IFRS TRANSITION REPORT

Embargoed: 0700hrs 15 September 2005 CLS Holdings PLC (`CLS' or the `Group') Adoption of International Financial Reporting Standards (`IFRS') 2004 Income Statement and Balance Sheet CLS is today presenting information to illustrate the effect of adopting IFRS on its Income Statement and Balance Sheet for the year ended 31 December 2004 in preparation for the adoption of IFRS for the year ended 31 December 2005. An extract of the Group's accounting policies under IFRS is included within this report and explains the basis under which the Group's Interim results have been prepared. The adoption of IFRS has no effect on the fundamental operating basis of the Group, its strategy or management, or on the cash flows derived from the business. Effect of adoption of IFRS on 2004 results: UK GAAP IFRS Adjusted Net Asset Value per 516.6p 521.3p share* Statutory Net Asset Value per 508.5p 385.1p share Shareholders' funds Â£426.4m Â£323.0m Deferred tax liability* Â£6.8m Â£114.1m Net rental income Â£67.5m Â£67.6m Profit before tax Â£18.8m Â£55.8m Retained profit Â£18.1m Â£40.3m Basic earnings per share 21.1p 46.7p * In accordance with industry practice, Adjusted Net Asset Value per share is shown excluding any deferred tax liability. In practice CLS will not pay this theoretical maximum deferred tax liability that it is obliged to account for under IFRS. This provision takes no account of the way in which the Group would intend to sell its properties and does not allow for the deduction of indexation relief which is available on the disposal of UK properties. In common with other companies in the real estate sector, the main changes to the Income Statement and Balance Sheet are: - Revaluation gains and losses on Investment Property are now shown in the Income Statement rather than being shown as a movement in reserves. - Deferred tax is charged on a balance sheet basis on all differences between the tax base cost and the carrying value of properties, this means that an additional deferred tax provision is made on the cumulative revaluation surpluses. - Joint Ventures have been consolidated proportionately on a line-by-line basis. Under UK GAAP they were shown as a single line entry in the Profit and Loss and Balance Sheet. - The Cash Flow Statement now includes movement on cash equivalents (previously shown as liquid resources) and reconciles directly to the Balance Sheet. For more detailed explanations of the above adjustments, please refer to the full text attached to this press release or contact: Steven Board, Chief Operating Officer CLS Holdings plc www.clsholdings.com Tel. +44 (0)20 7582 7766 -ends- 1- IFRS transition report Introduction To date, CLS Holdings ('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 ('IFRS') for financial periods beginning on or after 1 January 2005. As a result the Group will be required to prepare its consolidated financial statements in accordance with IFRS as adopted by the EU. CLS Holdings' first IFRS results will be its interim results for the half year 2005. The Group's first Annual Report under IFRS will be for the year ended 31 December 2005. This report presents CLS Holdings' results, restated in accordance with IFRS, for the year ended 31 December 2004, and includes the consolidated income statement, consolidated balance sheet, consolidated statement of changes in equity, consolidated statement of cash flows and selected notes thereto, together with, where appropriate, reconciliations between the figures presented under UK GAAP and those under IFRS. These results are unaudited. The purpose of this paper is to: - State the principal accounting policies of the Group under IFRS, and those applicable from the 1st January 2005, these are set out in section 5. - Indicate the effect of the adoption of IFRS on the consolidated income statement and consolidated balance sheet for the year ended 31 December 2004. - Set out the principal accounting policy differences between UK GAAP and IFRS as they affect the Group. Basis of preparation The financial information has been prepared in accordance with the basis of accounting described in section 5. This financial information has been prepared on the basis of our interpretation of IFRS currently, and expected to be applicable at 31 December 2005, 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. Accordingly the presentation of the primary statements set out in section 3 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 changes in equity' will replace the 'statement of group total recognised gains and losses', 'reconciliation of group historical cost profits and losses', and the 'reconciliation of movements in group shareholders' funds'. - UK GAAP comparative information has been reformatted to reflect IFRS reporting requirements. Transition arrangements The rules for first time adoption of IFRS are set out in IFRS 1 - 'First-time Adoption of International Financial Reporting Standards'. The standard allows a number of exceptions and exemptions, both optional and mandatory, to the principle that an entity's opening IFRS balance sheet shall comply with each IFRS, these are further explained in section 3 of this report. As the Group publishes comparative information for one year in its Annual Report, the date of transition to IFRS is 1 January 2004, being the start of the earliest period of comparative information. This has been determined in accordance with IFRS 1. For the past 12 months, the Group has been working towards the implementation of IFRS. The transition to IFRS has required the analysis of each standard to identify the differences between the Group's existing accounting policies under UK GAAP, and those which it will adopt under IFRS; the collection of additional data required to restate the Group's results in accordance with IFRS with effect from the transition date; and the on-going modification of the Group's operational, reporting, and consolidation systems to meet IFRS 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 proportional consolidation method, under UK GAAP the equity accounting method was used. - 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, it is now subject to impairment review. Negative goodwill has been written off to retained earnings or the income statement, as appropriate. - Head leases - 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 movements 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 in its local currency 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 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 proportional consolidation of joint venture assets and liabilities as this 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 included within the corresponding line of the balance sheet. Similarly, the Group's share of operating profit of joint ventures is reanalysed to the corresponding lines of the 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 Under IFRS 3, goodwill on acquisition is no longer amortised, but is held at its UK GAAP carrying value at the transition date, or acquisition date, as appropriate, and is then subject to impairment review at each reporting date. 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 transition, with a corresponding adjustment to opening retained earnings. Under IFRS, the acquisition of properties, whether by outright purchase or 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. In the light of IFRS 3, a portfolio acquired during 2004 has been reclassified as a business combination rather than as a purchase of assets. IAS 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 two properties are affected, 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 - Implications for 2005 The Group has taken advantage of the IFRS 1 exemption to not restate comparatives for 2004 under IAS 32 and IAS 39. The impact of IAS 32 and IAS 39 is therefore effective for the accounting period commencing on 1 January 2005. The proposed accounting policy to be adopted from 1 January 2005 is included in section 5.3. There are a number of effects on the Group which will apply from 1 January 2005. Hedge accounting Hedging instruments such as interest rate swaps and forward foreign exchange contracts will be included in the balance sheet at fair value. Movements in fair value of these hedging instruments will be recognised in the income statement or in equity, as appropriate. To the extent that such instruments are ineffective hedges, they will be included in the balance sheet at fair value with changes in fair value being recognised in 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. The IFRS balance sheet at 31 December 2004 will be restated at 1 January 2005 for the adoption of IAS 32 and IAS 39, and a reconciliation of this will be included within the published Interim Statement. 2 - Primary Statements Consolidated IFRS income statement (all amounts in GBP thousands unless otherwise stated) Year ended 31 December 2004 Revenue 86,913 _________ Rental and similar income 74,489 Service charge and similar income 6,900 Service charge expense and similar charges (13,772) _________ Net rental income 67,617 Turnover from non-property activities 5,524 Cost of sales from non-property activities (4,076) _________ Net income non-property activities 1,448 Other operating gains/(losses) - net 2,651 Administrative expenses (15,003) Net property expenses (3,902) _________ Operating profit before net gain on investment properties 52,811 Net gain from fair value adjustment on 36,988 investment property Profit/(loss) from sale of investment 464 property _________ Operating profit 90,263 Finance income 1,801 Finance expense (36,050) Share of (loss)/profit of associates - post (201) tax _________ Profit before income tax 55,813 Taxation - current (596) Taxation - deferred (16,042) _________ (16,638) _________ Profit for the year 39,175 _________ Attributable to: Equity holders of the parent 40,253 Minority interest (1,078) _________ 39,175 _________ Earnings per share for profit attributable to the equity holders of the Company during the year (expressed in pence per share) - basic 46.7 _________ - diluted 46.5 _________ Please refer to section 3 of this report for a full reconciliation of UK GAAP to IFRS financial information. Consolidated IFRS balance sheet (all amounts in GBP thousands unless otherwise stated) As at 31 December 2004 ASSETS Non-current assets Investment properties 1,022,539 Property, plant and equipment 10,710 Intangible assets 2,944 Investments in associates 3,010 Investments 171 Deferred income tax assets 13,813 Trade and other receivables 3,163 _________ 1,056,350 Current assets Trade and other receivables 11,261 Investments 10,492 Cash and cash equivalents 57,371 _________ 79,124 _________ Total assets 1,135,474 _________ LIABILITIES Non-current liabilities Trade and other payables 1,279 Deferred income tax liabilities 127,951 Borrowings, including finance leases 620,508 Provisions for other liabilities and charges 301 _________ 750,039 Current liabilities Trade and other payables 44,128 Current income tax liabilities 902 Borrowings, including finance leases 17,447 _________ 62,477 _________ Total liabilities 812,516 _________ Net assets 322,958 _________ EQUITY Capital and reserves attributable to the company's equity holders Share capital 21,374 Other reserves 122,070 Retained earnings 181,492 _________ 324,936 Minority interest (1,978) _________ Total equity 322,958 _________ Please refer to section 3 of this report for a full reconciliation of UK GAAP to IFRS financial information. Consolidated IFRS statement of changes in equity (all amounts in GBP thousands unless otherwise stated) Attributable to equity Minority Total holders of the company interest Share Other Retained capital reserves earnings Balance at 31 December 2003 as previously reported under UK GAAP 21,911 330,739 33,224 (900) 384,974 Changes to the accounting policy relating to first time adoption of IFRS - (210,129) 123,810 - (86,319) ______ _______ _______ _______ _______ Balance at 1 January 2004 as restated under IFRS 21,911 120,610 157,034 (900) 298,655 _______ _______ _______ _______ _______ Arising in the year:- Currency translation differences on foreign currency net investments - 485 (1) - 484 Expenses of share issue/purchase of own shares - - (118) - (118) Purchase of own shares - - (15,676) - (15,676) Issue of shares 72 356 - - 428 Cancellation of shares (609) 609 - - - _______ _______ _______ _______ _______ Net gains/(losses) recognised directly in equity (537) 1,450 (15,795) - (14,882) Employee share option scheme - 10 - - 10 Profit for the year - - 40,253 (1,078) 39,175 _______ _______ _______ _______ _______ Total increase/(decrease) in equity for the year (537) 1,460 24,458 (1,078) 24,303 _______ _______ _______ _______ _______ At 31 December 2004 as restated under IFRS 21,374 122,070 181,492 (1,978) 322,958 _______ _______ _______ _______ _______ Please refer to section 3 of this report for a full reconciliation of UK GAAP to IFRS financial information. Consolidated IFRS statement of cash flows (all amounts in GBP thousands unless otherwise stated) Year ended 31 December 2004 Cash flows from operating activities Cash generated from operations 52,257 Interest paid (33,326) Income tax paid (539) ________ Net cash inflow from operating activities 18,392 ________ Cash flows from investing activities Purchase of investment property (38,249) Capital expenditure on investment property (31,177) Proceeds from sale of investment property 8,486 Purchases of property, plant and equipment (PPE) (1,545) Proceeds from sale of PPE 2,029 Purchase of available-for-sale financial assets (6,529) Purchase of interests in associates (1,486) Interest received 1,715 ________ Net cash outflow from investing activities (66,756) ________ Cash flows from financing activities Issue of shares 428 Purchase of own shares (15,795) New loans 112,938 Issue costs of new loans (2,018) Interest rate caps purchased (1,234) Repayment of loans (45,814) ________ Net cash inflow from financing activities 48,505 ________ Net increase in cash and cash equivalents 141 Cash and cash equivalents at beginning of year 57,230 ________ Cash and cash equivalents at end of year 57,371 ________ Please refer to section 3 of this report for a full reconciliation of UK GAAP to IFRS financial information. 3 - Explanation of transition to IFRS 3.1 Application of IFRS 1 In 2005 the Group will adopt International Financial Reporting Standards ('IFRS') for the first time. Previously the Group reported under UK Generally Accepted Accounting Principles ('UK GAAP'). The Group has applied IFRS 1 - 'First-time Adoption of International Financial Reporting Standards' ('IFRS') to provide a starting point for reporting under IFRS. The date of transition to IFRS is 1 January 2004 and all information in these financial statements has been restated to reflect the Group's adoption of IFRS. The adoption of International Financial Reporting and Accounting Standards has resulted in changes to the Group's accounting policies, as stated in section 5. In preparing its opening IFRS balance sheet, the Group has adjusted amounts reported previously in financial statements prepared in accordance with its old basis of accounting (UK GAAP). An explanation of how the transition from UK GAAP to IFRS has affected the Group's financial position and financial performance is set out in the following notes, reconciliations and notes to the reconciliations. In preparing this restatement report in accordance with IFRS 1, the Group has applied the mandatory exceptions and certain of the optional exemptions from full retrospective application of IFRS. 3.2 Exemptions from full retrospective application The Group has applied the following optional exemptions from retrospective application; (a)Business combinations exemption The Group has applied the business combinations exemption in IFRS 1. It has not restated business combinations that took place prior to the 1 January 2004 transition date. (b)Exemption from restatement of comparatives for IAS 32 and IAS 39 The Group elected to apply this exemption. It applies previous GAAP rules to derivatives, financial assets and financial liabilities and to hedging relationships for the 2004 comparative information. The adjustments required for differences between UK GAAP and IAS 32 and IAS 39 are determined and recognised at 1 January 2005. The application of this exemption will take effect in the opening balance sheet at 1 January 2005. (c)Share based payment transaction exemption The Group has elected to apply this exemption. The Group has applied IFRS 2 from 1 January 2004 to those options that were issued after 7 November 2002 but that have not vested by 1 January 2005. (d)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 application of this exemption will take effect in the opening balance sheet at 1 January 2005, as this is the IAS 32 and IAS 39 transition date. The Group has not applied the following optional exemptions from retrospective applications; (e) Fair value as deemed cost exemption (f) Cumulative translation difference exemption The following optional exemptions from retrospective application are not applicable to the Group; (g) Employee benefits exemption (h) Compound financial instruments (i) Assets and liabilities of subsidiaries, associates and joint ventures exemption (j) Insurance contracts exemption (k) Decommissioning liabilities included in the cost of property, plant and equipment exemption (l) Fair value measurement of financial assets or liabilities at initial recognition 3.3 Exceptions from full retrospective application The Group has applied the following mandatory exceptions from retrospective application; (a) Derecognition of financial assets and liabilities exception Financial assets and liabilities derecognised before 1 January 2004 are not re-recognised under IFRS. The application of the exception from restating comparatives for IAS 32 and IAS 39 means that the Group recognised from 1 January 2005 any financial assets and financial liabilities derecognised since 1 January 2004 that do not meet the IAS 39 derecognition criteria. Management did not choose to apply the IAS 39 derecognition criteria to an earlier date. (b) Hedge accounting exception Management has claimed hedge accounting from 1 January 2005 only if the hedge relationship meets all the hedge accounting criteria under IAS 39. (c) Estimates exception Estimates under IFRS at 1 January 2004 should be consistent with estimates made for the same date under previous GAAP, unless there is evidence that those estimates were in error. (d) Assets held for sale and discontinued operations exception Management has applied IFRS 5 from 1 January 2004. Any assets held for sale or discontinued operations are recognised in accordance with IFRS 5 from 1 January 2004. The Group did not have any assets that met the held-for-sale or discontinued operations criteria during the period presented. 3.4 Reconciliations between IFRS and GAAP 3.4.1 Reconciliation of consolidated IFRS balance sheet at 1 January 2004 (all amounts in GBP thousands unless otherwise stated) Inter- ests Prev- Oper- Invest- in iously Share Busin- ating For- ments joint Impair- Invest- Re- report- Based ess lease eign in vent- ment ment Total stated ed pay- combin- Income incent exch- asso- ures of prop- adjust- under under ments ations taxes Leases ives ange ciates assets erty ments IFRS UK GAAP* IFRS 2 IFRS 3 IAS 12 IAS 17 SIC 15 IAS 21 IAS 28 IAS 31 IAS 36 IAS 40 ASSETS Non-current assets Invest- ment properties 882,442 - - - 146 - - - 36,133 - - 36,279 918,721 Property, plant and 6,847 - - - - - - - 2,117 - - 2,117 8,964 equipment Intangible - - - - - - - - - - - - - assets Investments in associates 3,225 - - - - - - - - - - - 3,225 Investments in joint ventures 8,499 - - - - - - - (8,499) - - (8,499) - Investments 171 - - - - - - - - - - - 171 Deferred income tax assets - - - 14,458 - - - - - - - 14,458 14,458 Trade and other receivables 3,695 - - - - - - - 71 - - 71 3,766 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 904,879 - - 14,458 146 - - - 29,822 - - 44,426 949,305 Current assets Trade and other receivables 7,976 - - - - 135 - - 749 - - 884 8,860 Investments 3,963 - - - - - - - - - - - 3,963 Cash and cash equivalents 56,693 - - - - - - - 537 - - 537 57,230 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 68,632 - - - - 135 - - 1,286 - - 1,421 70,053 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Total assets 973,511 - - 14,458 146 135 - - 31,108 - - 45,847 1,019,358 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ LIABILITIES Non-current liabilities Trade and other payables 5,960 - - - - - - - - - - - 5,960 Deferred income tax liabilities 5,680 - - 102,117 - - - - - - - 102,117 107,797 Borrowings, including finance leases 523,615 - - - 146 - - - 27,038 - - 27,184 550,799 Provisions for other liabilities and charges 33 - - - - - - - - - - - 33 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 535,288 - - 102,117 146 - - - 27,038 - - 129,301 664,589 Current liabilities Trade and other payables 35,257 - - - - - - - 2,365 - - 2,365 37,622 Current income tax liabilities 1,149 - - - - - - - - - - - 1,149 Borrowings, including finance leases 16,843 - - - - - - - 500 - - 500 17,343 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 53,249 - - - - - - - 2,865 - - 2,865 56,114 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Total 588,537 - - 102,117 146 - - - 29,903 - - 132,166 720,703 liabilities _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Net assets 384,974 - - (87,659) - 135 - - 1,205 - - (86,319) 298,655 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ EQUITY Capital and reserves attributable to the company's equity holders Share 21,911 - - - - - - - - - - - 21,911 capital Other 330,739 5 - - - - 11,888 - - - (222,022) (210,129) 120,610 reserves Retained 33,224 (5) - (87,659) - 135 (11,888) - 1,205 - 222,022 123,810 157,034 earnings _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 385,874 - - (87,659) - 135 - - 1,205 - - (86,319) 299,555 Minority (900) - - - - - - - - - - - (900) interest _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Total equity 384,974 - - (87,659) - 135 - - 1,205 - - (86,319) 298,655 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Notes - refer to section a. b. c. d. e. f. g. h. i. j. 3.4.5 * Reformatted to reflect IFRS reporting requirements 3.4.2 Reconciliation of consolidated IFRS balance sheet at 31 December 2004 (all amounts in GBP thousands unless otherwise stated) Inter- ests Prev- Oper- Invest- in joint iously Share Busin- ating For- ments vent- Impair- Invest- Re- report- Based ess lease eign in ures ment ment Total stated ed pay- combin- Income incent exch- asso- of prop- adjust- under under ments ations taxes Leases ives ange ciates assets erty ments IFRS UK GAAP* IFRS 2 IFRS 3 IAS 12 IAS 17 SIC 15 IAS 21 IAS 28 IAS 31 IAS 36 IAS 40 ASSETS Non-current assets Investment properties 981,560 - - - 146 - - - 40,833 - - 40,979 1,022,539 Property, plant and equipment 5,040 - - - - - - - 5,670 - - 5,670 10,710 Intangible - - 2,509 - - - - - 435 - - 2,944 2,944 assets Investments in associates 3,010 - - - - - - (143) - 143 - - 3,010 Investments in joint ventures 13,848 - - - - - - - (13,848) - - (13,848) - Investments 171 - - - - - - - - - - - 171 Deferred income tax assets - - - 13,813 - - - - - - - 13,813 13,813 Trade and other receivables 3,096 - - - - - - - 67 - - 67 3,163 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 1,006,725 - 2,509 13,813 146 - - (143) 33,157 143 - 49,625 1,056,350 Current assets Trade and other receivables 10,480 - - - - 223 - - 558 - - 781 11,261 Investments 10,492 - - - - - - - - - - - 10,492 Cash and cash equivalents 56,680 - - - - - - - 691 - - 691 57,371 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 77,652 - - - - 223 - - 1,249 - - 1,472 79,124 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Total assets 1,084,377 - 2,509 13,813 146 223 - (143) 34,406 143 - 51,097 1,135,474 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ LIABILITIES Non-current liabilities Trade and other payables 1,279 - - - - - - - - - - - 1,279 Deferred income tax liabilities 6,777 - - 121,174 - - - - - - - 121,174 127,951 Borrowings, including finance leases 592,439 - - - 146 - - - 27,923 - - 28,069 620,508 Provisions for other liabilities and charges 301 - - - - - - - - - - - 301 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 600,796 - - 121,174 146 - - - 27,923 - - 149,243 750,039 Current liabilities Trade and other payables 39,472 - - - - - - - 4,656 - - 4,656 44,128 Current income tax liabilities 902 - - - - - - - - - - - 902 Borrowings, including finance leases 16,825 - - - - - - - 622 - - 622 17,447 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 57,199 - - - - - - - 5,278 - - 5,278 62,477 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Total 657,995 - - 121,174 146 - - - 33,201 - - 154,521 812,516 liabilities _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Net assets 426,382 - 2,509 (107,361) - 223 - (143) 1,205 143 - (103,424) 322,958 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ EQUITY Capital and reserves attributable to the company's equity holders Share 21,374 - - - - - - - - - - - 21,374 capital Other 374,592 15 97 (951) - - 13,096 - - - (264,779) (252,522) 122,070 reserves Retained 32,394 (15) 2,412 (106,410) - 223 (13,096) (143) 1,205 143 264,779 149,098 181,492 earnings _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 428,360 - 2,509 (107,361) - 223 - (143) 1,205 143 - (103,424) 324,936 Minority (1,978) - - - - - - - - - - - (1,978) interest _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Total equity 426,382 - 2,509 (107,361) - 223 - (143) 1,205 143 - (103,424) 322,958 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Notes - refer to section a. b. c. d. e. f. g. h. i. j. 3.4.5 * Reformatted to reflect IFRS reporting requirements 3.4.3 Reconciliation of consolidated IFRS income statement for year ended 31 December 2004 (all amounts in GBP thousands unless otherwise stated) Inter- ests Prev- Oper- Invest- in joint iously Share Busin- ating For- ments vent- Impair- Invest- Re- report- Based ess lease eign in ures ment ment Total stated ed pay- combin- Income incent exch- asso- of prop- adjust- under under ments ations taxes Leases ives ange ciates assets erty ments IFRS UK GAAP* IFRS 2 IFRS 3 IAS 12 IAS 17 SIC 15 IAS 21 IAS 28 IAS 31 IAS 36 IAS 40 Rental and similar income 71,787 - - - - 83 - - 2,619 - - 2,702 74,489 Service charge and similar income 6,401 - - - - - - - 499 - - 499 6,900 Service charge expense and similar charges (13,293) - - - - - - - (479) - - (479) (13,772) _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Net rental 64,895 - - - - 83 - - 2,639 - - 2,722 67,617 income Turnover from non-property activities 5,524 - - - - - - - - - - - 5,524 Cost of sales of non-property activities (4,076) - - - - - - - - - - - (4,076) _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Net income non-property activities 1,448 - - - - - - - - - - - 1,448 Other operating gains/(losses) 2,651 - - - - - - - - - - - 2,651 - net Administrative expenses (14,845) (10) - - - - - - (148) - - (158) (15,003) Net property expenses (3,911) - - - 9 - - - - - - 9 (3,902) _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Operating profit before net gain on investment properties 50,238 (10) - - 9 83 - - 2,491 - - 2,573 52,811 Net gain from fair value adjustment on investment property - - (1,394) - - 5 - - - - 38,377 36,988 36,988 Profit on sale of investment properties 464 - - - - - - - - - - - 464 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Operating 50,702 (10) (1,394) - 9 88 - - 2,491 - 38,377 39,561 90,263 profit Finance income 1,801 - - - - - - - - - - - 1,801 Finance (36,041) - - - (9) - - - - - - (9) (36,050) expense Share of (loss)/profit of associates (201) - - - - - - 143 - (143) - - (201) Share of (loss)/profit of JVs 2,491 - - - - - - - (2,491) - - (2,491) - _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Profit before income tax 18,752 (10) (1,394) - - 88 - 143 - (143) 38,377 37,061 55,813 Taxation - (596) - - - - - - - - - - - (596) current Taxation - (1,097) - 3,806 (18,751) - - - - - - - (14,945) (16,042) deferred _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Profit for 17,059 (10) 2,412 (18,751) - 88 - 143 - (143) 38,377 22,116 39,175 year _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Attributable to: Equity holders of the parent 18,137 (10) 2,412 (18,751) - 88 - 143 - (143) 38,377 22,116 40,253 Minority (1,078) - - - - - - - - - - - (1,078) interest _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 17,059 (10) 2,412 (18,751) - 88 - 143 - (143) 38,377 22,116 39,175 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Notes - refer to section 3.4.5 a. b. c. d. e. f. g. h. i. j. * Reformatted to reflect IFRS reporting requirements 3.4.4. Notes to the consolidated IFRS statement of cash flows for year ended 31 December 2004 The transition to IFRS will not affect the cash flows of the business. The presentation of the cash flow statement for the Group does not differ significantly from that under UK GAAP, except for the inclusion of short term deposits within the definition of cash and cash equivalents. Previously these were shown separately from cash as liquid resources. From 1 January 2005, due to the classification of investments as 'available-for-sale' financial assets, the movement in investments will now be shown in the cash flow statement under cash flows from investing activities rather than in cash generated from operations. There are no other material differences between the cash flow statement presented under IFRS and the cash flow statement presented under UK GAAP. 3.4.5. Notes to 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 applied. A corresponding release from equity means that there is no effect on the balance sheet or NAV. b. IFRS 3 - Business combinations In the light of IFRS 3, a portfolio acquired during 2004 has been reclassified as a business combination rather than as a purchase of assets. 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. d. IAS 17 - Leases Investment property head leases are capitalised and shown as a corresponding lease liability. e. SIC 15 - Operating lease incentives Lease incentives are now amortised over the period of the lease, rather than to the first rent review. f. IAS 21 - The effects of changes in foreign exchange rates Under UK GAAP revaluation movements on overseas assets were booked at the closing rate and retranslated at each reporting period. Since the revaluation movements are now posted to the income statement, they are translated at the average rate. On transition to IFRS, all previous exchange gains held within the revaluation reserve have been transferred back to the cumulative translation reserve. g. IAS 28 - Investments in associates Cessation of goodwill amortisation. Negative goodwill eliminated. h. IAS 31 - Interests in joint ventures Proportional consolidation for all joint ventures. The net investment line is now eliminated and joint ventures are shown gross on a line-by-line basis. Cessation of goodwill amortisation. Negative goodwill eliminated. i. IAS 36 - Impairment of assets Certain assets are reviewed for impairment. An impairment loss is recognised for the amount by which the assets' carrying amount exceeds its recoverable amount. j. IAS 40 - Investment property Investment property revaluations and tax thereon taken through the income statement. 4 - Selected notes - extracts 4.1 Investment property (all amounts in GBP thousands unless otherwise stated) Year ended 31 December 2004 At beginning of year 918,721 Net exchange differences 6,179 Additions 69,007 Disposal (8,351) Other (5) Net gain from fair value adjustments on investment property 36,988 ________ At end of year 1,022,539 ________ The investment properties were revalued at 31 December 2004 to their fair value, valuations were based on current prices in an active market for all properties. The property valuations were carried out by Allsop & Co (for the UK and Swedish properties) and DTZ Debenham Tie Leung (for Continental European properties), who are independent, professionally qualified valuers. 4.2 Deferred tax (all amounts in GBP thousands unless otherwise stated) Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred taxes relate to the same fiscal authority. The offset amounts are as follows: Year ended 31 December 2004 Deferred tax assets: (13,813) ________ (13,813) Deferred tax liabilities: 127,951 ________ 127,951 ________ 114,138 ________ The gross movement on the deferred income tax account is as follows: Year ended 31 December 2004 Beginning of the year 93,339 Income statement charge 16,042 Acquisition of subsidiaries 3,806 Exchange differences 951 ________ End of year 114,138 ________ The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: Deferred tax assets: Tax losses Other Total At 1 January 2004 (8,131) (6,327) (14,458) Charged /(credited) to the income statement 428 217 645 ________ ________ ________ At 31 December 2004 (7,703) (6,110) (13,813) ________ ________ ________ Deferred tax liabilities: Tax on fair value Deduction for UK adjustments to capital allowances investment properties Other Total At 1 January 2004 14,631 93,166 - 107,797 Charged/(credited) to the income 928 14,447 22 15,397 statement Acquisition of subsidiary - 3,806 - 3,806 Exchange differences - 951 - 951 ________ ________ ________ ________ At 31 December 2004 15,559 112,370 22 127,951 ________ ________ ________ ________ ________ 114,138 ________ Deferred income tax assets are recognised for tax loss carry-forwards to the extent that the realisation of the related tax benefit through the future taxable profits is probable. At 31 December 2004 the Group did not recognise deferred income tax assets of Â£1,072 in respect of losses amounting to Â£3,478 that can be carried forward against future taxable income or gains in those entities. 4.3 Income tax expense (all amounts in GBP thousands unless otherwise stated) Year ended 31 December 2004 Current tax (596) Deferred tax (16,042) ________ (16,638) ________ The tax on the Group's profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated companies as follows: Year ended 31 December 2004 Profit before tax 55,813 _______ Tax calculated at domestic tax rates applicable to profits in the respective 17,375 countries Expenses not deductible for tax purposes 1,950 Income not subject to tax (74) Utilisation of previously unrecognised tax losses (2,054) Losses used through consortium relief by minorities 234 Adjustment in respect of prior periods (793) _______ Tax charge 16,638 _________ The weighted average applicable tax rate was 31.13% 5. Significant accounting policies 5.1 General information CLS Holdings PLC ('the Company') and its subsidiaries (together 'CLS Holdings' or 'the Group') are an investment property group which is principally involved in the investment, development and management of commercial properties. The Group's principal operations are carried out in the United Kingdom, Sweden and Continental Europe. The Company is registered in the UK, registration number 2714781, of registered address: One Citadel Place, Tinworth Street, London SE11 5EF. The Company has its primary listing on the London Stock Exchange. 5.1.1 Basis of preparation This transition report (the 'report') restates the 2004 financial results and provides the opening balance sheet as at 1 January 2004 under International Financial Reporting Standards ('IFRS'). This report is prepared in accordance with the transitional provisions set out in IFRS 1 - 'First-time Adoption of IFRS'. The Group's first IFRS financial statements will be for the year ended 31 December 2005. The policies set out below have been consistently applied to all the years presented except for those relating to the classification and measurement of financial instruments. In accordance with the transitional provisions set out in IFRS 1, and other relevant standards, the Group has applied IFRS expected to be in force as at 31 December 2005 in its financial reporting with effect from 1 January 2004, however the Group has made use of the exemption available under IFRS 1 to only apply IAS 32 and IAS 39 from 1 January 2005. The policies applied to financial instruments for 2004 and 2005 are disclosed separately below. This transition report has been prepared in accordance with those IFRS standards and IFRIC interpretations issued and effective or issued and early adopted as at the time of preparing this report. The IFRS standards and IFRIC interpretations that will be applicable at 31 December 2005, including those that will be applicable on an optional basis, are not known with certainty at the time of preparing this report, as further standards and interpretations may be issued that could be applicable for financial years beginning on or after 1 January 2005 or that are applicable to later accounting periods but with the option for companies to adopt for earlier periods. The Group's first annual financial statements prepared under IFRS may, therefore, be prepared in accordance with different accounting policies to those used in the preparation of the financial information in this document. In addition, IFRS is currently being applied in the European Union and other countries for the first time and contains many new and revised standards. Therefore practice on which to draw in applying the standards may develop. At this preliminary stage, before the Group's first annual financial statements prepared under IFRS are completed, it should be noted that the financial information in this document could be subject to change. CLS Holdings' consolidated financial statements were prepared in accordance with UK Generally Accepted Accounting Principles ('GAAP') until 31 December 2004. GAAP differs in some areas from IFRS. In preparing this transition report, management has amended certain accounting, valuation and consolidation methods applied in the GAAP financial statements to comply with IFRS. Reconciliations and descriptions of the effect of the transition from GAAP to IFRS on the Group's equity and its net income and cash flows are provided in section 3. This transition report has been prepared in accordance with International Financial Reporting Standards ('IFRS') for the first time. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of investment property, which is carried at fair value. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgement 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. The financial information contained in this document does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The auditors have issued an unqualified opinion on the Group's UK GAAP financial statements for the year ended 31 December 2004. 5.1.2 Early adoption of standards When preparing this transition report, and in accordance with IFRS 1, the Group has adopted the following standards which are effective from 1 January 2005: IAS 1 (revised 2004) Presentation of Financial Statements IAS 2 (revised 2003) Inventories IAS 8 (revised 2003) Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 (revised 2004) Events after Balance Sheet Date IAS 16 (revised 2004) Property, Plant and Equipment IAS 17 (revised 2004) Leases IAS 21 (revised 2003) The Effects of Changes in Foreign Exchange Rates IAS 24 (revised 2003) Related Party Disclosures IAS 27 (revised 2004) Consolidated and Separate Financial Statements IAS 28 (revised 2003) Investments in Associates IAS 33 (revised 2004) Earnings per Share IAS 36 (revised 2004) Impairment of Assets IAS 38 (revised 2004) Intangible Assets IAS 40 (revised 2003) Investment Property IFRS 2 (issued 2004) Share-based Payments IFRS 3 (issued 2004) Business Combinations IFRS 5 (issued 2004) Non-current Assets Held for Sale and Discontinued Operations 5.2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 5.2.1 Consolidation (a) Subsidiaries Subsidiaries are all entities (including special purpose 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. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the date, irrespective of the extent of any minority interest. The excess of the cost of the acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. (b) Joint ventures The Group's interests in jointly controlled entities are accounted for by proportionate consolidation. The Group combines its share of the joint ventures' individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Group financial statements. The Group recognises the portion of gains or losses on the sale of assets by the Group to the joint venture that is attributable to the other venturers. The Group does not recognise its share of the profits or losses from the joint venture that result from the Group's purchase of assets from the joint venture until it resells the assets to an independent party. However, a loss on the transaction is recognised immediately if the loss provides evidence of a reduction in the net realisable value of the current assets, or an impairment loss. (c) Associates 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. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost. The Group's investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition. The Group's share of its associates' post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. 5.2.2 Segment reporting A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. 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. 5.2.3 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in pounds sterling, which is the Company's functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Translation differences on non-monetary items, such as equities held at fair value through profit and loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, will be included in the fair value reserve in equity from 1 January 2005. (c) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of the balance sheet; (ii) income and expenses for each income statement are translated at the average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and (iii) all resulting exchange differences are recognised as a separate component of equity (cumulative translation adjustment). On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 5.2.4 Property, plant and equipment Property, plant and equipment is stated at historical 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 assets' 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. Land is not depreciated. Depreciation on property, plant and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Land: Nil Property, plant and equipment: 4 - 15 years The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. 5.2.5 Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of net identifiable assets including intangible assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries and joint ventures is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the Group's investment in each country of operation by each primary reporting segment. 5.2.6 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). 5.2.7 Investment property Property that is held for long-term rental yields or for capital appreciation or both, and that is not occupied by the companies in the consolidated Group, is classified as investment property. Investment property comprises freehold land, freehold buildings, land held under operating leases and buildings held under finance leases. Land held under operating leases is classified and accounted for as investment property when the rest of the definition of investment property is met. 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. 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 annually 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. 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 other repairs and maintenance costs are charged to the income statement during the financial period in which they are incurred. Changes in fair values are recorded in the income statement. 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. Hotel buildings held by the Group are not owner occupied. The Group rents the buildings to third-party operators who run the hotels. 5.2.8 Inventories Properties that are being 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. 5.2.9 Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. 5.2.10 Deferred income tax 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. 5.2.11 Employee benefits (a) Pension obligations The Group operates various defined contribution plans. The Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. In Sweden, the total pension benefits are a combination, with some parts being defined contribution plans and others defined benefit plans. Defined benefit plans relate to the Swedish ITP pension plan which is administered by Alecta. The Swedish Financial Accounting Standards Council's interpretations committee defined this plan as a multi-employer defined benefit plan. The Group did not have access to information from Alecta that would have made it possible for this plan to be reported as a benefit plan. Therefore, the plan has been reported for the year ended 31 December 2004 as a defined contribution plan. This treatment is consistent with other Swedish companies investing in similar pension plans. (b) Share-based compensation The Group operated an equity-settled, share-based compensation plan. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period. The proceeds received net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium when the options are exercised. 5.2.12 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. 5.2.13 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 charges 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 cable operations Income comprises amounts invoiced, excluding trade discounts and intra-Group trading. Other income is accounted for as follows: (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 investments Dividend income from investments is recognised when the shareholders' rights to receive payment have been established. 5.2.14 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 5.2.15 Tender offer buy-backs In lieu of paying dividends, a distribution by way of a tender offer buy-back is made twice yearly. Shares purchased by way of the tender offer are currently retained as treasury shares. Up to 10% of the issued share capital can be held as treasury shares. Where the Company purchases its own shares out of free reserves, a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account and details of the transfer disclosed in the balance sheet. The total cost of the tender offer buy-back is charged to retained earnings. 5.2.16 Financial instruments (UK GAAP) From 1 January 2004 to 31 December 2004 Interest rate caps The premium paid for interest rate caps used to hedge borrowings is held within debtors on the balance sheet and amortised over the period of the cap. Shares, warrants & options Shares, warrants and options are held on the balance sheet at the lower of cost and net realisable value. Net realisable value is determined by the quoted market price in respect of listed instruments and Directors' valuation regarding non-listed instruments. Profits are only recognised on shares once they are sold and on options when either the maturity date is reached or the exposure on the option is closed out. Income received on options which have not yet reached maturity is held as deferred income. Forward foreign exchange contracts When forward foreign exchange contracts are entered into to hedge the Group's net investment in overseas operations, any gains and losses on those contracts are taken directly to reserves. Any potential losses on forward contracts at the balance sheet date are similarly provided for, although potential profits are deferred until they crystallise. Any premium paid is taken to the profit and loss account in the year. 5.3 Summary of significant additional accounting policies to be adopted from 1 January 2005 5.3.1 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 initially at cost. Subsequent to initial recognition, derivatives are stated 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 item being hedged. The Group designates certain derivatives as either: (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); (2) hedges of highly probable forecast transactions (cash flow hedges); or (3) hedges of net investments in foreign operations. 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. (a) Fair value hedge accounting Changes in fair value of derivatives that qualify and are designated as fair value hedges are recorded in the income statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. (b) Cash flow hedge accounting For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow hedge is recognised initially directly in shareholders' equity, and recycled to the income statement in the periods when the hedged item will affect profit and loss. Any ineffective portion of the gain or loss on the hedging instrument is recognised in the income statement immediately. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecasted transaction is ultimately recognised in the income statement. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was recognised in equity is immediately transferred to the income statement. (c) Hedges of net investments Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised directly in equity; the gain or loss relating to the ineffective portion of the hedge is recognised immediately in the income statement. Gains and losses accumulated in equity are recognised in the income statement when the foreign operation is disposed of. (d) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement. 5.3.2. 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. (c) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has a positive intention and ability to hold to maturity. During the year, the Group did not hold any investments in this category. (d) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. 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. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. 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. Unrealised gains and losses arising from changes in the fair value of non-monetary securities classified as available-for-sale are recognised in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains or losses from investment securities. 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. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. 5.3.3 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. 5.3.4 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. 5.3.5 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.

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