25 Sep 2008 07:00
| 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."
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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 liabilities | (4) | - | - | - | (4) |
| (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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