments 10,550 487 11,037 Property Asset Investment Management Group Total £'000 £'000 £'000 Year to 31 March 2005 Rental and similar income 26,521 - 26,521 Turnover from property trading activities 12,446 - 12,446 Costs of sales of property trading activities (10,788) - (10,788) Service charge and similar income 2,170 - 2,170 Service charge expense and similar charges (2,773) - (2,773) Net rental and trading income 27,576 - 27,576 Turnover from asset management activities - 3,915 3,915 Cost of sales of asset management activities - (1,437) (1,437) Administrative expenses (1,755) - (1,755) Net property expenses (4,453) - (4,453) Operating profit before net gain on investments 21,368 2,478 23,846 All turnover and operating profit has arisen from continuing operations. 4. RETIREMENT BENEFIT OBLIGATIONS The Group operates and contributes to pension schemes for certain Directors and employees and makes some discretionary allowances. The costs charged to the profit and loss account for the six months to 30 September 2005 in respect of these amounted to £149,000 (half year to 30.9.04: £154,000; year to 31.3.05: £298,000). Pension premiums paid in advance were £35,000 (half year to 30.9.04: £105,000; year to 31.3.05: £70,000). The Group operated a defined benefit scheme in the UK, The Warner Estate Group Retirement Benefits Scheme. A full valuation was carried out at 31 March 2004. The values at and updated to 30 September 2005, and 31 March 2005 were updates of the 31 March 2004 valuation carried out by a qualified independent actuary. It has been agreed with the Trustees that the Group contributes are 23% of pensionable salary plus £67,000 per annum. The value of the assets and liabilities of the Scheme were as follows: Value at Value at Value at 30.9.2005 30.9.2004 31.3.2005 £'000 £'000 £'000 Total market value of assets 5,369 4,966 5,061 Present value of scheme liabilities (5,690) (5,436) (5,397) Retirement benefit obligations (321) (470) (336) Analysis of amount charged to operating profit 6 months 6 months Year ended ended ended 30.9.2005 30.9.2004 31.3.2005 £'000 £'000 £'000 Current service cost 22 21 42 5. PROFIT ON SALE OF INVESTMENT PROPERTIES 6 months 6 months Year ended ended ended 30.9.2005 30.9.2004 31.3.2005 £'000 £'000 £'000 Surplus over book value: Investment properties 37 111 1,711 Arising on disposal of properties into joint ventures - 549 549 37 660 2,260 6. FINANCE INCOME 6 months 6 months Year ended ended ended 30.9.2005 30.9.2004 31.3.2005 £'000 £'000 £'000 Income from investments Listed 25 342 533 Unlisted 366 - - 391 342 533 Interest receivable and similar income: From joint ventures 2,419 3,042 5,842 Other interest 281 170 323 3,091 3,554 6,698 7. FINANCE EXPENSE 6 months 6 months Year ended ended ended 30.9.2005 30.9.2004 31.3.2005 £'000 £'000 £'000 Interest payable on bank loans and overdrafts, mortgages 6,622 6,356 14,239 and other loans Charges in respect of cost of raising finance 356 193 458 6,978 6,549 14,697 Less: Interest capitalised (371) - - 6,607 6,549 14,697 Interest payable under finance leases 59 137 242 6,666 6,686 14,939 Other finance cost / (income) Expected return on pension scheme assets (146) (139) (279) Interest on pension scheme liabilities 145 144 288 (1) 5 9 6,665 6,691 14,948 8. TAXATION The taxation charge for the period has been estimated from the expected taxable profits of the Group after taking account of capital allowances available. 9. EARNINGS PER SHARE Earnings per share of 52.34p (half year to 30 September 2004: 48.73p; year to 31 March 2005: 89.20p) are calculated on the profit for the period of £27,721,000 (half year to 30 September 2004: £24,517,000; year to 31 March 2005: £44,954,000) and the weighted average of 52,970,778 (half year to 30 September 2004: 50,387,275; year to 31 March 2005: 50,399,047) shares in issue throughout the period. Diluted earnings per share are based on the profit for the period as above divided by the weighted average number of shares in issue, being 53,285,741 (half year to 30 September 2004: 50,542,900; year to 31 March 2005: 50,747,241) after the dilutive impact of share options granted. 10. INVESTMENT PROPERTIES AND PROPERTIES UNDER THE COURSE OF DEVELOPMENT Freehold Leasehold Properties with over Total Under the 50 years Investment Course of unexpired Properties Development £'000 £'000 £'000 £'000 At 31 March 2005 276,169 51,568 327,737 - Additions 12 116 128 11,000 Disposals (28,025) - (28,025) - Net gain from fair value adjustments on investment 12,903 2,398 15,301 - property At 30 September 2005 261,059 54,082 315,141 11,000 11. JOINT VENTURES At 30.9.2005 At 30.9.2004 At 31.3.2005 £'000 £'000 £'000 Share of joint ventures At 31 March 2005 102,517 86,529 86,529 Share of profit for the period 9,133 6,769 12,724 Net equity movements (952) - 4,100 Net loan movements 16,792 17,568 (836) At 30 September 2005 127,490 110,866 102,517 Unlisted shares at cost less amounts written off 11,215 6,865 11,040 Group's share of post acquisition retained profits and reserves 25,821 11,935 17,815 37,036 18,800 28,855 Amounts owed by joint ventures 90,454 92,066 73,662 127,490 110,866 102,517 Included in share of joint ventures' gross assets and liabilities are: Bareway Agora Skipper Radial Industrial Industrial Shopping Offices Distribution Properties Funds Centres Limited Limited Limited Limited Others Total (a) (b) (c) (d) (e) £'000 £'000 £'000 £'000 £'000 £'000 £'000 Period to 30 September 2005 Group share of results Revenue 7,457 1,545 2,683 496 2,895 - 15,076 Operating profit before net 4,838 996 2,453 422 989 - 9,698 gains on investments Net gain from fair value 11,463 - 3,632 731 - - 15,826 adjustments on investment properties Net gain from fair value - - - - 727 - 727 adjustment on investments Profit / (loss) on sale of 22 (810) 918 - 116 - 246 investment properties Profit on sale of fixed asset - - - - 3 - 3 investments Operating profit 16,323 186 7,003 1,153 1,835 - 26,500 Net finance expense (4,898) (1,486) (2,444) (438) (968) - (10,234) Change in fair value of (1,664) (305) (1,017) - - - (2,986) derivative financial instruments Profit / (loss) before income 9,761 (1,605) 3,542 715 867 - 13,280 tax Taxation - current 45 (375) (158) 5 (285) - (768) Taxation - deferred (3,078) 839 (677) (231) (232) - (3,379) Profit / (loss) for the period 6,728 (1,141) 2,707 489 350 - 9,133 Amounts receivable by Group Asset management fees 570 150 292 50 41 - 1,103 Interest receivable 337 537 275 278 992 - 2,419 Group share of Non-current assets Intangible assets - - - - 3,373 - 3,373 Investment properties 204,066 - 77,597 14,460 - - 296,123 Investments in unlisted shares - - - - 11,563 25 11,588 Finance lease assets - - 4,210 - - - 4,210 Deferred income tax assets - - 300 - - - 300 Derivative financial assets 937 - - - - - 937 Non-current assets held for - - - 18,779 - 18,779 re-sale Other non-current assets 506 - - - - - 506 205,509 - 82,107 14,460 33,715 25 335,816 Current assets Finance lease assets - - 244 - - - 244 Other current assets 3,525 - 11,871 1,057 17,919 - 34,372 3,525 - 12,115 1,057 17,919 - 34,616 Total assets 209,034 - 94,222 15,517 51,634 25 370,432 Non-current liabilities Deferred income tax (9,430) - (1,979) - (232) - (11,641) liabilities Borrowings, including finance (127,092) - (82,898) - - - (209,990) leases Derivative financial - - (998) - - - (998) liabilities (136,522) - (85,875) - (232) - (222,629) Current liabilities Deferred income tax - - - (498) - - (498) liabilities Borrowings, including finance (35,811) - - (9,132) (20,872) - (65,815) leases Other current liabilities (6,803) - (3,107) (4,614) (29,930) - (44,454) (42,614) - (3,107) (14,244) (50,802) - (110,767) Total liabilities (179,136) - (88,982) (14,244) (51,034) - (333,396) Share of net assets 29,898 - 5,240 1,273 600 25 37,036 Effective Group share 50% 50% 50% 50% 50% 50% Potential recourse to the Nil Nil Nil 9,150 Nil Nil Group Bareway Agora Skipper Radial Industrial Shopping Offices Distribution Properties Centres Limited Limited Limited Others Total (a) (b) (c) (d) £'000 £'000 £'000 £'000 £'000 £'000 Period to 30 September 2004 Group share of results Turnover 6,710 3,328 1,804 408 20 12,270 Operating profit before net gains on 4,557 2,319 1,626 352 35 8,889 investments Net gain from fair value adjustments 7,306 1,296 779 313 - 9,694 on investment properties Profit / (loss) on sale of investment - 263 - - (10) 253 properties Operating profit 11,863 3,878 2,405 665 25 18,836 Net finance expense (4,267) (2,131) (2,100) (337) (24) (8,859) Change in fair value of derivative 20 (360) - - - (340) financial instruments Profit before income tax 7,616 1,387 305 328 1 9,637 Taxation - current (27) (99) 16 31 1 (78) Taxation - deferred (2,120) (266) (276) (128) - (2,790) Profit for the period 5,469 1,022 45 231 2 6,769 Amounts receivable by Group Asset management fees 491 246 231 38 - 1,006 Interest receivable 510 1,422 894 216 - 3,042 Group share of Non-current assets Investment properties 204,889 86,855 74,735 10,215 - 376,694 Finance lease assets - - 5,530 - - 5,530 Derivative financial assets 3,385 603 - - - 3,988 Other non-current assets 486 - - - - 486 208,760 87,458 80,265 10,215 - 386,698 Current assets Finance lease assets - - 281 - - 281 Other current assets 4,435 2,049 3,132 608 270 10,494 4,435 2,049 3,413 608 270 10,775 Total assets 213,195 89,507 83,678 10,823 270 397,473 Non-current liabilities Deferred income tax liabilities (5,926) (1,970) (300) (94) - (8,290) Borrowings including finance leases (135,760) (82,763) (81,819) (9,799) - (310,141) (141,686) (84,733) (82,119) (9,893) - (318,431) Current liabilities Borrowings including finance leases (3) - - - - (3) Other current liabilities (52,247) (3,314) (4,060) (554) (64) (60,239) (52,250) (3,314) (4,060) (554) (64) (60,242) Total liabilities (193,936) (88,047) (86,179) (10,447) (64) (378,673) Share of net assets 19,259 1,460 (2,501) 376 206 18,800 Effective Group share 50% 50% 50% 50% 50% Potential recourse to the Group Nil Nil Nil 7,150 Nil Bareway Agora Skipper Radial Industrial Shopping Offices Distribution Properties Centres Limited Limited Limited Others Total (a) (b) (c) (d) £'000 £'000 £'000 £'000 £'000 £'000 Year to 31 March 2005 Group share of results Turnover 12,593 5,743 4,374 818 - 23,528 Operating profit before net gains on 9,510 4,599 3,932 726 - 18,767 investments Net gain from fair value adjustments 8,295 1,673 2,679 883 - 13,530 on investment properties Profit on sale of investment 5,152 263 - - - 5,415 properties Operating profit 22,957 6,535 6,611 1,609 - 37,712 Net finance expense (9,724) (4,990) (4,724) (676) - (20,114) Change in fair value of derivative (764) (658) 19 - - (1,403) financial instruments Profit before income tax 12,469 887 1,906 933 - 16,195 Taxation - current (544) 175 (36) (24) - (429) Taxation - deferred (2,546) 741 (970) (267) - (3,042) Profit for the period 9,379 1,803 900 642 - 12,724 Amounts receivable by Group Asset management fees 2,766 551 520 78 - 3,915 Interest receivable 1,031 2,875 1,503 433 - 5,842 Group share of Non-current assets Investment properties 190,896 87,410 76,931 10,801 - 366,038 Finance lease assets - - 5,384 - - 5,384 Deferred income tax assets - - 11 - - 11 Derivative financial assets 2,601 305 54 - - 2,960 Other non-current assets 290 - - 11 - 301 193,787 87,715 82,380 10,812 - 374,694 Current assets Finance lease assets - - 289 - - 289 Other current assets 5,461 1,965 2,563 693 - 10,682 5,461 1,965 2,852 693 - 10,971 Total assets 199,248 89,680 85,232 11,505 - 385,665 Non-current liabilities Deferred income tax liabilities (6,351) (839) (1,013) (267) - (8,470) Borrowing including finance leases (126,228) (83,054) (78,824) - - (288,106) Derivative financial liabilities - - (35) - - (35) (132,579) (83,893) (79,872) (267) - (296,611) Current liabilities Borrowings including finance leases (35,490) - - (9,823) - (45,313) Other current liabilities (8,008) (3,420) (2,827) (631) - (14,886) (43,498) (3,420) (2,827) (10,454) - (60,199) Total liabilities (176,077) (87,313) (82,699) (10,721) - (356,810) Share of net assets 23,171 2,367 2,533 784 - 28,855 Effective Group share 50% 50% 50% 50% 50% Potential recourse to the Group Nil Nil Nil 7,150 Nil (a) Agora Shopping Centres was set up on 5 March 2003 and subsequently acquired the Pyramids in Birkenhead on 25 June 2003 and The Grange Shopping Centre, Birkenhead on 30 September 2004. (b) Skipper Offices Limited was set up on 23 July 2003. In June 2005 the properties were disposed of into the Apia Regional Offices Fund and the Group subsequently acquired the remaining 50% interest. (c) Fairway Industrial Limited was set up on 29 August 2003 and changed its name to Radial Distribution Limited on 14 October 2004. (d) Bareway Industrial Properties Limited was set up on 29 August 2003. The venture was initially consolidated, for the half year. However, following changes in the nature of the relationship it was treated as a joint venture in the full year accounts to 31 March 2004 and continues to be so. (e) Industrial Funds Limited was set up in March 2005 and completed the acquisition of Ashtenne Holdings PLC on 13 July 2005. Amounts owed by joint ventures comprise: At 30.9.2005 At 30.9.2004 At 31.3.2005 £'000 £'000 £'000 Agora Shopping Centres 25,687 32,528 25,687 Skipper Offices Limited - 29,441 29,916 Radial Distribution Limited 12,675 24,713 12,675 Bareway Industrial Properties Limited 7,092 5,384 5,384 Industrial Funds Limited 45,000 - - 90,454 92,066 73,662 12. INVESTMENTS IN LISTED AND UNLISTED SHARES At 30.9.2005 At 30.9.2004 At 31.3.2005 £'000 £'000 £'000 Listed investments 19,213 12,985 15,518 Unlisted investments 58,790 - - 78,003 12,985 15,518 13. INVESTMENTS IN ASSOCIATES This relates to an investment in Bride Hall Group Limited. At 30.9.2005 At 30.9.2004 At 31.3.2005 £'000 £'000 £'000 Share of net assets acquired 1,491 1,491 1,491 Goodwill 3,836 3,509 3,836 5,327 5,000 5,327 14. DEFERRED TAXATION At At At 30.9.2005 30.9.2004 31.3.2005 £'000 £'000 £'000 Deferred taxation assets Deferred taxation arising from unrealised derivative 413 369 349 financial instruments valuations Deferred taxation arising from retirement benefit 96 141 101 obligations 509 510 450 Deferred taxation liabilities Deferred taxation arising from the temporary differences noted below: Short term temporary differences 58 22 (23) Capital and industrial buildings allowances claimed on (3,508) (3,752) (3,763) investment properties Unrealised property and investment valuations (23,414) (14,330) (16,326) (26,864) (18,060) (20,112) 15. FINANCIAL INSTRUMENTS Financial Liabilities The interest rate profile of the Group's financial liabilities at 30 September 2005, after taking account of interest rate instruments taken out by the Group was: At 30.9.2005 At 30.9.2004 At 31.3.2005 £'000 £'000 £'000 Floating financial rate liabilities - 21,554 - Capped rate financial liabilities 95,766 100,000 85,574 Fixed rate financial liabilities 108,840 91,910 90,654 204,606 213,464 176,228 The benchmark rate for determining interest payments for the floating rate financial liabilities was LIBOR/base rate depending upon the facility. The weighted average interest rate on the fixed rate debt and the average maturity of that debt was as follows: At 30.9.2005 At 30.9.2004 At 31.3.2005 % % % Weighted average interest rate Group 7.35 7.99 8.01 Joint Ventures 5.70 5.76 4.89 Weighted average period for which interest rate is fixed Years Years Years Group 4.96 5.56 5.16 Joint Ventures 3.13 3.62 3.60 Maturity of financial liabilities At 30.9.2005 At 30.9.2004 At 31.3.2005 £'000 £'000 £'000 Group Within one year or on demand 22,749 59,102 61,948 Between one and two years 12,798 23,044 22,000 Between two and five years 123,029 6,882 69,780 In five years or more 46,030 124,436 22,500 204,606 213,464 176,228 Borrowing facilities The Group has various borrowing facilities that were not fully utilised at the period end and for which the conditions for utilising those facilities were met. At 30.9.2005 At 30.9.2004 At 31.3.2005 £'000 £'000 £'000 Expiring in one year or less: Total facilities 120,000 72,442 73,073 Unutilised 50,327 16,384 52,842 Fair values of financial assets and liabilities The table below sets out by category the changes to the balance sheet values on fixed rate debt that would occur if "fair values" applied. At 30.9.2005 At 30.9.2004 At 31.3.2005 Fair value Fair value Fair value adjustment adjustment adjustment £'000 £'000 £'000 Group Primary financial instruments Liabilities Long term debt (over one year) (9,299) (9,171) (8,500) Assets Long term loan notes (over one year) (428) (692) (990) Fixed rate loan 15 (68) (67) Joint Ventures Primary financial instruments Long term debt (over one year) Long term loan notes 428 692 990 Fixed rate loan (7) 33 34 Increase in fair value (9,291) (9,206) (8,533) The effect on net assets per share of the total fair value adjustment (£9,291,000 less tax £2,787,000) would be a decrease of 12.3 pence (31 March 2005: 9.82 pence) The calculation of the fair values has been arrived at as follows: Debt has been calculated by discounting cash flows at prevailing rates of interest. The equity assets have been valued at the quoted share price based upon the strategic nature of the holdings compensating for any discount. Interest rate swaps have been valued at the market rate for such swaps. 16. CAPITAL AND RESERVES Other reserves Group Share Investment premium in own Share Capital account Reserves shares Total £'000 £'000 £'000 £'000 £'000 At 31 March 2005 2,548 5,559 265,663 (1,667) 272,103 Total recognised income and - - 27,695 - 27,695 expense for the period Shares issued 127 13,493 - - 13,620 Acquisition of investment in - - - (76) (76) own shares Disposal of investment in own - - - 680 680 shares Dividend paid - - (5,065) - (5,065) At 30 September 2005 2,675 19,052 288,293 (1,063) 308,957 17. RECONCILIATION OF OPERATING PROFIT TO NET CASH FLOW At At At 30.9.2005 30.9.2004 31.3.2005 £'000 £'000 £'000 Operating profit before net gains on investments 8,728 11,084 23,941 Depreciation of plant and equipment 62 56 109 Loss on sale of plant and equipment - - 1 Decrease in inventories 2,872 7,952 9,242 (Increase) / decrease in trade and other receivables (308) 1,417 (782) (Decrease) / increase in trade and other payables (6,947) 527 1,684 Cash generated from operations 4,407 21,036 34,195 UNAUDITED RECONCILIATIONS BETWEEN IFRS AND UK GAAP RECONCILIATION OF CONSOLIDATED IFRS BALANCE SHEET AT 30 SEPTEMBER 2004 Previously Share Events Income Leases Lease Investments Financial Investment Total Restated reported base after taxes IAS 17 incentives in instruments property adjustments under under UK payments balance IAS 12 SIC 15 associates IAS 39 IAS 40 IFRS GAAP* IFRS 2 sheet IAS 28 date IAS 10 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 ASSETS Non-current Assets Investment 346,619 - - - - (288) - - 3,038 2,750 349,369 properties Plant and 387 - - - - - - - - - 387 equipment Investments 116,605 - - (5,444) (3,003) (84) - 2,792 - (5,739) 110,866 in joint ventures Investments 18,291 - - - - - (5,000) (306) - (5,306) 12,985 in listed and unlisted shares Investments in - - - - - - 5,000 - - 5,000 5,000 associates Deferred income 141 - - - - - - 369 - 369 510 tax assets Derivative - - - - - - - 83 - 83 83 financial assets Trade and other - - - - - 272 - - - 272 272 receivables 482,043 - - (5,444) (3,003) (100) - 2,938 3,038 (2,571) 479,472 Current Assets Inventories 9,525 - - 9,525 Trade and other 10,430 - - - - (170) - (380) - (550) 9,880 receivables Cash and cash 12,829 - - - - - - 73,158 - 73,158 85,987 equivalents 32,784 - - - - (170) - 72,778 - 72,608 105,392 Total Assets 514,827 - - (5,444) (3,003) (270) - 75,716 3,038 70,037 584,864 Liabilities Non-current liabilities Borrowings, (153,780) - - - - - - - (3,038) (3,038) (156,818) including finance leases Derivative - - - - - - - (1,229) - (1,229) (1,229) financial liabilities Deferred income (3,730) - - (14,330) - - - - - (14,330) (18,060) tax liabilities Retirement (470) - - - - - - - - - (470) benefit obligations Provisions for - (80) - - - - - - - (80) (80) other liabilities and charges (157,980) (80) - (14,330) - - - (1,229) (3,038) (18,677) (176,657) Current liabilities Borrowings, (59,102) - - - - - - (73,158) - (73,158) (132,260) including finance leases Trade and other (21,299) - 4,458 - - - - - - 4,458 (16,841) payables Current income (3,288) - - - - (7) - 89 - 82 (3,206) tax liabilities (83,689) - 4,458 - - (7) - (73,069) - (68,618) (152,307) Total (241,669) (80) 4,458 (14,330) - (7) - (74,298) (3,038) (87,295) (328,964) liabilities Net assets 273,158 (80) 4,458 (19,774) (3,003) (277) - 1,418 - (17,258) 255,900 EQUITY Capital and reserves attributable to the Company's equity holders Share capital 2,548 - - - - - - - - - 2,548 Reserves 272,363 (80) 4,458 (19,774) (3,003) (277) - 1,418 - (17,258) 255,105 Investment in (1,753) - - - - - - - - - (1,753) own shares Total equity 273,158 (80) 4,458 (19,774) (3,003) (277) - 1,418 - (17,258) 255,900 Notes a b c d e f g h *Reformatted to reflect IFRS reporting requirements RECONCILIATION OF CONSOLIDATED IFRS INCOME STATEMENT FOR THE PERIOD ENDED 30 SEPTEMBER 2004 Previously Share Events Income Leases Lease Investments Financial Investment Total Restated reported base after taxes IAS 17 incentives in instruments property adjustments under under UK payments balance IAS 12 SIC 15 associates IAS 39 IAS 40 IFRS GAAP* IFRS 2 sheet IAS 28 date IAS 10 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 Rental and 13,184 - - - - 101 - - - 101 13,285 similar income Turnover from 10,575 - - - - - - - - - 10,575 property trading activities Cost of sales (9,242) - - - - - - - - - (9,242) of property trading activities Service charge 1,031 - - - - - - - - - 1,031 and similar income Service charge(1,316) - - - - - - - - - (1,316) expense and similar income Net rental 14,232 - - - - 101 - - - 101 14,333 income and trading income Turnover from 1,006 - - - - - - - - - 1,006 asset management activities Cost of sales (519) - - - - - - - - - (519) of asset management activities Net income from 487 - - - - - - - - - 487 asset management activities Administrative (870) (47) - - - - - - - (47) (917) expenses Property (3,003) - - - - - - - 137 137 (2,866) expenses Operating 10,846 (47) - - - 101 - - 137 191 11,037 profit before net gains on investments Net gain from - - - - - (170) - - 15,176 15,006 15,006 fair value adjustments on investment property Net gain from - - - - - - - (136) - (136) (136) fair value adjustments on fixed asset investments Profit on sale 660 - - - - - - - - - 660 of investment property Operating 11,506 (47) - - - (69) - (136) 15,313 15,061 26,567 profit Finance 3,554 - - - - - - - - - 3,554 income Finance (6,554) - - - - - - - (137) (137) (6,691) expense Change in fair - - - - - - - 251 - 251 251 value of derivative financial instruments Share of joint 148 - - (2,883) (240) 70 - (238) 9,912 6,621 6,769 ventures post tax profits Profit before 8,654 (47) - (2,883) (240) 1 - (123) 25,088 21,796 30,450 income tax Taxation - (1,962) - - - - (3) - 24 - 21 (1,941) current Taxation - (190) - - (3,702) - - - (100) - (3,802) (3,992) deferred Profit for the 6,502 (47) - (6,585) (240) (2) - (199) 25,088 18,015 24,517 period Notes a b c d e f g h *Reformatted to reflect IFRS reporting requirements RECONCILIATION OF CONSOLIDATED IFRS BALANCE SHEET AT 31 MARCH 2005 Previously Share Events Income Leases Lease Investments Financial Investment Total Restated reported base after taxes IAS 17 incentives in instruments property adjustments under under UK payments balance IAS 12 SIC 15 associates IAS 39 IAS 40 IFRS GAAP* IFRS 2 sheet IAS 28 date IAS 10 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 ASSETS Non-current Assets Investment 326,593 - - - - (371) - - 1,515 1,144 327,737 property Other 347 - - - - - - - - - 347 tangible assets Invest- 111,250 - - (7,023) (3,568) (190) - 2,048 - (8,733) 102,517 ments in joint ventures Investments 21,135 - - - - - (5,327) (290) - (5,617) 15,518 in listed and unlisted shares Investment in - - - - - - 5,327 - - 5,327 5,327 associates Deferred 101 - - - - - - 349 - 349 450 income tax assets Derivative - - - - - - - 11 - 11 11 financial assets Trade and other - - - - - 350 - - - 350 350 receivables 459,426 - - (7,023) (3,568) (211) - 2,118 1,515 (7,169) 452,257 Current Assets Inventory 8,235 - - - 8,235 Trade and 9,597 - - - - (235) - (311) - (546) 9,051 other receivables Cash and 22,884 - - - - - - 86,482 - 86,482 109,366 cash equivalents 40,716 - - - - (235) - 86,171 - 85,936 126,652 Total 500,142 - - (7,023) (3,568) (446) - 88,289 1,515 78,767 578,909 Assets LIABILITIES Non-current liabilities Borrow- (114,008) - - - - - - (80,115) (1,515) (81,630) (195,638) ings, including finance leases Derivative - - - - - - - (1,162) - (1,162) (1,162) financial liabilities Deferred (3,786) - - (16,326) - - - - - (16,326) (20,112) income tax liabilities Retirement (336) - - - - - - - - - (336) benefit obligations Provisions for - (128) - - - - - - - (128) (128) other liabilities and charges (118,130) (128) - (16,326) - - - (81,277) (1,515) (99,246) (217,376) Current liabilities Borrowings,(61,902) - - - - - - (6,367) - (6,367) (68,269) including finance leases Trade and (23,638) - 4,847 - - - - - - 4,847 (18,791) other payables Current (2,197) - - - - (11) - 90 - 79 (2,118) income tax liabilities (87,737) - 4,847 - - (11) - (6,277) - (1,441) (89,178) Total (205,867) (128) 4,847 (16,326) - (11) - (87,554) (1,515) (100,687) (306,554) liabilities Net assets 294,275 (128) 4,847 (23,349)(3,568) (457) - 735 - (21,920) 272,355 EQUITY Capital and reserves attributable to the Company's equity holders Share 2,548 - - - - - - - - - 2,548 capital Reserves 293,142 (128) 4,847 (23,349)(3,568) (457) - 735 - (21,920) 271,222 Investment (1,667) - - - - - - - - - (1,667) in own shares Equity 294,023 (128) 4,847 (23,349)(3,568) (457) - 735 - (21,920) 272,103 shareholders' funds Minority 252 - - - - - - - - - 252 interest Total 294,275 (128) 4,847 (23,349)(3,568) (457) - 735 - (21,920) 272,355 equity Notes a b c d e f g h *Reformatted to reflect IFRS reporting requirements RECONCILIATION OF CONSOLIDATED IFRS INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2005 Previously Share Events Income Leases Lease Investments Financial Investment Total Restated reported base after taxes IAS 17 incentives in instruments property adjustments under under UK payments balance IAS 12 SIC 15 associates IAS 39 IAS 40 IFRS GAAP* IFRS 2 sheet IAS 28 date IAS 10 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 Rental and 26,387 - - - - 134 - - - 134 26,521 similar income Turnover from 12,446 - - - - - - - - - 12,446 property trading activities Cost of (10,788) - - - - - - - - - (10,788) sales of property trading activities Service charge 2,170 - - - - - - - - - 2,170 and similar income Service (2,773) - - - - - - - - - (2,773) charge expense and similar income Net rental 27,442 - - - - 134 - - - 134 27,576 and trading income Turnover from 3,915 - - - - - - - - - 3,915 asset management activities Cost of (1,437) - - - - - - - - - (1,437) sales of asset management activities Net income 2,478 - - - - - - - - - 2,478 from asset management activities Admin- (1,660) (95) - - - - - - - (95) (1,755) istrative expenses Property (4,695) - - - - - - - 242 242 (4,453) expenses Operating 23,565 (95) - - - 134 - - 242 281 23,846 profit before net gains on investments Net gain from - - - - - (273) - - 22,144 21,871 21,871 fair value adjustments on investment property Net gain from - - - - - - - 2,397 - 2,397 2,397 fair value adjustments on fixed asset investments Profit on sale 2,260 - - - - - - - - - 2,260 of investment property Operating 25,825 (95) - - - (139) - 2,397 22,386 24,549 50,374 profit Finance income 6,698 - - - - - - - - - 6,698 Finance (14,706) - - - - - - - (242) (242) (14,948) expense Change in fair - - - - - - - 315 - 315 315 value of derivative financial instruments Share of joint 4,723 - - (4,521) (805) (36) - (982) 14,345 8,001 12,724 venture post tax profits Profit before 22,540 (95) - (4,521) (805) (175) - 1,730 36,489 32,623 55,163 income tax Taxation - (4,117) - - - - (7) - 26 - 19 (4,098) current Taxation - (290) - - (5,698) - - - (121) - (5,819) (6,109) deferred Profit for 18,133 (95) - (10,219) (805) (182) - 1,635 36,489 26,823 44,956 the year Attributable to: Equity 18,131 (95) - (10,219) (805) (182) - 1,635 36,489 26,823 44,954 holders Minority 2 - - - - - - - - - 2 interests Notes a b c d e f g h *Reformatted to reflect IFRS reporting requirements RECONCILIATION OF CONSOLIDATED IFRS BALANCE SHEET AT 31 MARCH 2004 Previously Share Events Income Leases Lease Investments Financial Investment Total Restated reported base after taxes IAS 17 incentives in instruments property adjustments under under UK payments balance IAS 12 SIC 15 associates IAS 39 IAS 40 IFRS GAAP* IFRS 2 sheet IAS 28 date IAS 10 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 ASSETS Non-current Assets Investment 317,453 - - - - (208) - - 3,038 2,830 320,283 properties Plant and 429 - - - - - - - - - 429 equipment Investments 89,012 - - (2,596) (2,763) (154) - 3,030 - (2,483) 86,529 in joint ventures Investments 13,371 - - - - - - (250) - (250) 13,121 in listed and unlisted shares Deferred 134 - - - - - - 469 - 469 603 income tax assets Derivative - - - - - - - 234 - 234 234 financial assets Trade and - - - - - 191 - - - 191 191 other receivables 420,399 - - (2,596) (2,763) (171) - 3,483 3,038 991 421,390 Current Assets Inventories 17,477 - - - - - - - - - 17,477 Trade and 9,580 - - - - (100) - (449) - (549) 9,031 other receivables Cash and 16,647 - - - - - - 72,406 - 72,406 89,053 cash equivalents 43,704 - - - - (100) - 71,957 - 71,857 115,561 Total 464,103 - - (2,596) (2,763) (271) - 75,440 3,038 72,848 536,951 Assets LIAIBILITIES Non-current liabilities Borrowings, (155,061) - - - - - - (3,038) (3,038)(158,099) including finance leases Derivative - - - - - - - (1,562) - (1,562) (1,562) financial liabilities Deferred (3,496) - -(10,628) - - - - - (10,628) (14,124) income tax liabilities Retirement (447) - - - - - - - - - (447) benefit obligations Provisions for - (33) - - - - - - - (33) (33) other liabilities and charges (159,004) (33) -(10,628) - - - (1,562) (3,038) (15,261)(174,265) Current liabilities Borrowings, (36,146) - - - - - - (72,406) - (72,406)(108,552) including finance leases Trade and (21,413) - 4,458 - - - - - - 4,458 (16,955) other payables Current (1,289) - - - - (4) - 65 - 61 (1,228) income tax liabilities (58,848) - 4,458 - - (4) - (72,341) - (67,887)(126,735) Total (217,852) (33) 4,458(10,628) - (4) - (73,903) (3,038) (83,148)(301,000) liabilities Net assets 246,251 (33) 4,458(13,224) (2,763) (275) - 1,537 - (10,300) 235,951 EQUITY Capital and reserves attributable to the Company's equity holders Share capital 2,548 - - - - - - - - - 2,548 Reserves 245,392 (33) 4,458(13,224) (2,763) (275) - 1,537 - (10,300) 235,092 Investment in (1,689) - - - - - - - - - (1,689) own shares Total equity 246,251 (33) 4,458(13,224) (2,763) (275) - 1,537 - (10,300) 235,951 Notes a b c d e f g h *Reformatted to reflect IFRS reporting requirements NOTES TO THE IFRS RECONCILIATIONS (a) IFRS 2 - Share based payments Share option plans are fair valued at the date of grant and costs taken to the income statement over the vesting period. IFRS 1 transitional exemption has been applied. A corresponding release from equity means that there is no effect on the balance sheet or NAV. (b) IAS 10 - Events after balance sheet date Only dividends actually declared at balance sheet date should be provided for, therefore proposed dividends have been reversed, and are reinstated on payment. (c) IAS 12 - Income taxes Provision is now made for the deferred tax liability associated with the revaluation of investment properties. This was not required under UK GAAP. Capital gains tax which was previously charged directly to reserves is now included in the income statement, this has no impact on net assets. (d) IAS 17 - Leases This adjustment represents those leases that have been classified as finance lease assets. (e) Statements of Investment Circular (SIC) 15 - Lease incentives Lease incentives are now amortised over the lease term rather than to the first rent review. As the value of lease incentives is included within the property valuation, investment property and reserves have been adjusted by the value of the lease incentive debtor to prevent double counting. (f) IAS 28 - Investments in associates Under IFRS an investment in associate is where the investor has the power to exercise significant influence. Previously under UK GAAP an investor had to actually exercise significant influence. Therefore the investment in Bride Hall was previously treated as a fixed asset investment, and has now been equity accounted. (g) IAS 32 & 39 - Financial instruments Financial assets and liabilities such as interest rate swaps and caps, have been included in the balance sheet at fair value. Investments are carried at fair value on the balance sheet. (h) IAS 40 - Investment Property Investment property valuation movements and tax thereon has been taken through the income statement. Investment property head leases are capitalised and shown as a corresponding finance lease creditor. Detailed transition to IFRS Basis of Preparation This financial information has been prepared on the basis of our interpretation of IFRS currently, and expected to be applicable at 31 March 2006 and is unaudited. It is possible that conventions which differ from our current interpretation will evolve within the property sector, and IFRS are subject to ongoing amendment; accordingly, the amounts disclosed in this paper may be subject to revision. Presentation of financial statements under IFRS Under IFRS, with effect from 1 January 2005, the Group will prepare its financial statements in accordance with IAS 1 - 'Presentation of financial statements'. Where IAS 1 does not provide definitive guidance on presentation, for example in relation to aspects of the income statements, the Group proposes to adopt a format consistent, where possible, with UK GAAP. The presentation of the primary statements are likely to develop over time through industry practice. Key changes include: • The 'profit and loss account' is renamed the 'income statement'. • All assets and liabilities are required to be analysed between current and non-current items. • Deferred tax assets to be presented separately from deferred tax liabilities. • A 'statement of recognised income and expense' will replace the 'statement of group total recognised gains and losses'. UK GAAP comparative information has been reformatted to reflect IFRS reporting requirements. Overview of impact The principal changes arising from the adoption of IFRS for the financial statements under review are: • Property revaluations - surpluses and deficits on investment properties are shown in the income statement, rather than as a movement in reserves. • Deferred tax - is provided in respect of property valuation surpluses and is accrued as a deferred tax liability. Under UK GAAP, no deferred tax provision was made in respect of property revaluation surpluses. • Joint ventures - are accounted for using the equity method as permitted by UK GAAP and IAS 31. • Share based payments - the fair value of share options and other share based payments is recognised as an expense through the income statement over the vesting period. • Goodwill - positive goodwill is no longer amortised, but is now subject to an impairment review. • Head leases - where the Group is the lessee of a finance lease arrangement, the rental obligations have been capitalised and shown as a liability on the balance sheet. • Lease incentives - are amortised over the term of the lease, in each case typically longer than under UK GAAP, which was to the first rent review. Main changes in accounting under IFRS IAS 40 - Investment property Under this standard, investment property will be recognised in the accounts at fair value, with revaluation gains and losses being taken directly to the income statement rather than to the revaluation reserve as was the case under UK GAAP. Accumulated revaluation surpluses relating to the investment properties at the date of transition to IFRS have been reallocated to retained earnings. This treatment does not, however, have any impact on the distributable profits. Full provision for tax on the valuation surpluses has been provided under IAS 12. IAS 12 - Income taxes This standard requires full provision to be made for deferred income tax on temporary differences. The main difference compared to the deferred tax provided under UK GAAP is that provision has been made in full for the deferred income tax arising from the revaluation of investment properties. The deferred income tax has been calculated on the basis that the gain (or loss) on the properties will be realised through the income generated by holding the properties. The tax base for each property has been compared to the valuation for that property. Since the deferred income tax liabilities have been calculated on the basis of continued use of the properties, no account has been taken of the way in which properties may be sold or of the tax which the Group would expect to be payable in practice on the sale of the properties. Indexation allowance which would be available to further reduce the taxable capital gains when properties subject to UK corporation tax are sold has similarly not been taken into account. Deferred income tax is provided as appropriate on the other adjustments which have been made to convert the UK GAAP accounts to IFRS. IAS 31 - Financial reporting of interests in joint ventures Under UK GAAP, the Group accounted for interests in joint ventures under the equity accounting method. Under IFRS, IAS 31 allows companies to make a one-time choice as to whether joint ventures will be accounted under the equity method or proportionally consolidated. The Group has opted for the equity accounting method of joint venture assets and liabilities as this is consistent with past treatment and, more closely reflects the substance of the Group's joint venture arrangements. Therefore, the Group's share of individual assets and liabilities of the joint venture are shown as one line in the balance sheet income statement. Other changes in accounting under IFRS IFRS 2 - Share based payments Under IFRS 2, the fair value of share options and other share based payments is recognised as an expense through the income statement over the vesting period. The Group has elected to apply the IFRS 1, share-based payment exemption, therefore the Group has applied IFRS 2 from 1 January 2004 to those options that were issued after 7 November 2002 but have not vested by 1 January 2005. IFRS 3 - Business combinations IFRS 3 uses a different term for 'negative goodwill' and requires it to be taken to the income statement in the year of acquisition. Previously recognised negative goodwill has been derecognised at the date of transitions, with a corresponding adjustment to opening retained earnings. Under IFRS, the acquisition of properties, whether by outright purchase of by corporate acquisition, are carefully considered on a case by case basis to determine whether they are, in substance, an acquisition of assets or a business. The Group has elected to apply the IFRS 1, business combination exemption, therefore the Group has not applied IFRS 3 retrospectively to past business combinations. IFRS 17 - Leases Under UK GAAP, leases to occupational tenants were almost invariably treated as operating leases, because the risks and rewards in the underlying freehold were usually assessed as remaining with the landlord. However, while IAS 17 is based on a similar principle, it lists a number of situations that individually or in combination would require a lease to be classified as a finance lease and, in particular, 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 make such a distinction. This means that it is more likely that a lease term could be viewed as being for the major part of the economic life of an asset, resulting in finance lease classification of the building element. The Group has carefully reviewed each of its leases and has concluded that the lease classification and treatment under UK GAAP is consistent with IFRS. Where an investment property is itself subject to a head or ground lease, that head lease must be treated as if it were a finance lease and accounted for accordingly. In total only nine properties are affected, of which two are held by joint ventures leading to the recognition of a finance lease liability and an increase in the carrying value of the Group's investment properties. SIC 15 - Operating lease incentives Under SIC 15, the cost of rent free periods and other incentives given to tenants under operating leases must be spread over the term of the lease rather than, as under UK GAAP, to the first review to market rents. Further, there are no transitional provisions, so that incentives granted before the UK standard came into effect have now been brought back into account. This will therefore change the timing but not the aggregate amount recognised in relation to lease incentives. For the investment property business, the changes amount to a minor reclassification between rent and revaluation surpluses in the income statement and, in the balance sheet, between investment properties and receivables. IAS 32 and IAS 39 Hedge accounting Where a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument and the hedged item as well as its risk management objectives and its strategy for undertaking the various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in the hedging transactions are highly effective in offsetting the changes in fair values or cash flows of the hedged items. Where hedge accounting requirements were not met, changes in fair value of derivatives are recognised through the income statement. Investments Investments will be carried at fair value on the balance sheet, with changes in the fair value being recognised either in the income statement or in equity and recycled through the income statement when the investments are realised, as appropriate. Under UK GAAP these investments were carried at the lower of cost and market value. Other financial instruments Movements in the fair value of those derivative financial instruments which are not accounted for as hedging instruments are recognised in the income statement and not by way of a note, as is the case under UK GAAP. Borrowings The version of IAS 39 adopted by the European Union prohibits the option to carry borrowings at their fair values, and consequently the Group will continue to include borrowings in the balance sheet at amortised cost. The fair value of borrowings will be disclosed under IAS 32, as is the case under UK GAAP. Exemptions from full retrospective application The Group has applied the following optional exemptions from retrospective application: (a) Share based payment transaction exemption The Group has elected to apply this exemption. The Group has applied IFRS 2 from 1 April 2004 to those options that were issued after 7 November 2002 but that have not vested by 1 January 2005. (b) Designation of previously recognised financial instruments The Group has elected to apply this exemption. Therefore, financial instruments will be designated at the date of transition as at fair value through profit or loss or as available-for-sale. The following optional exemptions from retrospective application are not applicable to the Group; (c) Fair value as deemed cost exemption (d) Cumulative translation difference exemption (e) Business combinations exemption (f) Employee benefits exemption (g) Compound financial instruments (h) Assets and liabilities of subsidiaries, associates and joint ventures exemption (i) Insurance contracts exemption (j) Decommissioning liabilities included in the cost of property, plant and equipment exemption (k) Fair value measurement of financial assets or liabilities at initial recognition Exceptions from full retrospective application The Group has applied the following mandatory exception from retrospective application: (a) Estimates exception Estimates under IFRS at 1 April 2004 should be consistent with estimates made for the same date under previous GAAP, unless there is evidence that those estimates were in error. This information is provided by RNS The company news service from the London Stock Exchange