INTERNATIONAL ACCOUNTING STANDARDS WORKSHOP · Graham Roberts, Finance Director IAS Workshop. 12 IAS Workshop 25 January 2005 BRITISH LAND BEFORE AND AFTER IAS CURRENT TREATMENT Efficient

INTERNATIONAL ACCOUNTING STANDARDS WORKSHOP

25 JANUARY 2005

IAS Workshop25 January 2005

2


WELCOME TO THE IAS WORKSHOP

GRAHAM ROBERTS, FINANCE DIRECTOR


3


OVERVIEW

British Land will commence reporting under IAS in the year ended31 March 2006

Cash Flows unaffected

Dividend policy unaffected

Banking arrangements unaffected

IAS and its interpretation is subject to change

4


COMMUNICATION TIMETABLE

MAY 2005 2005 UK GAAP Preliminary Results

JULY 2005 2005 IAS Annual Results

NOV 2005 2006 H1 IAS Interim Results

MAY 2006 2006 IAS Preliminary Results

5


AGENDA

THE MOVE TO IASISOBEL SHARP, DELOITTE

BRITISH LAND AND IASLUCINDA BELL, HEAD OF TAX & ACCOUNTING

SIMON CARTER, TREASURY EXECUTIVEMARC FURLONGER, SENIOR ACCOUNTANT

INDICATIVE EFFECTS OF IASLUCINDA BELL, HEAD OF TAX & ACCOUNTING

Q & A


5

6


AGENDA

THE MOVE TO IASISOBEL SHARP, DELOITTE

BRITISH LAND AND IASLucinda Bell, Head of Tax & Accounting

Simon Carter, Treasury ExecutiveMarc Furlonger, Senior Accountant

INDICATIVE EFFECTS OF IASLucinda Bell, Head of Tax & Accounting

Q & A


6

7


STANDARD SETTING CIRCA 2000

Asia crisis – blame on accounting

The old International Accounting Standards Committee under review

The creation of a single European market

7


8


EUROPEAN MOVES

ECOFIN meeting – Lisbon 2000

EC Council of Ministers – IAS Regulation 2002

Applies directly to listed groups for periods beginning on or after 1 January 2005

British Land’s 1 April 2005 to 31 March 2006 period

IASB standards as adopted by Europe

8


9


THE REASONS

Part of Financial Services Action Plan

Better functioning of the internal market, efficient and cost-effective capital markets, investor protection, maintenance of confidence

Standards accepted internationally and truly global

Hope – acceptable to SEC by 2008

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10


THE NEW IMPROVED IASB

Began work in 2001

From 70 unpaid part-timers to 14 full-time

2005 created real pressure on work programme

Big prize is movement in US post Enron, etc

IASB / FASB in step (almost)

Real work now starting, e.g. leasing, reporting performance, financial instruments

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11


AGENDA

THE MOVE TO IASIsobel Sharp, Deloitte & Touche

BRITISH LAND AND IASLUCINDA BELL, HEAD OF TAX & ACCOUNTING



Q & AGraham Roberts, Finance Director


12


BRITISH LAND BEFORE AND AFTER IAS

CURRENT TREATMENT

Efficient Balance Sheet

Strong Cash Flows

Growing Dividend

IAS TREATMENT

Efficient Balance Sheet

Strong Cash Flows

Growing Dividend

13


KEY MESSAGE

Business - Unchanged

Reporting – Significant changes

14


BRITISH LAND AND IAS

Key areas of change

Summarise impact

Reporting measures

15


TEMPLATE

CURRENT TREATMENT

Current Balance Sheet and Profit & Loss treatment

IAS TREATMENT

IAS Balance Sheet and Income Statement treatment

16


TEMPLATE (CONTINUED)

INDICATIVE IMPACT ON HALF YEAR TO SEPT 2004

All figures are indicative and unaudited

All figures include share of Joint Ventures

Income Statement and Balance Sheet figures are to the nearest £5m

17


AREAS OF PARTICULAR FOCUS

Contingent Tax

Debt and Derivatives

Property and Leasing

Other issues

18



Contingent Tax



Other issues

19


CONTINGENT TAX

CURRENT TREATMENT

Contingent tax disclosed, but not recognised

IAS TREATMENT

Recognise contingent tax on property and other valuations

The deferred tax recognised in the period is charged or credited to the Income Statement

20


CONTINGENT TAX: IMPACT


Reduce net assets – 2004/5 H1 £810m increased deferred tax provision

Reduce profits – 2004/5 H1 £85m increased deferred tax charge

See Appendix page 57 for reconciliation of IAS to UK GAAP contingent tax at 30 Sept 2004

21


EXAMPLE: SALE OF THE SWISS CENTRE

Accounting impact will not be what we pay

Capital gain ¼ of 30 Sept 2004 provision

22


AGENDA



SIMON CARTER, TREASURY EXECUTIVEMarc Furlonger, Senior Accountant




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Contingent Tax



Other issues

24


DEBT AND DERIVATIVES

IAS SUMMARY

Minimal impact on profits

All British Land derivatives qualify as “effective” hedges

Majority of debt held at nominal value rather than market value

25


INTEREST RATE MANAGEMENT

British Land maintains around 85% of debt at fixed rates

Fixed and floating debt raised from variety of sources

Interest rate swaps used to hedge floating rate debt

26


EXAMPLE: £100M 5 YR FACILITY SWAPPED TO FIX

(10)

(8)

(6)

(4)

(2)

02

4

6

8

10

1 2 3 4 5

Year

Swap

Loan

Cash flow£m

(10)

(8)

(6)

(4)

(2)

02

4

6

8

10

1 2 3 4 5 (10)

(8)

(6)

(4)

(2)

02

4

6

8

10

1 2 3 4 5

27


ACCOUNTING FOR DERIVATIVES

All derivatives at fair value on Balance Sheet under IAS

All British Land derivatives qualify as “effective” hedges

Movements in fair value through Reserves not Income Statement

28


CHANGES IN INTEREST RATES

When

But …

No impact on profits

NET ASSETSDERIVATIVE VALUERATES

NET ASSETSDERIVATIVE VALUERATES

29


DEBT AND DERIVATIVES

CURRENT TREATMENT

Effective derivatives not recorded on Balance Sheet

All debt at nominal value rather than market value

NB: Market value of debt and derivatives disclosed

IAS TREATMENT

Mark to market for derivatives on Balance Sheet

Majority of debt at nominal value rather than market value¹

¹ See Appendix page 58

30


DEBT AND DERIVATIVES: IMPACT


Minimal impact on profits

Impacts net assets – 2004/5 H1 £15m decrease

See Appendix page 58 for reconciliation of derivative net asset impact

31


AGENDA



Simon Carter, Treasury ExecutiveMARC FURLONGER, SENIOR ACCOUNTANT




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Contingent Tax



Other issues

33


INVESTMENT PROPERTIES

CURRENT TREATMENT

Held at market value

Revaluation gains/(losses) shown as a reserve movement¹

IAS TREATMENT


Revaluation gains/(losses) shown in Income Statement

¹ Also shown in the Statement of Total Recognised Gains and Losses (STRGL)

34


INVESTMENT PROPERTIES: IMPACT


Revaluation gains/(losses) shown in Income Statement –

2004/5 H1 £385m gain reallocated to income from reserves

No impact on net assets

35


DEVELOPMENT PROPERTIES

CURRENT TREATMENT

Held at cost (or market value, if lower)

NB: Revaluation gains added back for “adjusted NAV” per share

IAS TREATMENT


Investment properties being redeveloped still treated as investment properties

Other development properties revalued through Reserves¹

¹ Also shown in the Statement of Recognised Income and Expense (SRIE) – the IAS replacement for STRGL

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DEVELOPMENT PROPERTIES: IMPACT


Increase profits – 2004/5 H1 £10m

Small impact on net assets – 2004/5 H1 £25m increase in book value of development

properties

British Land’s “adjusted NAV” already includes developments at market value

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TENANT INCENTIVES

CURRENT TREATMENT

Tenant incentives amortised to first open market rent review

IAS TREATMENT

Tenant incentives amortised over lease term (or tenant’s first right to break)

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TENANT INCENTIVES: IMPACT


Net rents – 2004/5 H1 £5m increase

Revaluation surplus – 2004/5 H1 £5m decrease

No net impact on profits or net assets

39


OTHER ISSUES

Tenant leases

Head leases

Joint Ventures

Dividends

Negative goodwill

40


OTHER ISSUES: LEASES

All leases reviewed for requirements of IAS

All British Land properties will be treated as operating leases

No impact on Balance Sheet or Income Statement

TENANTLEASES

Ground rents on leasehold properties capitalised as financial liability

Increases 2004/5 H1 investment properties by £20m and net debt by £20m

No impact on profits or net assets

HEADLEASES

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OTHER ISSUES: JOINT VENTURES

No change in consolidation method under IAS

Consolidated using equity methodBALANCE

SHEET

JV profit after tax shown in British Land’s pre-tax profit as one line

On conversion to IAS - the amounts currently included separately in the

profit & loss account will be reallocated to this one line

INCOMESTATEMENT

NB: The effect of all other IAS impacts on Joint Ventures will be reflected net in the JVs line in both the Balance Sheet and Income Statement

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OTHER ISSUES: FIRST-TIME ADOPTION

Proposed dividend not recognised until approved

Net assets increase by £25m for half yearDIVIDENDS

Negative Goodwill not recognised under IAS

One-off increase to net assets of £35mNEGATIVEGOODWILL

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AGENDA




INDICATIVE EFFECTS OF IASLUCINDA BELL, HEAD OF TAX & ACCOUNTING



44


PROFIT AFTER TAX: NET INDICATIVE EFFECTS

(85)Contingent tax

(5)Other305

371IAS treatment

66Current treatment

395Revaluations gains

£mHalf year to 30 Sept 2004

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INCOME STATEMENT: DETAILED INDICATIVE EFFECTS

+

-

+

+

-

+

+

+

Indicative effect of IAS on profitIncrease/(Decrease)

£m

305

(60)

365

305

(5)

10

50

5

Income tax expense(14)

Profit before tax80

Profit after tax66

Profit on property trading and fixed assets5

Net valuation gains on investment property-

(172)

34

213

30 Sept 2004UK GAAP

£m

Profit from operations

Net interest payable

Share of the profit of joint ventures

See Appendix page 55 for detailed breakdown

46


REPORTING: EARNINGS MEASURE

Industry discussion on earnings performance measures

Earnings Before Gains on Asset Revaluations and Disposals (EBGARD)

Strip out related tax effects

Similar to current underlying profit measure

47


EARNINGS MEASURES: INDICATIVE EFFECTS

+ 59Earnings per share¹12.7

12.1

30 Sept 2004UK GAAP

p

Minimal changeUnderlying/EBGARD earnings per share¹

Indicative effect of IASIncrease/(Decrease)

p

¹ Diluted

48


NET ASSETS: NET INDICATIVE EFFECTS

(740)

(15)Mark to market on interest rate swaps

25Revaluation surplus on development properties

35Write back of – Negative goodwill

4,525IAS treatment

5,265Current treatment

(810)Contingent tax

25Write back of – Proposed dividend

£mAs at 30 Sept 2004

49


BALANCE SHEET: DETAILED INDICATIVE EFFECTS

-

+

-

-

-

+

(710)Provisions(106)

40Other net assets/(liabilities)(179)

5,265

(4,936)

756

9,730

30 Sept 2004UK GAAP

£m

(30)Net debt

(740)Net assets

45Properties & lease incentives

(85)Investments in joint ventures

Indicative effect of IAS on net assetsIncrease/(Decrease)

£m

See Appendix page 56 for detailed breakdown

50


REPORTING: BALANCE SHEET MEASURE

“Adjusted NAV”

Net assets

Including:• Revaluation on trading properties

Excluding:• Contingent taxes and “FRS 19” provision• Fair value adjustments of debt and derivatives

Similar to current adjusted NAV

51


INDICATIVE EFFECTS ON NET ASSET VALUE

+

- (149)Net asset value per share¹1027

1049

30 Sept 2004UK GAAP

p

12Adjusted net asset value per share¹

Indicative effect of IASIncrease/(Decrease)

p

¹ Diluted

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REPORTING MEASURES: CONCLUSION

Reporting – Significant changes

Performance Measures – Minimal effect

Business - unchanged

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INTERNATIONAL ACCOUNTING STANDARDS WORKSHOP

Q & A


APPENDIX


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55


INCOME STATEMENT: INDICATIVE EFFECTS

-

-

-

5

(5)

-

(5)

15

(15)

-

JV Reclassification

-(5)5----Underlying/EBGARD profits

305(5)-10385-(85)Profit after tax

59p(1)-2p74p-(16p)EPS1

TotalOne-off items

Tenant Incentives

Development Properties

Investment Properties

Debt & Derivatives

Contingent Tax£m

(60)-----(65)Income tax expense

365(5)-10385-(20)Profit before tax

305-(5)10300--Net valuation gains on investment property

(5)------Profit on property trading and fixed assets

10(5)-----Net interest payable

50---85-(20)Share of the profit of joint ventures

5-5----Profit from operations

¹ Diluted

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BALANCE SHEET: INDICATIVE EFFECTS

5p

5p

25

25

-

-

-

-

Dividends

(149p)7p---(3p)(158p)NAV per share¹

12p7p-----Adjusted NAV per share¹

(740)35-25-(15)(810)Net assets

TotalNegative Goodwill

Head Leases

Development Properties

Investment Properties

Debt & Derivatives

Contingent Tax£m

4015-----Other net assets/ (liabilities)

(710)-----(710)Provisions

(30)-(20)--(10)-Net debt

(85)20---(5)(100)Investments in joint ventures

45-2025---Properties & lease incentives

¹ Diluted

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RECONCILIATION OF CONTINGENT TAX

40

20²Deduction for estimated selling costs and other adjustments

35³Deduction for negative goodwill

810IAS treatment

770Current treatment

(15)¹Tax on revaluation of trading properties


NOTES

¹ Trading properties are carried at cost in the Balance Sheet and thus to be consistent the contingent tax recognised does not reflect any tax arising on the revaluation surplus.

² Under the current treatment selling costs are treated as an allowable deduction in calculating the contingent tax. Under IAS selling costs cannot be anticipated.

³ Negative goodwill, which relates to deductions for contingent tax on acquisition, will reverse on sale of the asset. This reversal is anticipated under the current treatment. Under IAS there is no negative goodwill on the Balance Sheet so this adjustment is no longer required.

58


RECONCILIATION OF DERIVATIVE NET ASSET IMPACT

10- Fixed rate debt swapped to floating²

Value adjustments to hedged liabilities

(5)Share of Joint Venture derivative market value

(45)

20- US Private Placements at spot exchange rate¹

(15)IAS impact on net assets

(40)Group derivative market value


NOTES

¹ British Land uses cross currency swaps to eliminate foreign exchange risk on US denominated debt. Under IAS, these effective swaps have minimal impact on net assets since their fair value is offset by the spot retranslation of the debt.

² British Land has a small number of interest rate derivatives which swap fixed rate debt into floating. Under IAS hedge accounting these have no impact on net assets because there is an equal and offsetting adjustment to the carrying value of the swapped debt.

59


BALANCE SHEET: VALUATION BASIS

MVMVPension asset

PVPVPension liability

HCHCFloating rate debt

Debtors

Net Debt

HCHCOther creditors

HCHCProvisions for liabilities and charges

MVHCDerivatives (effective)

SEHEUS Private Placements swapped to Sterling

MVHCFixed rate debt swapped to floating

HCHCFixed rate debt

HCHCCash and deposits

HCHCPrepayments and accrued income

HCHCAmounts owed by joint ventures

HCHCTrade debtors

HC1HC1Trading properties

NRHCNegative goodwill

MVMVOther investments

BVBVInvestments in joint ventures

MVHC1Development properties

MVMVInvestment properties

IASUK GAAP

MV – Market Value

HC – Lower of Historic Cost or Net Realisable Value (for Net Debt = Nominal Value)

HE – Historical Exchange Rate

SE – Spot Exchange Rate

BV – Book Value. Equity accountedwhere individual assets/liabilitiesare valued as per this schedule

PV – Present Value of defined benefit obligations determined by our actuaries

NR – Not Recognised

¹ Included at Market Value in “Adjusted NAV”

60


OTHER AREAS OF IAS NOT COVERED

Areas of IAS impact that are not covered in this Workshop due their immateriality to British Land:

Accounting for share-based payments and share schemesAccounting for employees benefits and defined benefit pensions schemesAccounting for properties subject to a finance leaseInventories and trading propertiesSpreading of letting fees and other direct costs incurred on the inception of a tenant leaseRevenue recognition – disclosure of gross service charge income and expenseUse of the foreign currency translation reserveHedging of the net investment of a foreign operationFair value hedge accountingCash flow hedge accounting for foreign exchange riskAccounting for Convertible BondsImpairment of assetsSegmental reporting requirementsRelated party disclosures

61


BROADGATE REFINANCING

(125)5,265Net assets

53(179)Other net assets/(liabilities)

(178)(4,936)Net debt

-756Investments in JVs

-(106)Provisions

-9,730Properties

Effect of transaction

30 Sept 2004 £m

Accounting treatment similar under IAS for this transaction

Annual interest saving of £12m pa (£8m post tax)

Exceptional accounting charge against March 2005 pre-tax profits estimated of £178m (£125m post tax)

Virtually no effect on NNNAV

The above financial effects are illustrative and stated on a pro forma basis as though the refinancing had completed on 30 Sept 2004 and based on pricing at the close of business on 19 Jan 2005 (see press release).

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The workshop and accompanying presentation have been written in general terms and therefore cannot be relied on to cover specific situations.

Furthermore this presentation may contain certain “forward-looking” statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances, that could cause actual outcomes and results to differ materially from that expressed or implied by such forward-looking statements. Any forward-looking statements made by or on behalf of British Land speak only as of the date they are made. British Land does not undertake to update forward-looking statements to reflect any changes in British Land’s expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

This presentation is published solely for information purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness of reliability of the information contained herein. All opinions expressed in this presentation are subject to change without notice and may differ to opinions expressed elsewhere.

All numbers given in the presentation are estimates, included only for illustrative purposes. They are subject to change and should not be relied on or considered definitive.

Documents

INTERNATIONAL ACCOUNTING STANDARDS WORKSHOP · Graham Roberts, Finance Director IAS Workshop. 12 IAS Workshop 25 January 2005 BRITISH LAND BEFORE AND AFTER IAS CURRENT TREATMENT Efficient