1st Quarter Results

Workspace Group PLC 01 September 2005 WORKSPACE CONTINUES GROWTH IN FIRST QUARTER Workspace Group PLC ('Workspace'), the leading provider of flexible business accommodation to small and medium sized enterprises ('SMEs') in London and the South East today announces its results for the three months ended 30 June 2005. â€¢ Net Asset Value (NAV) per share Â£1.85 (under IFRS) at 30 June 2005, up 4.5% on the quarter and up 21% over twelve months (31 March 2005: Â£1.77) (30 June 2004: Â£1.53). â€¢ NAV per share Â£2.35 (under former UK GAAP) at 30 June 2005 (31 March 2005: Â£2.24; 30 June 2004: Â£1.83). â€¢ Valuation surplus for quarter Â£18.1m (2004: Â£14.2m). â€¢ Pre-tax profits Â£19.82m (2004: Â£18.60m). â€¢ Pre-tax profits on trading operations Â£3.14m (2004: Â£3.49m). â€¢ Basic earnings per share 8.5p (2004: 8.1p). â€¢ Earnings per share on trading activities 1.3p (2004: 1.5p). â€¢ Turnover Â£13.95m for the quarter, up 4.1% (2004: Â£13.40m). â€¢ Total rent roll Â£43.2m up 2.1% on the quarter (31 March 2005: Â£42.3m). â€¢ Acquisitions Â£95.7m since 31 March 2005 with Annual Income of Â£6.1m. Harry Platt, Chief Executive of Workspace commented, ' We have seen a sound start to the year. We have made acquisitions totalling Â£95.7m, offering excellent prospects for growth in line with the Group's development plan. ' We have continued to make progress on our 'added value' schemes. Our major refurbishments are continuing as planned, and should produce good earnings growth next year. ' Enquiry levels remain robust and the award of the 2012 Olympics to London will offer significant opportunities for the Group going forward. As the market leader we are ideally positioned to capitalise on the growing demand for space from small and medium sized businesses.' -ends- Date: 1 September 2005 For further information: Workspace Group PLC City Profile Group Harry Platt, Chief Executive Simon Courtenay Mark Taylor, Finance Director Oliver Winters 020-7247-7614 020-7448-3244 e-mail: info@workspacegroup.co.uk Web: www.workspacegroup.co.uk Operating & Financial Review Chairman's Statement We have made a good start to the current year with NAV per share up 4.5% over the quarter and 21% over the last 12 months. In particular, after a year in which our acquisitions levels, in a competitive market, were lower than planned, I am pleased to report sound progress in the current period. Since 31 March 2005 Â£95.7m of acquisitions have been completed or contracted, showing a combined initial yield of 6.4% and a yield on current market rental levels at full occupancy of 8.85%. These properties have potential for further growth. These are the first financial statements that we have released prepared under the new International Financial Reporting Standards (IFRS). In common with most other companies, the introduction of IFRS has a profound impact on our financial reporting. As a UK based property company, the two main changes are the incorporation of valuation surpluses in the Income Statement, which has the impact of increasing earnings per share substantially to 6.5 times that under the former accounting principles, and the full recognition of deferred tax liabilities principally on valuation surpluses, which has reduced Net Worth and Net Asset Value per share, with NAV per share 21% lower under these principles. Another significant impact will be the increased level of volatility in reported performance. This and the related impacts on Earnings per Share (EPS) are commented upon more fully in the Financial Review. This is the first time that the Group has undertaken an independent quarterly valuation of its portfolio. A valuation surplus of Â£18.1m, an increase of 2.47% on the portfolio value immediately prior to the revaluation, was recorded in the quarter, taking Net Asset Value per share to Â£1.85 (31st March 2005 Â£1.77) (under former UKGAAP Â£2.35 at 30th June 2005 and Â£2.24 at 31st March 2005). Going forward, it seems that the immediate prospects for some parts of the economy have recently become more uncertain, which has had the effect of slowing activity in these sectors. As yet, we see no evidence of a change to the activity pattern of our SME customer base, with occupancy rates little changed. In the longer term, the award of the 2012 Olympics to London must present opportunities. We believe that this will act as an important stimulant to the whole of the London economy; extending beyond the Lea Valley in East London, where the principal stadiums are to be located. As a major investor in London servicing the SME business community in the city, the Group should benefit substantially from the Olympiad. Chief Executive's Statement The first quarter shows the Group making further progress. Net rental income, including acquisitions, was up 2.45% at Â£10.06m for the quarter (2004: Â£9.82m) with overheads down 4.2%. Net asset value per share is up 4.5% on the opening 31 March 2005 value. Earnings per share, at 8.5p are up 4.9% on the first quarter of 2004/5. Of this 7.2p per share relates to Other Items, arising principally from the valuation surplus net of the change in fair value of the financial derivatives. As noted above, five acquisitions, totalling Â£95.7m, have been achieved in the year to date, a period in which competition for property continued to be high. These acquisitions have been secured at values that, we anticipate, will provide good support for earnings and net asset value growth in the future. With the Group's increasing focus on the London metropolitan area, the Board is undertaking a review of its portfolio. It is possible that the disposal of certain properties outside this areas may follow, particularly where the Board considers that these properties are unlikely to contribute to growth at the levels comparable with those anticipated for similar properties within London. Taking into account the acquisitions completed or contracted following the quarter end, the Group's portfolio now stands at over Â£830.0m, well on the way to the target set in September 2003 of Â£1bn by September 2008. Valuation The financial results include, for the first time, an independent valuation of the Group's portfolio at the quarter end. This valuation showed a surplus of Â£18.1m for the quarter, a 2.47% increase. This increase was largely attributable to yield movements in the sector over the period with just 10% arising from net rental improvements. Portfolio The following acquisitions and disposals have been made or contracted in the year to date: Name of Property Description Acquisition Initial/Exit Market rent / Sale Income at 30 June Price Â£000 pa 2005 Â£000 pa Acquired during quarter: 111 Power Road, Factory complex Chiswick, of 98,000 sq.ft. Â£7.50m 151.8 1,349.1 London, W4 Marshgate Multi-let Business Centre, industrial Â£5.59m 347.3 483.0 London, E15 estate of 93,400 sq.ft. Acquired following quarter end: Evelyn Court, 16,000 sq.ft., Deptford, 18 unit offices Â£2.64m 210.0 209.5 SE8 5AD Uplands Business 287,500 sq.ft. Park, industrial Walthamstow, E17 estate with 45 Â£24.0m 1,711.0 1,889.0 units Contracts exchanged following quarter end: 333,100 sq.ft. business park Â£56.0m 3,705.4 4,545.0 Kennington Park, arranged over 11 Kennington, SW9 buildings with 71 lettable units. Â£95.73m 6,125.5 8,475.6 Yield 6.40% 8.85% Sold: Payne Road Site sold with Studios, London, consent for E3 mixed residential and Â£2.10m 97.4 - commercial accommodation. Exit Yield 4.64% 111 Power Road, Chiswick was identified following the acquisition last year of Chiswick Studios, which is located nearby. It is a former costume jewellery factory complex. The previous owners had commenced a phased programme to convert it to a business centre use, with the result that only 32% of the space was occupied. We plan to invest a further Â£4.5m to accelerate and complete this conversion, following which it should provide over time an income of Â£1.35m (yielding in excess of 10% on our total investment). Marshgate Business Centre and Uplands Business Park are located in East London and will be directly impacted by the Olympics in 2012. Marshgate Business Centre is situated on the edge of the Olympic zone and could potentially be subject to a compulsory purchase order. This was recognised at the time of purchase (before the Olympics announcement) but we believe that, given its inexpensive purchase price at Â£60 per sq.ft., we will, in any event, see a good return from our investment in the property. Uplands is located further north in the Lea Valley. It is positioned well to benefit from lettings to those businesses that will need to be relocated from the core Olympic zone. Evelyn Court, Deptford is a small office scheme, which is highly visible being located on the A200, Evelyn Street. This is an improving area and we expect rental and capital values to advance over time in reflection of this. Kennington Park will be a significant acquisition. Contracts were exchanged for the purchase of this estate on 19th August 2005 and it will complete on 15th September 2005. It is well located on an island site fronting the A23 adjacent to the Oval tube station in an area which we believe will change substantially in the medium term. It comprises a development of 11 separate buildings, used formerly for a mixture of industrial activities. It is now subdivided and occupied by a range of activities. It is just 2 miles from Westminster and compliments the cluster of other properties that the Group has acquired nearby over recent periods in the Southwark/Lambeth districts. Following the acquisitions and disposals completed in the quarter, the portfolio statistics, and progress through the year to date may be summarised as follows: 30 June 2005 31 March 2005 Number of estates 105 104 Total floor space at end of period 5.33 5.16 (million sq. ft.) of which: Like for like portfolio (million sq. ft.) 4.97 Net Acquisitions/Disposals (million sq. ft.) 0.18 Developments (million sq. ft.) 0.18 Lettable units (number) 4,748 4,717 Annual rent roll of occupied units (Â£m) 43.17 42.28 Average rent (Â£/sq. ft) 9.35 9.29 Average rent of like-for-like 9.26 9.11 portfolio (Â£/sq. ft) Occupancy overall 86.65% 88.26% Occupancy of like-for-like portfolio 89.40% 90.27% Comparisons of overall occupancy and rent roll are distorted by acquisitions, disposals and transfers. The 'like-for-like portfolio' is defined as those properties that have been held throughout the year to date and which are not subject to refurbishment/ redevelopment programmes. Like-for-like occupancy declined slightly during the quarter from 90.3% to 89.4%, although it remains at levels that are regarded as effective full occupancy by the Group. There has been some attrition since the quarter end with expected tenant departures which may result in a further reduction in occupancy levels in the next two quarters. For example, the Inland Revenue is departing from Surrey House which is making 16,900 sq.ft. of space available for letting in conjunction with our Great Guilford Street Business Centre. Against this, average rental income per square foot (on a like-for-like basis) increased by 1.6% over the quarter, equivalent to an annual rate of increase of 6.75%, comfortably ahead of our target growth level of 5.0%. Progress on the Group's programme to add value to its properties continues. Following the receipt of planning consent to redevelop its Wharf Road property, the Group invited tenders from residential developers to acquire the site for a consideration comprising the provision of a replacement business centre on the site, together with a cash lump sum. Negotiations are now in progress with the preferred bidder. Despite being recommended for approval by officers, our planning application for the mixed-use development at Aberdeen Studios was rejected by Islington Council. We are now preparing to appeal the decision. Negotiations continue on our planning application for a major mixed-use scheme at Thurston Road in Lewisham. We anticipate a decision during the current financial year. Financial Review As noted in the Chairman's Statement, these are the first financial statements that have been prepared using the International Financial Reporting Standards (IFRS). Under IFRS, the focus of the accounts has moved from the P & L Account (now called the Income Statement) to the Balance Sheet with this being prepared by reference to 'fair values' of assets and liabilities rather than their historic costs as formerly. This fair valuing of assets will cause greater volatility as the valuation differences pass through the Income Statement. We have decided to preserve our practice of analysing our Income Statement between 'Trading Operations' and non trading 'Other Items'. The valuation adjustments have been classified under other items alongside profits/losses on disposals of investment properties and other exceptional items. This approach has the advantage of presenting a trading performance which accords broadly with that presented previously under former UK GAAP in the 'Trading Operations' column whilst drawing together the fair value adjustments made to these values under the 'Other Items' column. Consequently, a more consistent pattern should be preserved in the Trading Operations column with the higher volatility items focussed in Other Items. This approach also serves to spotlight the impact that these adjustments have, with trading earnings per share of 1.5p increasing by 7.2p (554%) to 8.5p as a result of these adjustments. This Other Item total has arisen principally due to the valuation surplus of Â£18.12m in the quarter (2004: Â£14.18m), less the difference arising from the revaluation of derivative financial instruments (the interest rate hedges used to shelter the Group from the impact of excessive changes in interest rates) which last year contributed Â£1.04m but this time showed a cost of Â£1.22m. We propose reporting on this basis for the foreseeable future, whilst understanding of IFRS reporting develops. We will also continue to provide unaudited statements prepared under former UK GAAP on our website. Accompanying this report is a fuller statement advising on the changes under IFRS and providing a restatement of last years accounts. A copy of this will be placed on our website also. Profits before tax, at Â£19.82m are up 6.6% (2004: Â£18.60m). However, at a Trading Operations level, there was a reduction from Â£3.49m in 2004/5 to Â£3.14m in the current year. Interest charges for the quarter were up Â£0.74m on last year, Â£0.35m being due to increases in interest rates. The average rate of LIBOR for the quarter was 0.46% higher than that for the comparable period last year. Since the quarter end LIBOR rates have declined and so, with the increases that occurred in the comparable periods last year, it is anticipated that year on year interest rate comparisons will show reductions for the remainder of the year. Adjusting for this increase in interest rates leaves Trading PBT level with that for the first quarter last year. Earnings growth in the period has also been impacted by reductions in net income on redevelopment and refurbishment projects which are not of a recurrent nature. The other significant impact of the implementation of IFRS is that on reported net worth and net asset value per share. Here the key influence is the full recognition of deferred tax liabilities on valuation surpluses. This deferred tax liability will only accrue if the related assets are sold, which as investment properties is unlikely to any substantial degree in the foreseeable future. The deferred tax liability increased from Â£7.35m to Â£86.08m on restatement of the 31 March 2005 Balance Sheet (an adjustment of 47 pence per share), increasing to Â£91.15m at 30 June once the valuation surplus and other items in the quarter were accounted for (amounting to 54 pence per share). The impact of this adjustment has been exacerbated by the requirement under IFRS that indexation allowances, ordinarily allowable under UK tax law, be ignored in computing the deferred tax liability. As a result, the reported deferred tax liability overstates the tax liability estimated on the basis of gains measured at the reporting date by Â£15.6m (9.6 pence per share). The following table summarises the impacts of these changes: Net Assets per share 31st March 2005 Movements 30th June 2005 Under former UKGAAP Â£2.24 Â£0.11 Â£2.35 Adjustments Â£(0.47) Â£(0.03) Â£(0.50) Under IFRS Â£1.77 Â£0.08 Â£1.85 During the quarter acquisitions totalling Â£13.1m were made. Following the quarter end a further Â£82.6m have been completed or contracted taking the total for the year to date to Â£95.7m. These acquisitions have been financed using the Group's existing facilities with Natwest and Bradford & Bingley. The latter of these has been increased by Â£70m to Â£270m, renewing the term to a fresh 5 year period maturing in July 2010. Once these acquisitions are complete, then the Group will have approximately Â£10m of available facilities. Negotiations are in hand for a further facility to support acquisitions. In addition, the review of the Group's portfolio may lead to receipts from disposals. The reduction in net worth referred to earlier has a consequent impact on gearing. Your Board considers that gearing measurement should continue to be monitored under the former UK GAAP principles. As a result, both IFRS and former UK GAAP measures are incorporated in the following table of key financial statistics and indicators:- 3 months to Year to 31 3 months to 30 June 2005 March 2005 30 June 2004 Net rental income: turnover 72% 74% 73% Trading operating profit: 58% 60% 59% turnover Trading PBT: turnover 22% 26% 26% EPS per share (pence) 8.5 36.1 8.1 NAV per share (Â£) - IFRS 1.85 1.77 1.53 - UK GAAP 2.35 2.24 1.83 Trading interest cover 1.63 1.77 1.79 Gearing - IFRS 112% 112% 123% - UK GAAP 87% 88% 100% Available facilities (Â£m) *38.0 49.2 20.5 *Following the quarter end, available facilities were increased by Â£70m. If the acquisitions completed or contracted following the quarter end had been completed at the quarter end then the gearing level under IFRS would have been 141% and under former UKGAAP 111%. Prospects The Group has made a sound start to the year. In particular, it has secured a number of acquisitions that offer good prospects for growth and which keep the Group on target for its overall development plan. Other acquisitions are under negotiation. Earnings growth will be tempered in the immediate future, partly due to the largely neutral initial impact of new acquisitions and partly due to planned tenant departures at particular estates. Our schemes at Southbank, Clerkenwell and Enterprise should produce good earnings growth next year. Enquiries continue to be good with high levels of occupancy, and the rent review programme is meeting the Group's targets. Longer term, we believe that the decision on the Olympics and the related wider infrastructure investment will assist growth in London and that our customer base of small and medium size businesses will benefit from this. Our market place is very substantial and growing and we are well placed to capitalise on this as the leading supplier of space for new and small businesses in London. Consolidated Income Statement (unaudited) for the 3 months ended 30 June 2005 Year ended 3 months ended 30 June 2005 31 March 3 months 2005 Trading Other ended 30 (restated) Operations Items Total (restated) Â£000 Notes Â£000 Â£000 Â£000 Â£000 55,039 Revenue 1 13,947 - 13,947 13,404 (14,071) Direct costs 1 (3,899) 13 (3,886) (3,584) 40,968 Net Rental Income 1 10,048 13 10,061 9,820 (7,643) Administrative expenses (1,940) 65 (1,875) (1,958) 67,923 Gain from change in fair - 18,117 18,117 14,181 value of investment property (75) (Loss)/profit on disposal of 2 - (14) (14) 23 investment properties 101,173 Operating Profit 8,108 18,181 26,289 22,066 73 Finance income - Interest 7 - 7 18 receivable (19,523) Finance costs - Interest 3 (4,979) (280) (5,259) (4,524) payable 1,097 Change in fair value of - (1,217) (1,217) 1,036 derivative financial instruments 82,820 Profit before tax 3,136 16,684 19,820 18,596 (24,342) Taxation 4 (951) (4,988) (5,939) (5,624) 58,478 Profit for the period after 2,185 11,696 13,881 12,972 tax and attributable to equity shareholders 36.1p Basic earnings per share 6 1.3p 7.2p 8.5p 8.1p 34.8p Diluted earnings per share 6 1.3p 6.9p 8.2p 7.8p Other Items above include items, such as profits and losses (together with their related taxation) on sales of investment properties, of a non trading nature together with valuation adjustments arising from the fair valuing of financial assets and liabilities. The adjustment to direct costs arises from the treatment of head lease payments as interest, with the adjustment to administrative expenses from the estimation under IFRS2 of the services cost arising from the grant of share options and other non-cash remuneration to staff. Consolidated Statement of Recognised Income and Expense (unaudited) for the 3 months ended 30 June 2005 Year ended 3 months 3 months 31 March ended 30 ended 30 2005 June 2005 June 2004 (restated) (restated) Â£000 Â£000 Â£000 58,478 Profit for the financial period 13,881 12,972 (15) Convertible loan stock conversion - (15) 231 Value of employee services 80 38 58,694 Total recognised income and expense 13,961 12,995 for the period Consolidated Balance Sheet (unaudited) As at 30 June 2005 31 March 2005 30 June 30 June (restated) 2005 2004 Â£000 Notes (restated) Â£000 Â£000 Assets Non-current assets 716,537 Investment properties 8 751,201 636,426 143 Intangible assets 139 185 3,523 Property, plant and equipment 10 3,600 3,443 720,203 754,940 640,054 Current assets 5,159 Trade and other receivables 11 8,124 13,849 Financial assets - derivative 187 financial instruments 91 710 1,251 Financial assets - tenant 12 1,298 1,146 deposits 3 Cash and cash equivalents 4 2,235 6,600 9,517 17,940 Liabilities Current Liabilities 817 Financial liabilities - 14 203 22 borrowings 24,816 Trade and other payables 13 29,380 29,239 2,507 Current tax liabilities 1,520 4,354 28,140 31,103 33,615 (21,540) Net current liabilities (21,586) (15,675) Non Current Liabilities 322,402 Financial liabilities - 14 336,936 304,601 borrowings Financial liabilities - 1,729 derivative financial 2,850 2,313 instruments 86,075 Deferred tax liabilities 16 91,150 70,215 410,206 430,936 377,129 288,457 Net Assets 302,418 247,250 Shareholders' equity 16,884 Ordinary shares 17 16,884 1,686 28,388 Share premium 19 28,388 43,469 (5,519) Investment in own shares 20 (5,519) (6,096) 461 Other reserves 18 541 268 248,243 Retained earnings 19 262,124 207,923 288,457 Total Shareholders' equity 19 302,418 247,250 Â£1.77 Net asset value per share 7 Â£1.85 Â£1.53 (basic) Â£2.22 Adjusted net asset value per 7 Â£2.33 Â£1.89 share (diluted) Consolidated Cash Flow Statement (unaudited) for the 3 months ended 30 June 2005 Year ended Notes 3 months 3 months 31 March 2005 ended 30 ended 30 (restated) June 2005 June 2004 (restated) Â£000 Â£000 Â£000 Cash flows from operating activities 33,870 Cash generated from operations 15 8,735 9,965 73 Interest received 7 18 (19,714) Interest paid (4,412) (4,024) (3,179) Tax paid (850) (813) 11,050 Net cash from operating activities 3,480 5,146 Cash flows from investing activities (44,944) Purchase of investment property (13,627) (4,890) (9,543) Capital expenditure on investment (4,790) (1,800) property 35,362 Proceeds from sales of investment 2,312 6,721 property (2,745) Taxation on disposal of investment (1,000) (407) property (44) Purchase of intangible assets (19) (15) (823) Purchase of property, plant and (228) (145) equipment (22,737) Net cash used in investing (17,352) (536) activities Cash flows from financing activities 287 Net proceeds from issue of ordinary - 170 share capital 16,300 Net proceeds from issue of new bank 14,500 - loan - Repayment of borrowings - (1,500) 687 Net distribution of own shares - 110 (51) Finance lease principal payments (13) (13) (5,186) Dividend paid to shareholders - - 12,037 Net cash from/(used in) financing 14,487 (1,233) activities 350 Net increase in cash and cash 615 3,377 equivalents (1,159) Cash and cash equivalents at start (809) (1,159) of period (809) Cash and cash equivalents at end of 15 (194) 2,218 period Notes to the Quarterly Results 1. Analysis of net rental income The Group operates a single business segment providing business accommodation for rent in London and the South East of England, which is continuing. Year ended 3 months ended 3 months ended 31 March 2005 (restated) 30 June 2005 30 June 2004 (restated) Net Net Net Rental Rental Rental Revenue Costs Income Revenue Costs Income Revenue Costs Income Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 43,270 (278) 42,992 Rental income 10,950 (47) 10,903 10,721 (105) 10,616 Service 9,865 (13,482) (3,617) charges and 2,634 (3,720) (1,086) 2,398 (3,490) (1,092) other recoveries Services, 1,904 (311) 1,593 fees, 363 (119) 244 285 11 296 commissions and sundry income 55,039 (14,071) 40,968 13,947 (3,886) 10,061 13,404 (3,584) 9,820 2. (Loss)/profit on disposal of investment properties Year ended 3 months 3 months 31 March ended 30 ended 30 2005 June 2005 June 2004 (restated) (restated) Â£000 Â£000 Â£000 34,721 Proceeds from sale of investment properties 2,100 11,880 (34,796) Book value at time of sale plus sales costs (2,114) (11,857) (75) (Loss)/profit on sale (14) 23 (4,007) Current tax (220) (2,489) 4,485 Deferred tax released on sale 278 2,497 478 Net tax 58 8 403 Net profit on disposal after tax 44 31 On 27 May 2005 the Group disposed of Payne Road Studios and 5 Payne Road, London, E3 for Â£2.1m. 3. Finance costs - interest payable Year ended 3 months 3 months 31 March ended 30 ended 30 2005 June 2005 June 2004 (restated) (restated) Â£000 Â£000 Â£000 Interest expense: 16,806 Interest payable on bank borrowings 4,589 3,892 391 Amortisation of issue costs of bank loans 101 90 51 Interest payable on finance leases 13 13 1,391 Interest payable on 11.125% First Mortgage 347 347 Debenture Stock 2007 814 Interest payable on 11.625% First Mortgage 204 204 Debenture Stock 2007 284 Interest payable on 11% Convertible Loan Stock 71 70 2011 (214) Interest capitalised on investment property (66) (92) re-developments 19,523 5,259 4,524 4. Taxation Year ended 3 months 3 months 31 March ended 30 ended 30 2005 June 2005 June 2004 (restated) (restated) Â£000 Â£000 Â£000 Analysis of charge in period: 6,190 Current tax 864 3,332 18,152 Deferred tax (see note 16) 5,075 2,292 24,342 Total taxation 5,939 5,624 The tax on the Group's profit for the period is lower than the standard applicable corporation tax rate in the UK (30%). The differences are explained below: - 82,820 Profit before taxation 19,820 18,596 24,846 Tax at standard rate of corporation tax in the 5,946 5,579 UK of 30% (2004/5: 30%) 14 Expenses not deductible for tax purposes 10 25 64 Other differences (mainly re: share based 38 35 payments) (408) Capital gains adjustments on property disposals (55) (15) (5) Reductions due to application of small companies - - rate (169) Adjustment in respect of previous periods - - 24,342 Tax expense 5,939 5,624 5. Dividends paid Year ended 3 months 3 months 31 March ended 30 ended 30 2005 June 2005 June 2004 (restated) (restated) Â£000 Â£000 Â£000 3,349 Final dividend for year ended 31 March 2004 - - of 2.07p* per ordinary share paid 2 August 2004 1,837 Interim dividend for year ended 31 March - - 2005 of 1.13p* per ordinary share paid 1 February 2005 5,186 Dividends paid out of retained earnings - - (note 19) *Figures adjusted to reflect bonus share issue made in March 2005. 6. Earnings per share a) Earnings used in calculating earnings per share Year ended 3 months 3 months 31 March ended 30 ended 30 2005 June 2005 June 2004 (restated) (restated) Â£000 Â£000 Â£000 58,478 Earnings for basic earnings per share 13,881 12,972 191 Interest saving net of taxation on 11% 30 8 Convertible Loan Stock 58,669 Diluted earnings 13,911 12,980 (48,229) Less non trading other items (11,696) (10,557) 10,440 Trading diluted earnings 2,215 2,423 b) Weighted average number of shares used for calculating earnings per share Year ended 3 months 3 months 31 March ended 30 ended 30 2005 June 2005 June 2004 (restated) (restated) No No No 161,931,920 Weighted average number of shares 163,256,213 16,053,769 - Increase due to capitalisation (March - 144,483,921 2005) 161,931,920 Used for calculating basic earnings 163,256,213 160,537,690 per share (excluding shares held in the ESOT) 1,682,780 Dilution due to Share Option Scheme 1,750,575 190,022 5,000,000 Dilution due to Convertible Loan 5,000,000 500,000 Stock - Increase due to capitalisation (March - 6,210,198 2005) 168,614,700 Used for calculating diluted earnings 170,006,788 167,437,910 per share 7. Net assets per share a) Net assets used in calculating net assets per share 31 March 30 June 30 June 2005 2005 2004 (restated) (restated) Â£000 Â£000 Â£000 288,457 Net assets at end of period 302,418 247,250 2,484 Dilution due to Convertible Loan Stock 2,417 2,407 290,941 Diluted net assets 304,835 249,657 6,541 Deferred tax on accelerated tax 6,766 4,932 depreciation 80,029 Deferred tax on fair value change of 85,206 65,858 investment properties (463) Deferred tax on derivative financial (828) (481) instruments 377,048 Adjusted diluted net assets 395,979 319,966 b) Number of shares used for calculating net assets per share 31 March 30 June 30 June 2005 2005 2004 (restated) (restated) No No No 168,839,660 Shares in issue at end of period 168,839,660 16,863,811 (5,620,370) Less ESOT shares (5,380,370) (667,066) - Increase due to capitalisation (March - 145,770,705 2005) 163,219,290 Number of shares for calculating basic 163,459,290 161,967,450 net assets per share 1,682,780 Dilution due to Share Option Scheme 1,750,575 190,022 5,000,000 Dilution due to Convertible Loan Stock 5,000,000 500,000 - Increase due to capitalisation (March - 6,210,198 2005) Number of shares for calculating 169,902,070 diluted net assets per share 170,209,865 168,867,670 8. Investment properties 31 March 30 June 30 June 2005 2005 2004 (restated) (restated) Â£000 Â£000 Â£000 626,817 Balance at beginning of period 716,537 626,817 55,973 Additions during the period 18,582 7,117 214 Capitalised interest on 66 92 re-developments (34,385) Disposals during the period (2,100) (11,780) 67,923 Gain from fair value adjustments on 18,117 14,181 investment property (5) Amortisation of finance leases (1) (1) 716,537 Balance at end of period 751,201 636,426 Capitalised interest is included as an addition in the period, the rate of capitalisation is 5.94% (31 March 2005: 5.79%; 30 June 2004: 5.48%). 9. Valuation The Group's investment properties were revalued at 30 June 2005 by CB Richard Ellis, Chartered Surveyors, a firm of independent qualified valuers. The valuations were undertaken in accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards on the basis of market value. Market value is defined as the estimated amount for which a property should exchange on the date of valuation between a willing buyer and willing seller in an arm's length transaction. A full valuation of the portfolio was not undertaken by CB Richard Ellis at 30 June 2004 and has not been undertaken retrospectively. The value for 30 June 2004 has been arrived at by CB Richard Ellis on a pro-rata basis using the actual valuations that were undertaken by CB Richard Ellis both at 31 March 2004 and 30 September 2004, taking into account properties purchased and sold, the actual change in total income and consideration of the performance of the IPD Property Index over this period. Included in the CB Richard Ellis valuations is an amount in respect of the Company's short leasehold interest (expiring 11 February 2011) in the Alpha Business Centre, Walthamstow. For accounts purposes, as the unexpired term of the leasehold interest in Alpha Business Centre is less than 20 years, the valuation of the property has been retained at a nominal Â£1. The adjustment from the valuation report total to the accounts total may be reconciled as follows: - 31 March 30 June 30 June 2005 2005 2004 (restated) (restated) Â£000 Â£000 Â£000 718,425 Total per CB Richard Ellis valuation 753,090 638,185 report (350) Alpha Business Centre (350) (400) (2,290) Owner occupied property (2,290) (2,115) 752 Head leases treated as finance leases 751 756 under IAS17 716,537 Total per Accounts 751,201 636,426 10. Property, plant and equipment Owner Owner Motor Equipment Total occupied occupied Vehicles and land buildings Fixtures Â£000 Â£000 Â£000 Â£000 Â£000 Cost Balance at 1 April 2004 500 1,525 25 4,165 6,215 (restated) Additions - 5 - 140 145 Disposals - - - - - Balance at 30 June 2004 500 1,530 25 4,305 6,360 (restated) Balance at 1 April 2004 500 1,525 25 4,165 6,215 (restated) Additions - 9 - 813 822 Disposals - - - (939) (939) Balance at 31 March 2005 500 1,534 25 4,039 6,098 (restated) Balance at 1 April 2005 500 1,534 25 4,039 6,098 Additions - 60 1 168 229 Disposals - - - - - Balance at 30 June 2005 500 1,594 26 4,207 6,327 Cumulative Depreciation to 30 June - 7 13 2,897 2,917 2004 (restated) Net Book Value at 30 June 2004 500 1,523 12 1,408 3,443 (restated) Cumulative Depreciation to 31 - 30 15 2,530 2,575 March 2005 (restated) Net Book Value at 31 March 2005 500 1,504 10 1,509 3,523 (restated) Cumulative Depreciation to 30 June - 38 16 2,673 2,727 2005 Net Book Value at 30 June 2005 500 1,556 10 1,534 3,600 At 1 April 2004, the fair value of owner occupied land and buildings was adopted as the deemed cost of those assets. The fair value of owner occupied land and buildings was Â£2,025,000 and the carrying value at 1 April 2004 under UK GAAP was Â£2,036,401. 11. Trade and other receivables - current 31 March 30 June 30 June 2005 2005 2004 (restated) Â£000 (restated) Â£000 Â£000 3,484 Trade debtors 3,630 5,129 (385) Less: provision for impairment of (523) (439) receivables 3,099 Trade debtors - net 3,107 4,690 - Deferred consideration on sale of - 5,000 property - Taxation and social security - 4 2,060 Prepayments and accrued income 5,017 4,155 5,159 8,124 13,849 12. Tenant deposits Financial assets - tenant deposits represent returnable cash security deposits received from tenants. These deposit deeds are ring-fenced under the terms of the individual lease contracts and cannot be used to fund the working capital of the Group. They are accordingly held separately from other cash balances and excluded from cash and cash equivalents. 13. Trade and other payables - current 31 March 30 June 30 June 2005 2005 2004 (restated) (restated) Â£000 Â£000 Â£000 2,219 Trade payables 4,449 4,092 1,111 Taxation and social security payable 2,370 4,328 1,251 Tenants' deposit deeds 1,298 1,146 4,869 Tenants' deposits 4,975 4,492 10,525 Accrued expenses 11,421 10,191 4,841 Deferred income-rent and service charges 4,867 4,990 24,816 29,380 29,239 14. Financial liabilities - borrowings a) Balances 31 March 30 June 30 June 2005 2005 2004 (restated) (restated) Â£000 Â£000 Â£000 Current 812 Bank loan and overdrafts due within one 198 17 year or on demand (secured) 5 Finance lease obligations 5 5 817 203 22 Non -current 2,484 11% Convertible Loan Stock 2011 2,417 2,407 (unsecured) 12,500 11.125% First Mortgage Debenture Stock 12,500 12,500 2007 (secured) 7,000 11.625% First Mortgage Debenture Stock 7,000 7,000 2007 (secured) 299,671 Other loans (secured) 314,273 281,943 747 Finance lease obligations 746 751 322,402 336,936 304,601 323,219 337,139 304,623 b) Maturity 31 March 30 June 30 June 2005 2005 2004 (restated) (restated) Â£000 Â£000 Â£000 Secured 812 Less than one year 198 17 - Between one year and two years - - 219,500 Between two years and three years 219,500 83,000 - Between three years and four years - 219,500 100,800 Between four years and five years 115,300 - 321,112 334,998 302,517 (1,129) Less cost of raising finance (1,027) (1,057) 319,983 333,971 301,460 Unsecured 2,484 In five years and more 2,417 2,407 Finance Leases 752 In five years and more 751 756 323,219 337,139 304,623 c) Financial instruments held at fair value The following interest rate caps and collars are held: Amount Interest Interest Expiry hedged Rate Cap Rate Â£ 000 Floor Interest rate cap and collar 104,200 8.00% 4.50% July 2009 Interest rate cap and collar 75,000 6.95% 4.05% July 2009 Both these instruments are treated as financial instruments at fair value with changes in value dealt with in the income statement at each reporting date. d) Fair values of financial instruments 31 March 2005 30 June 2005 30 June 2004 (restated) (restated) Book Fair Book Fair Book Fair Value Value Value Value Value Value Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Financial instruments not at fair value through profit and loss 812 812 Bank overdraft 198 198 17 17 2,484 8,800 11% Convertible Loan 2,417 8,930 2,407 8,524 Stock 2011 12,500 13,474 11.125% First Mortgage 12,500 13,376 12,500 13,549 Debenture Stock 2007 7,000 7,601 11.625% First Mortgage 7,000 7,535 7,000 7,652 Debenture Stock 2007 299,671 299,671 Other loans 314,273 314,273 281,943 281,943 752 752 Finance lease 751 751 756 756 obligations 323,219 331,110 337,139 345,063 304,623 312,441 Financial instruments at fair value through profit and loss Derivative financial instruments:- 1,729 1,729 Liabilities 2,850 2,850 2,313 2,313 (187) (187) Assets (91) (91) (710) (710) 1,542 1,542 2,759 2,759 1,603 1,603 324,761 332,652 339,898 347,822 306,226 314,044 The total gain/loss recorded in the income statement was Â£1,217,000 loss (31 March 2005: Â£1,097,000 gain, 30 June 2004: Â£1,036,000 gain) for changes of fair value of derivative financial instruments. The fair value of the interest rate collars has been determined by reference to market prices and discounted expected cash flows at prevailing interest rates. All other fair values have been calculated by discounting expected cash flows at prevailing interest rates. The total fair value adjustment equates to 4.9p per share (31 March 2005: 4.8p, 30 June 2004: 3.8p). Comparatives have been restated for bonus issue in March 2005. 15. Cash generated from operations Reconciliation of profit for the period to cash generated from operations Year ended 3 months to 3 months 31 March 30 June to 30 June 2005 2005 2004 (restated) (restated) Â£000 Â£000 Â£000 58,478 Profit for the period 13,881 12,972 24,342 Tax 5,939 5,624 567 Depreciation 151 150 96 Amortisation of intangible assets 23 24 (15) Share based payments (credit)/expense (65) 26 75 Profit on disposals of investment 14 (23) property Net gain from fair value adjustments (67,923) on investment property (18,117) (14,181) (1,097) Fair value gains on financial 1,217 (1,036) instruments (73) Interest income (7) (18) 19,523 Interest expense 5,259 4,524 Changes in working capital: 46 (Increase)/decrease in trade and other (3,030) (2,616) receivables (149) Increase/(decrease) in trade and other 3,470 4,519 payables 33,870 Cash generated from operations 8,735 9,965 For the purposes of the cash flow statement, the cash and cash equivalents comprise the following: 31 March 30 June 30 June 2005 2005 2004 (restated) (restated) Â£000 Â£000 Â£000 3 Cash and bank balances 4 2,235 (812) Bank overdrafts (note 14) (198) (17) (809) (194) 2,218 Total tax paid in the period was Â£1,850,000 (31 March 2005: Â£5,924,000; 30 June 2004 Â£1,220,000). 16. Deferred tax liabilities 31 March 30 June 30 June 2005 2005 2004 (restated) (restated) Â£000 Â£000 Â£000 67,934 Balance at start of period 86,075 67,934 18,152 Deferred tax charge to Income Statement 5,075 2,292 Deferred tax (credit) to equity re: (11) conversion of convertible loan stock - (11) 86,075 Balance at end of period 91,150 70,215 Deferred tax liability recognised in the balance sheet by each category of temporary timing difference is as follows: 31 March 30 June 30 June 2005 2005 2004 (restated) (restated) Â£000 Â£000 Â£000 80,029 Fair value gains on investment 85,206 65,858 properties 6,541 Accelerated tax depreciation 6,766 4,932 (463) Derivative financial instruments (828) (481) (32) Other 6 (94) 86,075 91,150 70,215 If the investment properties were sold for their revalued amount, there would be a potential liability to corporation tax of Â£69,579,000 (31 March 2005: Â£64,456,000, 30 June 2004: Â£48,175,000). Under IFRS no account is taken of indexation relief on capital gains resulting in the difference between expected corporation tax to be paid and the provision made for deferred tax. 17. Share Capital 31 March 30 June 30 June 2005 2005 2004 (restated) (restated) No No No 240,000,000 Authorised: ordinary shares of 10p 240,000,000 21,500,000 each 168,839,660 Issued: fully paid ordinary shares of 168,839,660 16,863,811 10p each Â£ Â£ Â£ 16,883,966 Issued: fully paid ordinary shares of 16,883,966 1,686,381 10p each Movements in share capital were as follows: 31 March 30 June 30 June 2005 2005 2004 (restated) (restated) No No No 16,733,811 No shares at start of period 168,839,660 16,733,811 151,955,694 Bonus issue - - 50,000 Executive Share Options exercised - 50,000 20,155 Employee Share Options exercised - - 80,000 Convertible Loan Stock converted - 80,000 168,839,660 No shares at end of period 168,839,660 16,836,811 18. Other reserves 31 March Equity Equity 30 June 30 June 2005 element of settled 2005 2004 (restated) convertible share based Total (restated) Total loan stock payments Total Â£000 Â£000 Â£000 Â£000 Â£000 254 At start of 151 310 461 254 period (35) Convertible loan - - - (35) stock conversion 11 Deferred tax on - - - 11 conversion 231 Value of employee - 80 80 38 services 461 At end of period 151 390 541 268 19. Statement of changes in shareholders equity 31 March 30 June 2005 30 June 2005 Share Share Investment Other Retained Total 2004 (restated) Capital Premium in Own Reserves Earnings Equity (restated) Total Shares Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 233,575 At start of period 16,884 28,388 (5,519) 461 248,243 288,457 233,575 697 Share issues - - - - - - 570 (10) Share issue - - - - - - - transaction costs 687 Distribution of own - - - - - - 110 shares (5,186) Dividends paid - - - - - - - Convertible Loan (26) Stock conversion - - - - - - (26) 11 Deferred tax on - - - - - - 11 conversion 231 Value of employee - - - 80 - 80 38 services 58,478 Profit for the - - - - 13,881 13,881 12,972 period 288,457 At end of period 16,884 28,388 (5,519) 541 262,124 302,418 247,250 20. Investment in Own Shares The Company has established an Employee Share Ownership Trust (ESOT) to purchase shares in the market for distribution at a later date in accordance with the terms of the 1993 and 2000 Executive Share Option Schemes. The shares are held by an independent trustee and the rights to dividend on the shares have been waived. During the period the Trust transferred 240,000 shares to employees on exercise of options. At 30 June 2005, the number of shares held by the Trust totalled 5,380,370 (31 March 2005: 5,620,370) with a book value of Â£5,518,800 (31 March 2005: Â£5,518,880). The shares have been included in shareholders equity (see note 19). 5,369,010 shares held by the Trust are subject to option awards. 21. Capital Commitments At the period end the estimated amounts of commitments for future capital expenditure not provided for were: 31 March 30 June 30 June 2005 2005 2004 (restated) Â£000 (restated) Â£000 Â£000 8,859 Under contract 9,452 2,115 12,550 Authorised by Directors but not 34,168 20,227 contracted 22. Post Balance Sheet Events Following 30 June 2005 contracts have been exchanged or completed for the purchase of: Cash Consideration Evelyn Court, London, SE8 (completed) Â£2.6m Uplands Business Park, London, E15 Â£24.0m (completed) Kennington Park, London, SW9 (exchanged) Â£56.0m 23. Basis of preparation This is the Group's first report prepared under International Financial Reporting Standards (IFRS). The financial information reflects the current versions of the standards of the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC). IFRS will continue to evolve through development and adoption of new Standards and Interpretations as well as through practical experience gained from the application of IFRS by reporting entities and their auditors. For these reasons, the information contained in this document may be amended before its presentation in the audited financial statements of the Group for the year ended 31 March 2006. UK generally accepted accounting practice (GAAP) differs in certain respects from IFRS. The comparative figures used within this report have been restated accordingly. The Group has issued an explanation and reconciliation of the adjustments from UK GAAP to IFRS for 31 March 2004 and 31 March 2005 and a statement of its IFRS accounting policies in the document entitled 'Workspace Group PLC - Adoption of International Financial Reporting Standards (IFRS)' which is available from the Group's website or Company Secretary. An explanation and reconciliation of the adjustments from UK GAAP to IFRS for the period ended 30 June 2004 is shown in note 24 below. The accounting policies set out in the document 'Workspace Group PLC - Adoption of International Financial Reporting Standards (IFRS)' have been applied in preparing the financial information contained in this report. This report was approved by the Board on 31 August 2005. This report is unaudited and does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The statutory accounts for the year to 31 March 2005, which were prepared under UK GAAP have been delivered to the Registrar of Companies. 24. Explanation and reconciliation of IFRS adjustments The principal differences between UK GAAP and IFRS as they affect the reported results and their presentation of Workspace Group are set out below: IAS 40 Investment property IAS 40 requires that the revaluation gains or losses on investment property held at fair value be recognised on the face of the Income Statement account rather than in reserves in the Statement of Group Total Recognised Gains and Losses as is the case under UK GAAP. As a result the revaluation reserve is no longer shown as a separate component of equity in the Balance Sheet but is included within retained earnings, and is non distributable. Under UK GAAP, on disposal of properties the tax due on the realisation of gains previously recognised through the revaluation reserve was shown in the Statement of Group Total Recognised Gains and Losses. Under IFRS it is included in the Income Statement. The tax due on sale will comprise an element in the Income Statement current tax charge (being the difference between the sales price and property's carrying value at the point of disposal) and a transfer from the deferred tax reserve of the deferred tax amount already provided in previous periods. IAS 12 Income taxes IAS 12 requires full provision to be made for the deferred tax on revaluation gains or losses of investment properties at the tax rate estimated at the point of realisation, a tax charge therefore arises in the Income Statement if a revaluation surplus occurs, the corresponding entry being a deferred tax liability in the balance sheet. Under IAS12 the provision for deferred tax will take no account of indexation allowances afforded under UK taxation law, the tax provided is not a calculation of potential Capital Gains Tax liability. Under UK GAAP the liability is an estimate of the Capital Gains Tax, but is not provided for, only disclosed in the notes (note 17 in the 31 March 2005 accounts). IAS 17 Leases IAS 17 requires leases, whether as the lessee or lessors to be examined to differentiate between finance and operating leases. Most property leases were recognised as operating leases under UK GAAP but under IFRS different criteria may mean some are considered as finance leases. Leases which extend for long periods and therefore under which a substantial portion of the asset life is consumed may be regarded as finance leases. a) Head leases. Some (or some parts) of the investment properties of the Group are held under long leases which under IFRS are classified as finance leases so requiring recognition of a liability based on the minimum lease payments and a corresponding increase in the carrying value of the investment property. Many of these head leases incur only a peppercorn rent hence creating no finance lease liability. For head leases with rental payments other than peppercorn the rent paid is split between interest payable and repayment of the lease liability. Any rent payable in excess of the minimum lease payments as identified at initial recognition of the lease is considered as contingent rent and is expensed immediately. Under UK GAAP leasehold investment properties were reported at the valuation of the legal interest owned. b) Tenant leases are subject to the same tests. Because of the multi tenanted nature of the Group's buildings and the short-term nature of most tenancies, no leases granted by the Group have been determined to be finance leases. SIC- 15 Operating Lease - Incentives SIC 15 requires that any lease incentives offered to tenants, such as rent free periods or reduced initial rents are recognised over the lease term. An adjustment is therefore made to increase revenue in the Income Statement and create a financial asset. Under UK GAAP any incentive was spread to the shorter of the lease term or periods to the first rent review or lease break. The Group has granted no material operating lease incentives. IAS 10 Events after the Balance Sheet Date IAS 10 requires dividends only to be recognised when there is an irrevocable legal obligation to make payment. The final dividend does not become irrevocable until approved by the members at the Annual General Meeting. Under IFRS the final dividend is therefore not recognised until approved and interim dividend not recognised until paid. IAS 16 Property, Plant and Equipment IAS 16 requires owner occupied property to be shown as part of Property, Plant and Equipment. The Group's head office is defined as owner occupied property. As land has an indefinite life and buildings a finite life the land and building elements of the owner occupied property are shown separately, the latter being depreciated over the expected useful life and the former not being depreciated. Under UK GAAP the whole property was subject to depreciation. The valuation of the asset at the date of transition to IFRS is taken to be its deemed cost, any surplus or deficit being recognised in retained reserves. IAS 23 Borrowing costs IAS 23 allows the capitalisation of directly attributable borrowing costs on the creation or refurbishment of property by applying the weighted average borrowing costs to the expenditures on the asset. In the case of investment properties only the expenditure on the improvement costs may be subject to capitalisation of related borrowing costs and the underlying carrying cost of the property is excluded. Under UK GAAP interest capitalisation arose on both the original value of the investment property and on the improvement costs. IAS 38 Intangible Assets IAS 38 requires externally acquired computer software to be classified as an intangible asset. Under UK GAAP software was shown within fixtures and fittings amongst other tangible assets. IAS 32/39 Financial Instruments: Disclosure and Presentation, Recognition and Measurement a) IAS 32 requires the Convertible Loan Stock to be split into its equity and debt components. The debt element is carried at amortised cost, amortised over the life of the instrument, such that interest is charged at a constant effective interest rate compared to the liability outstanding at any given point in time. Under UK GAAP the instrument was considered wholly as debt. b) IAS 32 requires derivative financial instruments to be valued at fair value through the Income Statement and their carrying values shown in the Balance Sheet unless they meet the IFRS hedging criteria. Under UK GAAP the fair value of such items was disclosed by way of a note and any original cost amortised over the life of the item. c) IAS 39 requires the identification of any embedded derivatives in the Group's contractual arrangements. Embedded derivatives are derivative instruments that have been combined with other contractual arrangements to create a composite contract. The Group currently believes it has no material embedded derivatives. IAS 7 Cash Flow Statements IAS 7 defines cash and cash equivalents to include short-term, highly liquid investments, thus including short-term bank deposits. Cash equivalents were shown as investments under UK GAAP. IFRS 2 Share-based payment The Group operates an employee Save as You Earn Scheme, an Executive Share Option Scheme and a Long Term Incentive Plan (LTIP). IFRS 2 requires the cost of services provided where payment is made through a share based payment scheme to be recognised as an expense in the Income Statement over their vesting periods and requires that where there is no reliable estimate of the cost of these services then the fair value of the options granted should be recognised as the cost of services. The fair values have been estimated by use of the Black- Scholes option valuation model in the case of the SAYE and Executive Share Option Schemes which have non market related performance conditions and by use of Monte Carlo simulation in the case of the LTIP whose performance conditions are market related. Subsequent changes in fair value are shown as an expense in the Income Statement. Provision is also made for employer's National Insurance costs relating to share based payment schemes. Under UK GAAP the SAYE and Executive Share Option Schemes were not directly recognised as an expense (although the interest costs arising from borrowings made to finance the purchase of shares held in the Group's ESOT to satisfy option exercises were recognised, together with share dilution where new shares were issued). The purchase cost of the matching shares was recognised for the LTIP on a straight line basis over the vesting period. Employer's National Insurance costs were recognised on share options expected to meet their vesting criteria. IAS 7 Cash Flow statements Under IFRS the consolidated cash flow statement describes movements in cash and cash equivalents. Under UK GAAP the cash flow analyses movements in cash only. With that exception there are no material differences between the previously published and restated cash flow statements. Workspace Group plc Reconciliation of consolidated profit for the 3 months ended 30 June 2004 IAS 40 IAS 12 IAS 17 IAS 23 IAS 32/39 IAS 39 IFRS 2 Previous Investment Contingent Property Capitalisation Convertible Fair value Share Restated GAAP Property tax head of interest loan stock of based under leases derivatives payments IFRS Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Revenue - continuing operations 13,404 13,404 Direct costs (3,597) 13 (3,584) 0 Net Rental Income 9,807 0 0 13 0 0 0 0 9,820 Administrative expenses (1,932) (26) (1,958) Gain from change in fair value of investment property 0 14,057 124 14,181 Surplus on disposal of investment properties 23 23 Operating profit 7,898 14,057 0 13 124 0 0 (26) 22,066 Interest receivable and payable and similar charge(4,389) (13) (124) 10 10 (4,506) Change in fair value of derivative financial instruments 1,036 1,036 Profit before tax 3,509 14,057 0 0 0 10 1,046 (26) 18,596 Taxation (1,078) 15 (4,217) (30) (314) (5,624) Profit for the period 2,431 14,072 (4,217) 0 0 (20) 732 (26) 12,972 Reconciliation of equity at 30 June 2004 IAS 40 IAS 12 IAS 17 IAS 10 IAS 16 IAS 38 IAS IAS 39 IAS 7 IFRS 2 32/39 Computer Fair Cash Proper- Owner soft- Conver- value and Share Invest- Contin- ty occupied ware tible of cash based Restated Previous ment gent head Divi- proper- intan- loan deriva- equiva- pay- under GAAP Property tax leases dends ty gible stock tives lents ments IFRS Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Non current assets Investment 621,613 14,057 756 636,426 properties Intangible assets 0 185 185 Property, plant 3,639 (511) (185) 2,943 and equipment - other Property, plant 0 500 500 and equipment - land Total non current 625,252 14,057 0 756 0 (11) 0 0 0 0 0 640,054 assets Current assets Trade and other 14,019 (196) 26 13,849 receivables Financial assets 0 710 710 - derivative financial instruments Tenant deposits/ 3,259 (2,113) 1,146 other investments Cash and cash 122 2,113 2,235 equivalents Total current 17,400 0 0 0 0 0 0 0 514 0 26 17,940 assets Current Liabilities Financial (17) (5) (22) liabilities - borrowings Trade and other (32,339) 3,321 (221) (29,239) payables Current tax (4,351) (3) (4,354) liabilities Total current (36,707) 0 0 (5) 3,321 0 0 0 (3) 0 (221) (33,615) liabilites Net current (19,307) 0 0 (5) 3,321 0 0 0 511 0 (195) (15,675) (liabilities)/ assets Non Current Liabilities Financial (303,943) (751) 93 (304,601) liabilities - borrowings Financial (2,313) (2,313) liabilities - derivative financial instruments Deferred tax (5,714) 2,497 (67,513) (28) 481 62 (70,215) liabilities Total non current (309,657) 2,497 (67,513) (751) 0 0 0 65 (1,832) 0 62 (377,129) liabilites Net Assets 296,288 16,554 (67,513) 0 3,321 (11) 0 65 (1,321) 0 (133) 247,250 Equity Ordinary Shares 1,686 1,686 Investment in own (6,096) (6,096) shares Share premium 43,469 43,469 Other reserves 0 151 117 268 Revaluation 201,241 (201,241) 0 reserve Retained earnings 55,988 217,795 (67,513) 0 3,321 (11) (86) (1,321) (250) 207,923 Total equity 296,288 16,554 (67,513) 0 3,321 (11) 0 65 (1,321) 0 (133) 247,250 25. Quarterly Statement Copies of this statement will be dispatched to shareholders on 5 September 2005 and will be available from the Group's registered office at Magenta House, 85 Whitechapel Road, London, E1 1DU from 9.00am on that day. Transition to IFRS Introduction Included in this document: â€¢Is a description of the differences between UK Generally Accepted Accounting Principles (GAAP) and IFRS as they affect Workspace Group. â€¢The consolidated results converted from UK GAAP to IFRS for the full year to 31 March 2005. â€¢The consolidated balance sheets converted from UK GAAP to IFRS for the date of IFRS transition, 1st April 2004 and for 31 March 2005. â€¢The Group's principal accounting policies under IFRS. IFRS will continue to evolve through development and adoption of new Standards and Interpretations as well as through practical experience gained from the application of IFRS by reporting entities and their auditors. For these reasons the information contained in this document may be amended before its presentation in the audited financial statements of the Group for the year ended 31 March 2006. The information presented in this document is unaudited. Adoption of International Financial Reporting Standards Under European legislation companies listed on Exchanges within the European Union are required to adopt IFRS for accounting periods beginning on or after 1 January 2005. The first full reporting year for Workspace Group is therefore the year ended 31 March 2006 and first reporting period the quarter to 30 June 2005. The transition date to IFRS for Workspace Group plc is 1st April 2004. IFRS 1 requires reporting entities to select accounting policies that comply with IFRS and apply them retrospectively to all periods presented in the first IFRS financial statements but permits a number of exemptions. The Group intends to take advantage of the following exemptions: â€¢Share based payment transactions - to not apply IFRS2 Share Based Payment to equity settled share based payments granted before 7th November 2002 and cash settled share based payment liabilities outstanding prior to 1 January 2005. â€¢Fair value as deemed cost - to take fair value as the deemed cost of owner occupied property, plant and equipment at the date of IFRS transition. â€¢Compound financial instruments - not to identify separately the elements of original equity and interest on compound financial instruments where the liability element has been settled before the date of transition. IFRS adjustments The principal differences between UK (GAAP) and IFRS as they affect the reported results and their presentation of Workspace Group are set out below: IAS 40 Investment property IAS 40 requires that the revaluation gains or losses on investment property held at fair value be recognised on the face of the Income Statement account rather than in reserves in the Statement of Group Total Recognised Gains and Losses as is the case under UK GAAP. As a result the revaluation reserve is no longer shown as a separate component of equity in the Balance Sheet but is included within retained earnings, and is non distributable. Under UK GAAP on disposal of properties the tax due on the realisation of gains previously recognised through the revaluation reserve was shown in the Statement of Group Total Recognised Gains and Losses. Under IFRS it is included in the Income Statement. The tax due on sale will comprise an element in the Income Statement current tax charge (being the difference between the sales price and property's carrying value at the point of disposal) and a transfer from the deferred tax reserve of the deferred tax amount already provided in previous periods. IAS 12 Income taxes IAS 12 requires full provision to be made for the deferred tax on revaluation gains or losses of investment properties at the tax rate estimated at the point of realisation, a tax charge therefore arises in the Income Statement if a revaluation surplus occurs, the corresponding entry being a deferred tax liability in the balance sheet. Under IAS12 the provision for deferred tax will take no account of indexation allowances afforded under UK taxation law, the tax provided is not a calculation of potential Capital Gains Tax liability. Under UK GAAP the liability is an estimate of the Capital Gains Tax, but is not provided for, only disclosed in the notes (note 17 in the 31 March 2005 accounts). IAS 17 Leases IAS 17 requires leases, whether as the lessee or lessors to be examined to differentiate between finance and operating leases. Most property leases were recognised as operating leases under UK GAAP but under IFRS different criteria may mean some are considered as finance leases. Leases which extend for long periods and therefore under which a substantial portion of the asset life is consumed may be regarded as finance leases. c) Head leases. Some (or some parts) of the investment properties of the Group are held under long leases which under IFRS are classified as finance leases so requiring recognition of a liability based on the minimum lease payments and a corresponding increase in the carrying value of the investment property. Many of these head leases incur only a peppercorn rent hence creating no finance lease liability. For head leases with rental payments other than peppercorn the rent paid is split between interest payable and repayment of the lease liability. Any rent payable in excess of the minimum lease payments as identified at initial recognition of the lease is considered as contingent rent and is expensed immediately. Under UK GAAP leasehold investment properties were reported at the valuation of the legal interest owned. d) Tenant leases are subject to the same tests. Because of the multi tenanted nature of the Group's buildings and the short-term nature of most tenancies, no leases granted by the Group have been determined to be finance leases. SIC- 15 Operating Lease - Incentives SIC 15 requires that any lease incentives offered to tenants, such as rent free periods or reduced initial rents are recognised over the lease term. An adjustment is therefore made to increase revenue in the Income Statement and create a financial asset. Under UK GAAP any incentive was spread to the shorter of the lease term or period to the first rent review or lease break. The Group has granted no material operating lease incentives. IAS 10 Events after the Balance Sheet Date IAS 10 requires dividends only to be recognised when there is an irrevocable legal obligation to make payment. The final dividend does not become irrevocable until approved by the members at the Annual General Meeting. Under IFRS the final dividend is therefore not recognised until approved and interim dividend not recognised until paid. IAS 16 Property, Plant and Equipment IAS 16 requires owner occupied property to be shown as part of Property, Plant and Equipment. The Group's head office is defined as owner occupied property. As land has an indefinite life and buildings a finite life the land and building elements of the owner occupied property are shown separately, the latter being depreciated over the expected useful life and the former not being depreciated. Under UK GAAP the whole property was subject to depreciation. The valuation of the asset at the date of transition to IFRS is taken to be its deemed cost, any surplus or deficit being recognised in retained reserves. IAS 23 Borrowing costs IAS 28 allows the capitalisation of directly attributable borrowing costs on the creation or refurbishment of property by applying the weighted average borrowing costs to the expenditures on the asset. In the case of investment properties only the expenditure on the improvement costs may be subject to capitalisation of related borrowing costs and the underlying carrying cost of the property is excluded. Under UK GAAP interest capitalisation arose on both the original value of the investment property and on the improvement costs. IAS 38 Intangible Assets IAS 38 requires externally acquired computer software to be classified as an intangible asset. Under UK GAAP software was shown within fixtures and fittings amongst other tangible assets. IAS 32/39 Financial Instruments: Disclosure and Presentation, Recognition and Measurement a) IAS 32 requires the Convertible Loan Stock to be split into its equity and debt components. The debt element is carried at amortised cost, amortised over the life of the instrument, such that interest is charged at a constant effective interest rate compared to the liability outstanding at any given point in time. Under UK GAAP the instrument was considered wholly as debt. b) IAS 32 requires derivative financial instruments to be valued at fair value through the Income Statement and their carrying values shown in the Balance Sheet unless they meet the IFRS hedging criteria. Under UK GAAP the fair value of such items was disclosed by way of a note and any original cost amortised over the life of the item. c) IAS 39 requires the identification of any embedded derivatives in the Group's contractual arrangements. Embedded derivatives are derivative instruments that have been combined with other contractual arrangements to create a composite contract. The Group currently believes it has no material embedded derivatives. IAS 7 Cash Flow Statements IAS 7 defines cash and cash equivalents to include short-term, highly liquid investments, thus including short-term bank deposits. Cash equivalents were shown as investments under UK GAAP. IFRS 2 Share-based payment The Group operates an employee Save as You Earn scheme, an Executive Share Option Scheme and a Long Term incentive plan (LTIP). IFRS 2 requires the cost of services provided where payment is made through a share based payment scheme to be recognised as an expense in the Income Statement over their vesting periods and requires that where there is no reliable estimate of the cost of these services then the fair value of the options granted should be recognised as the cost of services. The fair values have been estimated by use of the Black- Scholes option valuation model in the case of the SAYE and Executive share option schemes which have non market related performance conditions and by use of Monte Carlo simulation in the case of the LTIP whose performance conditions are market related. Subsequent changes in fair value are shown as an expense in the Income Statement. Provision is also made for employer's National Insurance costs relating to share based payment schemes. Under UK GAAP the SAYE and Executive Share Option schemes were not directly recognised as an expense (although the interest costs arising from borrowings made to finance the purchase of shares held in the Group's ESOT to satisfy option exercises were recognised, together with share dilution where new shares were issued). The purchase cost of the matching shares was recognised for the LTIP on a straight line basis over the vesting period. Employer's National Insurance costs were recognised on share options expected to meet their vesting criteria. 2.12 IAS 7 Cash Flow statements Under IFRS the consolidated cash flow statement describes movements in cash and cash equivalents. Under UK GAAP the cash flow analyses movements in cash only. With that exception there are no material differences between the previously published and restated cash flow statements. Reconciliation of consolidated profit for the year ended 31 March 2005 IAS 40 IAS 12 IAS 17 IAS 16 IAS 23 IAS 32/39 IFRS 2 IAS 39 Capita- lisation Conver- Contin- Property Owner of tible Share Fair value Restated Previous Investment gent head occupied inte- loan based of under GAAP Property tax leases property rest stock payments derivatives IFRS Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Revenue - continuing 55,039 55,039 operations Direct costs (14,122) 51 (14,071) 0 Net Rental Income 40,917 0 0 51 0 0 0 0 0 40,968 Administrative (7,660) 2 15 (7,643) expenses Gain from change in 0 67,256 667 67,923 fair value on investment property (Loss)/Surplus on (75) (75) disposal of investment properties Operating profit 33,182 67,256 0 51 2 667 0 15 0 101,173 Interest receivable (18,773) (51) (667) 2 39 (19,450) and payable and similar charges Change in fair value 1,097 1,097 of derivative financial instruments Profit before tax 14,409 67,256 0 0 2 0 2 15 1,136 82,820 Taxation (4,273) 516 (20,177) (7) (341) (24,342) Profit for the period 10,136 67,772 (20,177) 0 2 0 (5) 795 58,478 Reconciliation of equity at 31 March 2005 IAS 40 IAS 12 IAS 17 IAS 10 IAS 16 IAS 38 IAS IAS 39 IFRS 2 32/39 Computer Fair Proper- Owner soft- Conver- value Share Invest- Contin- ty occupied ware tible of based Restated Previous ment gent head Divi- proper- intan- loan deriva- pay- under GAAP Property tax leases dends ty gible stock tives ments IFRS Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Non current assets Investment 715,785 752 716,537 properties Intangible assets 0 143 143 Property, plant and 3,675 (509) (143) 3,023 Equipment - other Property, plant and 0 500 500 Equipment - land Total non current 719,460 0 0 752 0 (9) 0 0 0 0 720,203 assets Current assets Trade and other 5,223 (167) 103 5,159 receivables Financial assets - 0 187 187 derivative financial instruments Tenant deposits 1,251 1,251 Cash and cash 3 3 equivalents Total current assets 6,477 0 0 0 0 0 0 0 20 103 6,600 Current Liabilities Financial (812) (5) (817) liabilities - borrowings Trade and other (28,542) 3,721 69 (64) (24,816) payables Current tax (2,495) 0 (12) (2,507) liabilities Total current (31,849) 0 0 (5) 3,721 0 0 69 (12) (64) (28,140) liabilites Net current (25,372) 0 0 (5) 3,721 0 0 69 8 39 (21,540) (liabilities)/assets Non Current Liabilities Financial (321,671) (747) 16 (322,402) liabilities - borrowings Financial liabilities - (1,729) (1,729) derivative financial instruments Deferred tax (7,346) 4,284 (83,473) (5) 463 2 (86,075) liabilities Total non current (329,017) 4,284 (83,473) (747) 0 0 0 11 (1,266) 2 (410,206) liabilites Net Assets 365,071 4,284 (83,473) 0 3,721 (9) 0 80 (1,258) 41 288,457 Equity Ordinary Shares 16,884 16,884 Investment in own (5,519) (5,519) shares Share premium 28,388 28,388 Other reserves 0 151 310 461 Revaluation reserve 263,353 (263,353) 0 Retained earnings 61,965 267,637 (83,473) 3,721 (9) (71) (1,258) (269) 248,243 Total equity 365,071 4,284 (83,473) 0 3,721 (9) 0 80 (1,258) 41 288,457 Reconciliation of equity at 31 March 2004 IAS 40 IAS 12 IAS 17 IAS 10 IAS 16 IAS 38 IAS IAS 39 IFRS 2 32/39 Computer Fair Proper- Owner soft- Conver- value Share Invest- Contin- ty occupied ware tible of based Restated Previous ment gent head Divi- proper- intan- loan deriva- pay- under GAAP Property tax leases dends ty gible stock tives ments IFRS Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Â£000s Non current assets Investment properties 626,060 757 626,817 Intangible assets 0 195 195 Property, plant and Equipment - other 3,654 (511) (195) 2,948 Property, plant and Equipment - land 0 500 500 Total non current assets 629,714 0 0 757 0 (11) 0 0 0 0 630,460 Current assets Trade and other 6,795 (206) 6,589 receivables Financial assets - derivative financial instruments 0 543 543 Tenant deposits 1,150 1,150 Cash and cash 181 181 equivalents Total current assets 8,126 0 0 0 0 0 0 0 337 0 8,463 Current Liabilities Financial liabilities - (1,340) (5) (1,345) borrowings Trade and other payables (27,360) 3,321 80 (207) (24,166) Current tax liabilities (2,242) (2,242) Total current liabilites (30,942) 0 0 (5) 3,321 0 0 80 0 (207) (27,753) Net current (liabilities)/ assets (22,816) 0 0 (5) 3,321 0 0 80 337 (207) (19,290) Non Current Liabilities Financial liabilities - (305,756) (752) 29 (306,479) borrowings Financial liabilities - derivative (3,182) (3,182) financial instruments Deferred tax liabilities (5,483) (63,296) (9) 792 62 (67,934) Total non current (311,239) 0 (63,296) (752) 0 0 0 20 (2,390) 62 (377,595) liabilites Net Assets 295,659 0 (63,296) 0 3,321 (11) 0 100 (2,053) (145) 233,575 Equity Ordinary Shares 1,673 1,673 Investment in own shares (6,206) (6,206) Share premium 42,912 42,912 Other reserves 0 175 79 254 Revaluation reserve 209,565 (209,565) 0 Retained earnings 47,715 209,565 (63,296) 3,321 (11) (75)(2,053) (224) 194,942 Total equity 295,659 0 (63,296) 0 3,321 (11) 0 100 (2,053) (145) 233,575 IFRS accounting policies The principal accounting policies intended to be adopted for the financial statements for the year ended 31st March 2006 are set out below. These have been consistently applied in preparing the balance sheet at the date of transition to IFRS of 1 April 2004 and the summary IFRS balance sheets as at 31 March 2005 and 30 June 2004 and income statements for the 12 and 3 month periods then ending, as presented above. 1. Basis of Preparation The consolidated financial information has been prepared under the historical cost convention, as modified by the revaluation of financial assets and liabilities (including derivative instruments) at fair value through the profit and loss, and investment properties. 2. Basis of consolidation The consolidated financial information include the financial information in respect of the Company and all its subsidiary undertakings. Subsidiaries compromise all entities over which the Group has the power to govern the financial and operating policies. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences to the date control ceases. Inter company transactions, balances and unrealised gains from intra group transactions are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. 3. Investment property Investment properties are those properties owned or held under an operating or finance lease by the Group to earn rental income or for capital appreciation or both and are not substantially occupied by any part of the Group. Land or buildings held under operating leases are classified and accounted for as investment properties where 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 cost, including related transaction costs. After initial recognition investment property is held at fair value based on a valuation by an external professional valuer at each reporting date. Changes in fair value of investment property at the reporting date and its carrying amount prior to re measurement are recorded in the income statement. Properties are treated as acquired at the point the Group assumes the significant risks and returns of ownership and are treated as disposed when these are transferred to the buyer. Existing investment property that commences redevelopment for continued future use as investment property remains in investment property. Property that is being constructed or developed for future use as investment property, but has not previously been classified as such, is classified as property, plant and equipment and initially recognised at cost until construction or development is complete at which time it is reclassified as investment property at fair value. Subsequent expenditure is charged to the asset's carrying amount only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of each item can be reliably measured. All other repairs and maintenance costs are charged to the income statement during the period in which they are incurred. In the case of existing investment properties undergoing redevelopment capitalised interest on the redevelopment expenditure is added to the asset's carrying amount. Borrowing costs capitalised are calculated by reference to the actual interest rate payable on borrowings for, or if financed out of general borrowings by reference to the average rate paid on, funding the assets employed by the Group applied to the direct expenditure on the property under on-going redevelopment. Interest capitalised is from the date of commencement of the re-development activity until the date when substantially all the activities necessary to prepare the asset for its intended use are complete. 4. Property plant and equipment All property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent expenditure is charged to the asset's carrying amount or recognised as a separate asset only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of each item can be reliably measured. All other repairs and maintenance costs are charged to the income statement during the period in which they are incurred. In the case of properties undergoing construction or development, capitalised interest on the development expenditure is added to the asset's carrying amount. Depreciation is provided using the straight line method to allocate the cost over the asset's estimated useful lives as follows: Land Not Depreciated Buildings 50 years Motor vehicles 4 years Equipment and fixtures 4 years The assets' residual values and useful lives are reviewed and adjusted if appropriate at least at each financial year end. An asset's carrying amount is written down immediately to its recoverable amount if its carrying amount is greater than its estimated recoverable amount. 5. Intangible assets Acquired computer software licences and external costs of implementing or developing computer software programs are capitalised. These costs are amortised over their estimated useful lives of 4 years on a straight line basis. Costs associated with maintaining computer software programs and internally incurred costs of software implementation and development are recognised as an expense as incurred. 6. Leases A group company as a lessee i) Operating leases - leases in which substantially all the risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. Payments, including prepayments, made under operating leases are charged to the income statement on a straight line basis over the period of the lease. ii) Finance leases - 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's commencement at the lower of the fair value of the leased property or the net present value of the minimum lease payments. Each lease payment is allocated between liability and finance charges so as to achieve a constant rate of return 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 fair value. A group company as lessor i) Operating leases - properties leased out under operating leases are included in investment property in the balance sheet. Rental income from operating leases is recognised in the income statement 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. ii) Finance Leases - when assets are leased out under a finance lease, the present value of the minimum lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned 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. Where only the buildings element of a property lease is classified as a finance lease, the land element is treated as an operating lease. 7. Borrowings Borrowings are recognised initially at fair value, 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. 8. Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured less provision for impairment where it is established there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows. The movement in provision is shown in the income statement. 9. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts are included within cash and cash equivalents for the purpose of the cash flow statement. 10. Share Capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds of issue. 11. Income tax Income tax on the profit for the year comprises current and deferred tax. Current income tax is tax payable on the taxable income for the year and any prior year adjustment. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates that have been enacted by the balance sheet date and are expected to apply when the related deferred income tax is realised or the deferred tax liability settled. Deferred tax is provided in full on the difference between the original cost of investment properties and their carrying amounts at the reporting date without taking into account deductions and allowances which would apply if the properties concerned were disposed of (in particular, no adjustment is made for indexation allowances). No provision is made for temporary differences arising on the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and relating to investments in subsidiaries where it is probable that the temporary differences will not reverse in the foreseeable future. 12. Pensions The Group operates defined contribution pension arrangements with its staff. Contributions are charged to the income statement as incurred. 13. Share based payment Incentives in the form of shares are provided by the Group to employees under its share option and long-term co-investment schemes. The fair value of the options and matching shares granted is recognised over the vesting period. The Company has established an ESOT to satisfy part of its obligation to provide shares under its schemes. The Company provides funding to the ESOT to purchase these shares. Such shares are treated as treasury shares and deducted from equity and no profit or loss is recognised on their sale, issue or cancellation. 14. Revenue recognition Revenue includes rental income, service charges and other sums receivable from tenants of the Group's investment properties. Other sums include insurance re-charges, supplies of utilities, premia associated with surrender of tenancies, commissions, fees and other sundry income. Rental income from operating leases is recognised in the income statement on a straight line basis over the lease term. When the Group provides lease incentives to its tenants the cost of incentives are recognised over the lease term, on a straight line basis, as a reduction in income. Revenue for the sale of assets is recognised when the significant risks and returns have been transferred to the buyer. In the case of sales of properties this is generally taken on completion. Where any aspect of consideration is conditional other than through the passing of time then the revenue associated with that conditional item is deferred until the condition is satisfied and the amount of the consideration is ascertained. Profits are measured by reference to the net proceeds and the valuation at the start of the financial year. 15. Direct Costs Minimum lease payments payable under head leases categorised as finance leases are allocated between liability and finance charges so as to achieve a constant rate on the finance balance outstanding. 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. Contingent rents, being those lease payments that are not fixed at the inception of the lease, for example increases arising on rent reviews, are recorded as an expense in the income statement in the period in which they are incurred. This information is provided by RNS The company news service from the London Stock Exchange

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