RNS Number : 2417E
Telford Homes PLC
25 September 2008
Press Release 25 September 2008
Telford Homes Plc
('Telford' or 'the Company')
Early adoption of IFRIC 15 and IAS 23 (revised)
Impact on reported profits and net assets
Telford Homes Plc (AIM:TEF), today announces changes to its accounting policies for the
year to 31 March 2009, as a result of new
accounting standards, along with restated primary statements for the years ended 31 March 2008
and 31 March 2007.
Key points
* The Company is adopting IFRIC 15 and IAS 23 (revised) one year earlier
than required in order to give clarity over future reporting.
* Revenue and profit from the sale of open market private homes now
recognised at the point of legal completion in accordance with IFRIC 15.
* The accounting treatment for affordable homes is unaffected by IFRIC 15.
* Historically, revenue and profit were recognised from the point of
exchange of contracts and then on a percentage of completion basis.
* Substantial proportion of revenue and profit recognised in previous years
now deferred into future periods in accordance with expected completion
dates.
* Revenue secured by contracts exchanged but not yet recognised at 31 March
2008 restated to £252 million.
* Borrowing costs now capitalised within inventories in accordance with IAS
23 (revised). As a result the majority of bank interest incurred will now
be classified within cost of sales as and when revenue is recognised.
* As a result of the adoption of these accounting standards net assets at
31 March 2008 restated from £64.2 million to £48.9 million at historic
cost.
* Changes in accounting have no impact on the financial health or day to
day operation of the business or its cash flows, other than the recovery
of tax paid for the year ended 31 March 2008 and a reduction in future
tax payments.
* Corporation tax benefit of circa £5.2 million is a significant advantage
of early adoption of these accounting standards.
Andrew Wiseman, Chief Executive of Telford Homes, commented: "We hope that our early
adoption of these changes will assist the market in
understanding the reporting policies going forward. The corporation tax that is due back will
be beneficial to our cash flow, and the
changes that have been made have no impact or reflection on the stability or health of the
business."
- Ends -
For further information:
Telford Homes Plc
Andrew Wiseman, Chief Executive Tel: +44 (0) 1992 809 800
Jon Di-Stefano, Financial Director www.telfordhomes.plc.uk
Shore Capital
Graham Shore Tel: +44 (0) 20 7408 4090
Media enquiries:
Abchurch
Henry Harrison-Topham / Joanne Shears Tel: +44 (0) 20 7398 7709
joanne.shears@abchurch-group.com www.abchurch-group.com
Introduction
On 10 July 2008 the Company reported that it would adopt IFRIC 15 'Agreements for the
construction of real estate' for the year to 31
March 2009. The adoption of IFRIC 15 results in significant changes to the revenue and profit
reported in any given period and this is
explained in more detail below.
IFRIC 15 is being adopted one year earlier than required to ensure that the Company's
revenue and profit recognition policy is fully
understood and to prevent any uncertainty developing over future reporting. In addition, the
change in accounting results in a deferral of
tax liabilities previously paid and therefore has a significant cash flow benefit. This is
also explained in more detail below.
IAS 23 (revised) 'Borrowing costs' will be effective for the year to 31 March 2010 and
also results in significant changes to reported
profits. In order to prevent two major accounting changes being reported in consecutive years
the Company has also decided to adopt IAS 23
(revised) earlier than required for the year to 31 March 2009.
Restated income statements for the years ended 31 March 2008 and 31 March 2007 and
restated balance sheets as at those dates are
presented below. The only changes required to cash flow statements previously reported are
presentational. More detail on the restated
figures, including the notes to the financial statements, will be presented in the annual
report for the year to 31 March 2009.
Each income statement and balance sheet has been presented as previously reported followed
by columns separately identifying the impact
of IFRIC 15 and IAS 23 (revised), along with any balance sheet reclassifications required,
leading to the restated figures for each period.
IFRIC 15 explained
IFRIC Interpretation 15 'Agreements for the construction of real estate' was issued on 3
July 2008 and is effective for periods
beginning on or after 1 January 2009.
IFRIC 15 has arisen due to differing opinions on whether the revenue from certain real
estate transactions should be recognised in
accordance with IAS 18 'Revenue' or in accordance with IAS 11 'Construction contracts'. The
guidance in the existing standards allows
flexibility in the accounting treatment that should be adopted.
Telford Homes has historically accounted for revenues and therefore profits from all
property sales in accordance with IAS 11 and
similar standards under UK GAAP. Under IAS 11 revenue is recognised on a percentage of
completion basis once contracts for the sale of a
property have been exchanged and then only if the eventual profit from that property can be
foreseen with reasonable certainty.
The Company believes the principles of IAS 11 to be the most appropriate method of
representing the underlying transactions of the
business in its reported results. Each contract that is exchanged secures a sale up to three
years in advance of legal completion with a
non-refundable deposit paid. This sale fixes the price of the property and removes the most
significant variable risk / reward from the
development process. In accordance with its accounting policy the Company has historically
reviewed the likelihood of each property being
constructed and being legally completed before assessing whether any revenue and profit should
be recognised. Under IAS 18 there would be no
revenue recognised until the time of legal completion and, due to the Company's record of
securing pre-sales, this would typically occur
months or years after the original transaction has taken place.
However, IFRIC 15 concludes that revenue from open market sales of real estate should be
accounted for on legal completion of the
properties in accordance with IAS 18. The sale of properties under certain terms within
specific construction contracts will continue to be
accounted for under IAS 11 and in the Company's case this applies to all sales of affordable
homes. The accounting treatment for affordable
homes is therefore unaffected by IFRIC 15.
The Company will now recognise revenue from the sale of open market private homes and
commercial units entirely at the point of legal
completion in accordance with IAS 18. As a result of adopting IAS 18 all selling expenses
previously capitalised within inventories and
included with cost of sales when revenue was recognised will now be expensed as incurred
unless they relate to the creation of a tangible
asset such as a fixed sales office. These selling expenses will be charged after gross profit
but within operating profit.
The most significant impact of IFRIC 15 on the reported results of Telford Homes is
therefore the deferral of profits previously
recognised from the point of exchange of contracts onwards until the point of legal
completion. All of these profits are now recognised at a
later date and this will continue to be the case in future periods. This deferral of profits
has a material impact on the net assets of the
Company. The amount of revenue secured by contracts exchanged but not yet recognised at a
given date is now greater than previously
reported, and as at 31 March 2008 revenue secured but not yet recognised was £252 million on
the restated figures.
Revenue recognised in future periods will be significantly affected by the timing of
development completions and as such it is likely
that future revenues and therefore profits reported in each financial period will fluctuate
depending on the timing of specific
developments.
IAS 23 (revised) explained
IAS 23 (revised) 'Borrowing costs' is effective for periods beginning on or after 1
January 2009.
IAS 23 (revised) requires an entity to capitalise borrowing costs directly attributable to
the acquisition, construction or production
of qualifying assets as part of the cost of those assets. Qualifying assets are those that
take a substantial period of time to get ready
for use or sale. Previously, under the existing IAS 23, an entity was able to choose whether
to capitalise borrowing costs or to write them
off as incurred.
Each development undertaken by the Company represents a qualifying asset under IAS 23
(revised) due to the period of time taken in
obtaining planning consent and completing construction on the site. Each development typically
has site specific finance and therefore
borrowing costs can be directly attributed to each site.
As a result of IAS 23 (revised) the Company is now capitalising borrowing costs that are
directly attributable to each development
within inventories and these are then charged to cost of sales as and when revenue is
recognised.
In certain circumstances it is inappropriate to capitalise borrowing costs and examples
include sites where planning has been refused
and alternative solutions are being sought, sites where development work is on hold for a
prolonged period and sites where no effort is
being made to make the site ready for sale such as long term strategic land. The Company's
full policy on capitalisation of borrowing costs
will be disclosed in the annual report for the year to 31 March 2009.
As a result of the adoption of IFRIC 15 the impact of IAS 23 (revised) is typically to
defer the expensing of borrowing costs to the
income statement. Previously borrowing costs were written off as incurred over the life of
each development and now a substantial proportion
will not be expensed until legal completion of the open market private homes.
Impact on income statement for the year ended 31 March 2008
Revenue is reduced by £63.3 million as a result of the timing difference between contract
exchanges and legal completions under IFRIC
15. Revenue is further reduced by £0.4 million as a result of IAS 23 (revised) and the modest
effect it has on the percentage of completion
of affordable homes. Overall revenue is reduced from £160.4 million to £96.8 million.
Cost of sales is reduced by £50.7 million as a result of the change in recognition of
revenue under IFRIC 15 and the separate write off
of selling expenses. Under IAS 23 (revised) cost of sales is increased by £3.6 million where
finance costs have been capitalised within
inventories and released to cost of sales as revenue is recognised.
Administrative expenses are increased by £45,000 due to depreciation of sales offices now
recognised as tangible assets. Other selling
expenses are now written off as incurred increasing total expenses by a further £2.3
million.
Finance costs are reduced by £7.8 million as these are capitalised under IAS 23
(revised). Remaining finance costs relate to non
development specific costs and bank interest on developments where capitalisation has been
suspended.
Profit before income tax is reduced from £17.7 million to £6.5 million. The income tax
expense is restated by 30 percent of the net
impact on profit before income tax.
Impact on income statement for the year ended 31 March 2007
For the year ended 31 March 2007 the timing difference is weighted in favour of
completions during this period and therefore revenue is
increased by £1.4 million as a result of the adoption of IFRIC 15 and by £31,000 as a result
of IAS 23 (revised).
Cost of sales is reduced by £4.2 million under IFRIC 15 as a result of the change in
revenue offset by the direct write off of selling
expenses as incurred. Cost of sales is increased by £4.1 million under IAS 23 (revised)
through the release of capitalised finance costs.
Administrative expenses are increased by £40,000 and selling expenses written off total
£1.6 million. Finance costs are reduced by £3.8
million under IAS 23 (revised).
Profit before income tax is therefore increased from £13.5 million to £17.1 million
which together with the restated income statement
for 2008 illustrates the fluctuations in profit that are possible as a result of these
accounting standards.
Impact on balance sheet as at 31 March 2008
Property, plant and equipment is increased by £85,000 as result of the cost of
constructing sales offices now being recognised as
tangible assets rather than forming part of inventories.
Inventories are increased by £97.4 million as a result of the deferral of revenue
recognition to the point of legal completion under
IFRIC 15 and therefore the consequent reduction in inventories charged to cost of sales.Capitalisation of finance costs under IAS 23
(revised) further increases inventories by £7.3 million.
Receivables are reduced by £125.9 million under IFRIC 15 as a result of revenue on open
market homes now only being recognised as
completion proceeds are received. A further reduction of £0.8 million results from the change
in percentage completion on affordable sales
as a result of capitalising finance costs under IAS 23 (revised). Receivables then becomes a
payable balance primarily representing deposits
received in advance and is reclassified as such.
As a result of the significant deferral of profits previously recognised up to 31 March
2008 into future years the previous income tax
liability becomes an income tax debtor of £4.6 million created by the impact of both IFRIC 15
and IAS 23 (revised).
The movements in retained earnings represent the cumulative adjustments to the income
statement reducing retained profits by £19.9
million as a result of IFRIC 15 and increasing them by £4.5 million as a result of IAS 23
(revised).
Net assets and therefore total equity are reduced from £64.2 million to £48.9 million.
Impact on balance sheet as at 31 March 2007
This is included for comparative purposes only with the reasons for the various
restatements to assets and liabilities being the same as
for the balance sheet as at 31 March 2008.
Interim results for the six months to 30 September 2008
The Company expects to announce interim results for the six months to 30 September 2008 on
2 December 2008. These results will be the
first period presented under the revised accounting policies. The restated results for the six
months ended 30 September 2007 will be
presented for comparative purposes. The Company expects to report restated results for the
period ended 30 September 2007 showing a loss
before tax due to the timing of legal completions and a significant weighting towards the
second half of the year ended 31 March 2008.
Recovery of corporation tax
The net deferral of profits into future years as a result of the changes required by IFRIC
15 and IAS 23 (revised) creates a significant
corporation tax debtor as at 31 March 2008. Tax liabilities in previous years are reduced and
therefore payments made under quarterly
instalments in the year ended 31 March 2008 are now in excess of those liabilities.
The corporation tax asset as at 31 March 2008 was £4.6 million and the Company has made
subsequent payments in relation to the year
ended 31 March 2008 of £0.6 million. The total corporation tax benefit as a result of the
accounting changes is therefore £5.2 million
comprising an estimated repayment due of £3.7 million in respect of the year ended 31 March
2008 and a £1.5 million reduction in future tax
payments.
This recovery of corporation tax is the only actual impact that the changes in accounting
have on the financial health or day to day
operation of the business and is a significant benefit of making these changes to the
Company's accounting policies.
Jon Di-Stefano
Financial Director
25 September 2008
RESTATED INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2008
Previously IFRIC 15 IAS 23 Restated
reported
£000 £000 £000 £000
Revenue
Sales of properties 159,626 (63,264) (392) 95,970
Other direct income 807 - - 807
160,433 (63,264) (392) 96,777
Cost of sales
Sales of properties (125,698) 50,712 (3,613) (78,599)
Other direct costs (1,157) - - (1,157)
(126,855) 50,712 (3,613) (79,756)
Gross profit 33,578 (12,552) (4,005) 17,021
Administrative expenses (8,208) (45) - (8,253)
Selling expenses - (2,340) - (2,340)
Operating profit 25,370 (14,937) (4,005) 6,428
Finance income 493 - - 493
Finance costs (8,136) - 7,757 (379)
Profit before income tax 17,727 (14,937) 3,752 6,542
Income tax expense (5,400) 4,481 (1,126) (2,045)
Profit after income tax 12,327 (10,456) 2,626 4,497
RESTATED INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2007
Previously IFRIC 15 IAS 23 Restated
reported
£000 £000 £000 £000
Revenue
Sales of properties 103,636 1,378 31 105,045
Other direct income 747 - - 747
104,383 1,378 31 105,792
Cost of sales
Sales of properties (79,910) 4,180 (4,127) (79,857)
Other direct costs (1,091) - - (1,091)
(81,001) 4,180 (4,127) (80,948)
Gross profit 23,382 5,558 (4,096) 24,844
Administrative expenses (6,676) (40) - (6,716)
Selling expense - (1,606) - (1,606)
Operating profit 16,706 3,912 (4,096) 16,522
Finance income 794 - - 794
Finance costs (3,985) - 3,772 (213)
Profit before income tax 13,515 3,912 (324) 17,103
Income tax expense (3,865) (1,174) 97 (4,942)
Profit after income tax 9,650 2,738 (227) 12,161
RESTATED BALANCE SHEET AS AT 31 MARCH 2008
Previously IFRIC 15 IAS 23 Reclassify Restated
reported
£000 £000 £000 £000 £000
Non current assets
Property, plant and equipment 822 85 - - 907
Deferred income tax assets - - - - -
822 85 - - 907
Current assets
Inventories 74,446 97,370 7,297 - 179,113
Trade and other receivables 120,174 (125,933) (808) 6,567 -
Income tax assets - - - 4,624 4,624
Cash and cash equivalents 4,698 - - - 4,698
199,318 (28,563) 6,489 11,191 188,435
Total assets 200,140 (28,478) 6,489 11,191 189,342
Non current liabilities
Hire purchase liabilities (18) - - - (18)
Deferred income tax (4) - - - (4)
liabilities
(22) - - - (22)
Current liabilities
Trade and other payables (32,393) - - (6,567) (38,960)
Current income tax liabilities (1,971) 8,543 (1,948) (4,624) -
Borrowings (101,424) - - - (101,424)
Hire purchase liabilities (83) - - - (83)
(135,871) 8,543 (1,948) (11,191) (140,467)
Total liabilities (135,893) 8,543 (1,948) (11,191) (140,489)
Net assets 64,247 (19,935) 4,541 - 48,853
Capital and reserves
Issued share capital 3,750 - - - 3,750
Share premium 29,749 - - - 29,749
Retained earnings 30,748 (19,935) 4,541 - 15,354
Total equity 64,247 (19,935) 4,541 - 48,853
RESTATED BALANCE SHEET AS AT 31 MARCH 2007
Previously IFRIC 15 IAS 23 Reclassify Restated
reported
£000 £000 £000 £000 £000
Non current assets
Property, plant and equipment 851 128 - - 979
Deferred income tax assets 226 - - - 226
1,077 128 - - 1,205
Current assets
Inventories 70,135 48,999 3,152 - 122,286
Trade and other receivables 56,104 (62,669) (416) 6,981 -
Income tax assets - - - 1,587 1,587
Cash and cash equivalents 17,617 - - - 17,617
143,856 (13,670) 2,736 8,568 141,490
Total assets 144,933 (13,542) 2,736 8,568 142,695
Non current liabilities
Hire purchase liabilities (96) - - - (96)
Deferred income tax - - - - -
liabilities
(96) - - - (96)
Current liabilities
Trade and other payables (15,028) - - (6,981) (22,009)
Current income tax liabilities (1,655) 4,062 (820) (1,587) -
Borrowings (73,210) - - - (73,210)
Hire purchase liabilities (113) - - - (113)
(90,006) 4,062 (820) (8,568) (95,332)
Total liabilities (90,102) 4,062 (820) (8,568) (95,428)
Net assets 54,831 (9,480) 1,916 - 47,267
Capital and reserves
Issued share capital 3,694 - - - 3,694
Share premium 28,641 - - - 28,641
Retained earnings 22,496 (9,480) 1,916 - 14,932
Total equity 54,831 (9,480) 1,916 - 47,267
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