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Primary Health Props (PHP)

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Monday 14 November, 2005

Primary Health Props

Statement re IFRS

Primary Health Properties PLC
14 November 2005

Primary Health Properties PLC

14 November 2005



                         PRIMARY HEALTH PROPERTIES PLC

            Modern accommodation for the Provision of Primary Health

                                 Care Services



        Adoption of International Financial Reporting Standards ('IFRS')

Impact on the Consolidated Results of the Group for the year ended 30 June 2005



The Board of Directors of Primary Health Properties PLC ("PHP", the "Group" or
the "Company") have decided that, in the light of a number of changes in
accounting standards which the Group will be required to implement in the
current accounting year, it is important that shareholders be given an interim
explanation of how these changes affect the Group's balance sheet.



Introduction



On 22 September 2005 Primary Health Properties PLC reported its consolidated
financial results for the year ended 30 June 2005, prepared for the last time
under UK Generally Accepted Accounting Practice ("UK GAAP"). In future  the
Group will prepare its consolidated financial statements in accordance with IFRS
as required for all European Union listed companies for accounting periods
commencing on or after 1 January 2005. The Group's first IFRS results will
therefore be for the six months to 31 December 2005 and the Group's first annual
report under IFRS will be for the year ending 30 June 2006.



The new accounting standards represent a fundamental change in accounting and
reporting.  The following unaudited financial information based on the Group's
reported balance sheet at 30 June 2005 describes for shareholders the key
impacts of the conversion from UK GAAP to IFRS and explains the changes in
accounting policies that have been brought about as a result of the conversion
to IFRS. The pro-forma accounting policies that will apply to the Group's
consolidated financial statements under IFRS are also set out in full below.



The application of IFRS will not affect the underlying performance of the Group
or its cash flows.



In addition the dividend policy of the Group is not affected by the introduction
of IFRS.




International Financial Reporting Standards

Basis of preparation



The figures have been restated on the basis of the Group's  interpretation of
all IFRS currently applicable, and are unaudited. It is possible that this
interpretation may evolve as IFRS is subject to ongoing amendment; accordingly,
the amounts disclosed in this announcement may be subject to revision.



The principal areas where IFRS differs from UK GAAP that will affect the
consolidated results of the Group are considered below.


Investment Properties (IAS 40)



Under IAS 40 the Group must decide, on a property by property basis, whether
interests held under operating leases are to be classified as investment
properties or as leases under IAS 17. The Group expects that all of its
leasehold properties held under operating leases will continue to be classified
as investment properties under IFRS and will continue to be revalued every six
months.



IAS 40 requires that property revaluation movements are recorded in the profit
and loss account (or income statement as it will become) under IFRS.  Currently
under UK GAAP they are treated as a movement in reserves. Reported profits will
therefore be subject to greater volatility.



On 30 June 2005 the accumulated net revaluation reserve of £46,905,000 was
re-classified into retained earnings.



Tax  (IAS 12)



IAS 12 requires full deferred tax provisions to be made for all temporary
differences between base cost values for tax purposes and for accounting values.
UK GAAP on the other hand allows certain exemptions from this requirement.  In
particular UK GAAP does not require any provision to be made where there is no
binding agreement to dispose of the related property.  UK GAAP also allows
deferred tax to be calculated on a discounted basis.  Therefore there will be an
impact on the deferred tax position due to the inability to discount under IFRS.



For the Group the most significant difference between base cost values for tax
purposes and for accounting values comes from the revaluation of investment
properties. As a result net assets are expected to decrease under IFRS
accounting.  The Group will potentially suffer a payment of tax only if it sells
these investments.  The amount of tax then to be paid will reflect the sale
price achieved, the structure of the sale transaction, and any other allowances
for tax that may be available at that time.  Therefore, the deferred tax
provision that the Group will be required to provide within its opening balance
sheet reserves under IFRS, and the subsequent provision movements arising on
future valuation changes in its income statement, will not represent an amount
of tax that the Group expects to suffer at a future date.



In addition, the use of discounting in the assessment of the deferred tax
liability relating to accelerated capital allowances under UK GAAP results in no
provision being required.  Under IFRS discounting will not be allowed and a
deferred tax liability will need to be recorded in respect of accelerated
capital allowances.



On 30 June 2005, there will be a deferred tax provision in the balance sheet of
£17,860,000, comprising deferred tax on revaluation gains (£13,299,000) and
deferred tax on accelerated capital allowances (£4,561,000), that was not
previously required under UK GAAP. The effects of these deferred tax adjustments
are shown in the reconciliation below.



Derivatives (IAS 32/39)


IAS 32 and IAS 39 address the accounting for financial instruments. IAS 32 covers disclosure and presentation whilst IAS
39 covers recognition and measurement.

The Group has entered into a number of interest rate swap contracts to manage its risk exposure to changes in interest 
rates charged on its floating rate loan facilities. UK GAAP, as it applied to the Group's previous financial year, did 
not require these derivatives, when used as a hedge, to be valued in the balance sheet.  Under this policy, gains and 
losses on these hedges were deferred until the underlying hedged item was recognised in the profit and loss account. IAS
39 requires all derivatives, whether cash flow hedges or fair value hedges, to be carried at their fair values in the 
balance sheet. The hedge accounting provisions of IFRS provide for changes in the value of these interest rate swap 
contracts to be recorded as a movement in reserves, thus reducing the sensitivity of the income statement to their fair 
value movements. IFRS requires the effectiveness of these hedges to be regularly tested, with ineffective portions of 
the hedges not treated as a reserve movement but as a charge to the income statement. The Group expects all of its 
interest rate swap contracts to be fully effective and to account for them as cash flow hedges.


The Group will adopt IAS 32 and IAS 39 from 1 July 2005 as permitted by the transition arrangements in IFRS 1. 
Therefore, on 1 July 2005, the fair value of the interest rate swaps (£1,846,000) at that date will be shown as an 
opening adjustment to reserves, rather than restating the prior year's balance sheet comparatives. This is shown in the 
reconciliation between the balance sheet at 30 June 2005 and at 1 July below as an adjustment between retained earnings 
and a separate hedging reserve.



Dividends (IAS 37)

IFRS requires final dividends that must be approved by shareholders in general meeting to be recorded in the accounting 
period in which they are approved. UK GAAP, prior to its convergence with IFRS, required proposed final dividends to be 
accrued. Therefore, an increase in net asset value of £1,359,000 will result from this change at 30 June 2005, 
equivalent to the net cost of the proposed dividend (see reconciliation below).

The individual company financial statements of Primary Health Properties PLC ("PHP") and each of its subsidiary 
undertakings will continue to be prepared under UK GAAP, so that the introduction of IFRS will not affect PHP's 
distributable reserves. Accordingly the dividend policy of the Group is not affected by the introduction of IFRS.


Share Based Payments (IFRS 2)

The Group has incentivised its Joint Managers with the granting of options to subscribe for a fixed number of ordinary 
shares at a fixed price, exercisable at any time between 31 March 2006 and 31 March 2013 subject to the achievement of 
performance criteria.  Under UK GAAP, these share options were accounted for prospectively. The fully diluted net asset 
value assumes that the options are exercised, the Ordinary Shares issued and the monies arising on the exercise of the 
options have been received.  IFRS 2 requires the options granted to be measured by their fair value, with an equivalent 
amount charged over the vesting period to the income statement. For options outstanding at 1 July 2004, IFRS 2 must be 
applied retrospectively, with an adjustment to the opening balance of retained earnings. At 30 June 2005, the cumulative
charge relating to the options was £437,000, and is shown in the reconciliation below as an adjustment between retained 
earnings and a newly created share options reserve.








RECONCILIATION OF CONSOLIDATED EQUITY (UNAUDITED)

as at 30 June 2005


                   UK GAAP at       IAS 37    IAS 12    IFRS 2       IAS 40 IFRS at 30      IAS 32/39  IFRS at 1
                      30 June   Provisions    Income               Property  June 2005                 July 2005*
                     2005 (as                    Tax     Share  revaluation                 Financial
                   previously                            based                           Instru-ments
                    reported)                          payment

                        £'000        £'000     £'000     £'000        £'000     £'000           £'000      £'000
Non-current Assets

Investment            164,621           -         -         -            -    164,621               -   164,621
properties
                      164,621           -         -         -            -    164,621               -   164,621
Current assets
Debtors                 1,655           -         -         -            -      1,655               -     1,655
Net investment in
finance leases
-amounts falling           19           -         -         -            -         19               -        19
due within one
year
-amounts falling        2,504           -         -         -            -      2,504               -     2,504
due after more
than one year
Cash at bank            1,112           -         -         -            -      1,112               -     1,112
                        5,290           -         -         -            -      5,290               -     5,290
Creditors: amounts     (7,539)      1,359         -         -            -     (6,180)              -    (6,180)
falling due within
one year

Net current            (2,249)      1,359         -         -            -      (890)               -     (890)
liabilities

Total assets less     162,372       1,359         -         -            -    163,731               -   163,731
current
liabilities


Creditors: amounts
falling due after
more than one year

Bank loans            (88,800)          -         -         -            -    (88,800)              -   (88,800)
Deferred tax                -           -   (17,860)        -            -    (17,860)              -   (17,860)
liabilities
                      (88,800)          -   (17,860)        -            -   (108,506)              -  (108,506)
Net Assets             73,572       1,359   (17,860)        -            -     57,071               -    57,071

Capital and
reserves

Called up share        11,326                                                  11,326               -    11,326
capital
Share premium          11,952                                                  11,952               -    11,952
account
Capital reserve         1,618                                                   1,618               -     1,618
Revaluation            46,905                                      (46,905)         -               -         -
reserve
Cash flow hedging           -                                                        -        (1,846)    (1,846)
reserve
Share based                 -                             437                     437               -       437
payments reserve
Retained earnings       1,771       1,359   (17,860)     (437)      46,905     31,738          1,846     33,584


Equity                 73,572       1,359   (17,860)        -            -     57,071               -    57,071
shareholders'
funds

Net asset value        324.80p                                                 251.96p
per share       -
basic

              -        314.60p                                                 246.56p
diluted




* The column above has been shown to demonstrate the impact on the opening
balance sheet as at 1 July 2005 of the adoption of IAS 32/39.




Pro forma Accounting Policies



Primary Health Properties PLC is a public limited company incorporated in
England and Wales under the Companies Act 1985. The consolidated financial
statements of the Company (for the year ending 30 June 2006) comprise the
Company and its subsidiaries (the "Group").



Basis of preparation/Statement of compliance

The consolidated financial statements of the Group have been prepared in
conformity with International Financial Reporting Standards ("IFRS") issued by
the International Accounting Standards Board (as adopted by the EU),
interpretations issued by the International Financial Reporting Interpretations
Committee, and applicable requirements of United Kingdom company law, and
reflect the following policies which have been adopted and applied consistently.
  (These are the Group's first consolidated financial statements prepared in
conformity with IFRS and IFRS 1: First Time Adoption has been applied.



An explanation of how the transition to IFRS has affected the reported financial
position, financial performance and cash flows of the Group will be shown in the
notes to the Group's financial statements.)



Convention

The financial statements are presented in Sterling rounded to the nearest
thousand.  The financial statements have been prepared on a historical cost
basis, except for the measurement at fair value of investment properties and
financial instruments.


Basis of Consolidation


The Group's financial statements consolidate the financial statements of Primary
Health Properties PLC, its wholly owned subsidiary undertakings and its interest
in the joint venture as at 30 June each year.  The financial statements of the
subsidiary undertakings are prepared for the accounting reference period ending
30 June each year using consistent accounting policies.


Investment in subsidiary undertakings and interest in joint venture



The Group's interest in its joint venture is accounted for applying the equity
accounting concept, recognising the Group's interest in the gross assets and
liabilities on the face of the balance sheet and in the income statement, the
Group's share of the joint venture's turnover is noted.



The carrying value of investments in subsidiary undertakings and the interest in
the joint venture is reviewed for impairment if events or changes in
circumstances indicate that the carrying value may not be recoverable.


Investment properties



All the Group's completed properties are held for long-term investment.
Initially, investment properties are measured at cost including transaction
costs.  Subsequent to initial recognition investment properties are stated at
fair value.  Gains or losses arising from changes in the fair value of
investment properties are included in the income statement in the year in which
they arise.



Investment properties cease to be recognised for accounting purposes when they
have been disposed of.  Any gains and losses arising are recognised in the
income statement in the year of disposal.


Development loans


The Group has entered into development loan agreements with third party
developers in respect of certain primary health properties under development.
These loans are repayable at the option of the developer at any time. The Group
has entered into contracts to purchase the properties under development when
they are completed in accordance with the terms of the contracts. The loans are
repayable by the developers in the event that the building work is not completed
in accordance with the purchase contracts. Interest is charged under the terms
detailed in the respective development agreements and taken to the income
statement in the year in which it accrues.



Properties held for, or in the course of, development

Properties held for, or in the course of development, are included in the
consolidated balance sheet at cost or, on redevelopment if originally held as an
investment property, at the previous valuation together with subsequent costs.



Provision is made, if necessary, to reduce the carrying value of properties held
for development and in the course of development to the recoverable amount.



Segmental reporting

The Directors are of the opinion that the Group is engaged in a single segment
of business, being investment in primary health care property in the United
Kingdom leased principally to GPs, NHS Trusts, Health Authorities and other
associated health care users.



Income

Rental income is included in these financial statements on a receivable basis.

Interest receivable on short-term deposits is accounted for on an accruals
basis.



Cash and cash equivalents

Cash in hand and in banks and short-term deposits, which are held to maturity
are carried at cost. Cash and cash equivalents are defined as cash in hand,
demand deposits and short-term, highly liquid investments readily convertible to
known amounts of cash and subject to insignificant risk of changes in value.
Bank overdrafts that are repayable on demand which form an integral part of the
Group's cash management are included as a component of cash and cash equivalents
for the purpose of the statement of cash flows.



Bank loans and borrowings

All bank loans and borrowings are initially recognised at cost, being the fair
value of the consideration received, less issue costs where applicable. After
initial recognition, all interest-bearing loans and borrowings are subsequently
measured at amortised cost. With any difference between cost and redemption
value being recognised in the income statement over the period of the borrowings
on an effective interest basis.



Taxation

Taxation on the profit or loss for the year comprises current and deferred tax.
Taxation is recognised in the income statement except to the extent that it
relates to items recognised as direct movements in equity, in which case it is
also recognised as a direct movement in equity.



Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantially enacted at the balance sheet date, and
any adjustment to tax payable in respect of previous years.  The tax effect of
different items of expenditure is allocated between revenue and capital on the
same basis as the particular item to which it relates, using the Group's
effective rate of tax, as applied to those items allocated to revenue, for the
accounting year.



Deferred income tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax basis of assets and
liabilities and their carrying amount for financial reporting purposes. Deferred
income tax liabilities are measured at the tax rates that are expected to apply
to the period when the liability is settled, based on tax rates (and tax laws)
that have been enacted or substantially enacted at the balance sheet date.


Dividends payable to shareholders


Dividends proposed by the Board of Directors and unpaid at the period end are
not recognised in the financial statements until they have been approved by
shareholders at the Annual General Meeting.


Financial instruments



The Group uses interest rate swaps to hedge its risks associated with exposure
to interest rate fluctuations and the resulting variability in cash flows.



The Group criteria for adopting hedge accounting for interest rate swaps are:



(i)     the instrument must be related to a liability; and

(ii)      it must change the character of the interest rate by converting a
variable rate to a fixed rate or vice versa.



Interest differentials are recognised by accruing the net interest payable.




(As from 1 July 2005 the Group has adopted IAS32 and IAS 39 under which interest
rate swap contracts are accounted for as cash flow hedges with their fair value
stated in the Group's balance sheet at the year-end. Fair value is determined by
reference to market values for similar instruments.  The portion of the gain or
loss on the hedging instrument that is determined to be an effective hedge is
recognised directly in equity through the statement of changes in equity and the
ineffective portion is recognised in the income statement.  If they are
terminated early, any cumulative gain or loss recognised in equity is kept in
equity and is spread over the remaining term of the original instrument.)



Finance leases

Finance lease income is allocated to accounting periods so as to give a constant
rate of return on the net cash investment in the lease. The total net investment
in finance leases included in the balance sheet represents total lease payments
receivable net of finance lease income relating to future accounting periods.


Share based payments


Share based payments are measured at fair value at the date of grant with an
equivalent amount charged over the vesting period to the income statement.  The
fair value has been calculated using a derivative pricing model known as
Black-Scholes formula using assumptions deemed to be consistent with the price
that one might expect the incentive to have if it were traded in the markets.



G A Elliot

Chairman

14 November 2005







Enquiries:



Bell Pottinger Financial

David Rydell/Zoe Sanders

Tel: 020 7861 3232



Primary Health Properties PLC

Harry Hyman

Managing Director

Tel: 01483 306912 / 07973 344768


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