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Accounting policies
A Accounts presentation and convention These accounts have been
prepared under the historical cost convention modified to include
certain investments and fixed assets at valuation and in accordance
with the Statement of Recommended Practice – Financial Statements
of Investment Trust Companies (“SORP”) – and applicable accounting
standards, except as described below concerning the treatment of
capital profits.
As the Company is authorised and regulated by the Financial
Services Authority as a deposit taker, the accounts have also been
prepared in accordance with the requirements of Part VII of the
Companies Act 1985 in respect of banking companies and
groups.
The Articles of Association of the Company prohibit the
distribution of its capital profits. Accordingly, the Company’s
capital profits, shown in note 41, are
included in the capital reserve. In order to use consistent
accounting policies in the Group accounts, the capital profits of
subsidiary undertakings have been excluded from consolidated
revenue and included in capital reserve. These capital profits of
subsidiary undertakings are distributable. The Revenue statement of
the Company has been omitted from these accounts in accordance with
section 230 of the Companies Act 1985.
As the charge for carried interest and investment performance plans
has become more significant, it has been shown separately this year
to give greater clarity. Consequently, certain comparatives have
been restated to reflect this.
Fees receivable earned and deal related costs incurred as an
intrinsic part of an intention to acquire or dispose of an
investment, have been accounted for directly in the capital
reserve. To the extent that taxation losses have been transferred
between capital and revenue in order to be utilised against excess
taxable profits, the transfer is reflected in the Statement of
total return, Revenue statement and note 15.
Administrative expenses associated with making and managing
investments are allocated between capital and revenue. Finance
costs less interest income on surplus funds have been allocated
between revenue and capital. This allocation is 70% to capital and
30% to revenue for both administrative expenses and net finance
costs.
B Joint ventures and associated undertakings Entities whose
business is in a field of activity which is closely related or
complementary to that of the Group and in which holdings are
intended to be retained on a long-term basis and are jointly
controlled by the Group and one or more venturers under a
contractual agreement are treated as joint ventures. These joint
ventures are accounted for using the gross equity method of
accounting.
The Directors believe that equity accounting for investments which
may come within the Companies Act definition of associated
undertakings, because the Group exerts significant influence, would
not give a true and fair view of the income from the investment
activities of the Group, since this is better measured by the
inclusion of dividends and interest income. It is impracticable to
quantify the effects of this departure. The treatment adopted is in
accordance with Financial Reporting Standard 9 – Associates and
Joint Ventures.
C Fixed assets in use by the Group Fixed assets in use by the
Group are depreciated by equal annual instalments over their
estimated useful lives as follows: office equipment five years;
computer equipment three years; computer software three years;
motor vehicles four years. Properties in use by the Group are
included at external professional valuation, which is carried out
at each balance sheet date. Depreciation is not provided against
the value of the buildings as the amount is immaterial and
impairment is considered annually. Motor vehicles being acquired on
hire purchase are capitalised in the balance sheet and depreciated
over their estimated useful lives. The interest element of the
rental obligations is charged to the revenue account over the
period of the agreement and represents a constant proportion of the
balance of capital repayments outstanding.
D Financial fixed assets Loan investments, fixed income and
equity share investments, together with interests in joint ventures
and the shares in Group undertakings, are regarded as financial
fixed assets as they are held for long-term investment
purposes.
E Valuation of financial fixed assets and investment
properties Investment packages comprising mixtures of equity
shares, fixed income shares and loan investments, together with
financial fixed assets of joint ventures, are included at the
Directors’ estimate of Fair Value on the following bases:
a Listed investments and quoted shares for which an active market
exists are valued at mid-market price. This value is reduced by an
appropriate discount dependent on the size of the Group’s holding
relative to normal trading volumes.
b Unquoted investments are valued by the Directors as follows: new
investments are generally valued at cost until the first set of
accounts for a full financial period subsequent to investment are
received. An enterprise value for the investee company is estimated
using various methodologies, and, after adjusting for
higher-ranking debt and an appropriate marketability discount, is
apportioned over the remaining instruments including the Group’s
investments in loans, fixed income shares and equity shares.
Standard methodologies include applying an average sector earnings
multiple to operating profits, valuation by reference to the net
asset base and the price of recent investments made in the investee
company. If failure is expected the equity shares are valued at nil
and the fixed income shares and loan investments are valued at the
lower of cost or net recoverable amount.
c In all of the above categories of investment where failure has
occurred the loss is charged against realised capital
profits.
d Deferred consideration is included at the estimated present value
of the expected future proceeds. Investment properties are included
at external professional valuation.
F Income recognition Dividends receivable on listed shares are
brought into account on the ex-dividend date. Dividends receivable
on shares where no ex-dividend date is quoted are brought into
account when the right to receive payment is established. The fixed
return on a loan investment is recognised on a time apportionment
basis so as to reflect the effective yield on the loan. Other
income, including interest receivable from derivatives, is
recognised on the accruals basis except for income from finance
leases and hire purchase contracts, which is credited to revenue so
as to result in a constant periodic rate of return on the net cash
investment.
G Administrative expenses Administrative expenses which
comprise the costs of making and managing investments and the
management of the Group are accounted for on an accruals basis.
Costs associated with making and managing investments are allocated
to revenue and capital profits. Costs of management of the Group
are charged to revenue profit. Costs incurred as an intrinsic part
of an intention to acquire or dispose of an investment have been
accounted for in full as part of capital return as opposed to being
allocated between revenue and capital.
H Finance costs Finance costs, including those of
derivatives, are accounted for on an accruals basis. Discounts,
premiums and expenses arising on the issue of bonds and notes are
amortised over the period of the related borrowing.
I Trading assets Loans and advances to customers and other
non-investment assets are carried at the lower of book amount and
recoverable amount.
J Deferred tax Provision is made for deferred tax, using the
liability method, on all material timing differences between the
treatment of certain items for taxation and accounting purposes.
Deferred tax is provided at a rate at which it is anticipated the
timing difference will reverse. Provision is also made for deferred
tax on the unrealised appreciation of investment held by certain
subsidiaries, as reduced by losses, where these are expected to
crystallise in the future. Deferred tax assets are recognised only
when there is evidence that there will be taxable profits in the
future to offset the deferred tax asset.
K Foreign currency translation Foreign currency revenue
items, assets and liabilities, including those of non-UK subsidiary
undertakings, are translated into sterling at the exchange rates
ruling at the balance sheet date, with the exception of borrowings
covered by forward exchange contracts which are translated at the
contracted rates of exchange. Exchange adjustments arising on the
translation of investments, borrowings and net assets including
those of overseas subsidiary undertakings are dealt with through
the appropriate reserves. Exchange adjustments arising on realised
transactions are dealt with in the revenue or capital profit for
the period as appropriate.
L Pensions Contributions made to pension schemes are charged
so as to spread the cost of pensions over the employees’ working
lives within the Group. The regular cost is attributed to
individual periods using the projected unit method. Variations in
pension cost, which are identified as a result of independent
actuarial valuations, are spread over the average remaining service
lives of the current employees. To the extent to which such costs,
after interest, do not equate with cash contributions, an accrual
or prepayment is recognised in the balance sheet.
International financial reporting
standards
In June 2002, the European Union adopted a regulation that
requires, from 1 January 2005, European listed companies to prepare
their consolidated financial statements in accordance with
international accounting standards. The Group’s 2006 financial
statements will therefore be prepared in accordance with
International Financial Reporting Standards (“IFRS”). These
comprise not only IFRS but also International Accounting Standards
(“IAS”).
In the light of the European Union decision, the International
Accounting Standards Board (“IASB”) announced its commitment to
have a platform of high quality, improved standards in place by the
end of March 2004. This has largely been met. Certain key standards
continue to be under review. These include IAS 39 ‘Financial
Instruments: Recognition and Measurement’ and IAS 19 ‘Employee
Benefits’. In addition, a project is being undertaken to devise a
Statement of Comprehensive Income, which would replace the single
column profit and loss account required by IAS 1 ‘Presentation of
Financial Statements’.
Under IFRS the SORP generally ceases to be applicable. However, it
is as yet unclear how the Inland Revenue intends to apply going
forward the Investment Trust status requirements of section 842
Income and Corporation Taxes Act 1988. Dependent on this is the
continuing need to maintain a separate analysis of Revenue and
Capital. The Group will also be impacted by IAS 10 ‘Events after
the Balance Sheet Date’ in accordance with which dividends payable
are accounted for in the period in which they are declared as
opposed to under current UK GAAP when they are accounted for in the
period when they are proposed.
During 2003, the Group formed a project team and initiated a
programme to change its accounting policies and practices to be
IFRS compliant by 2005. Activities during 2003/2004 have included
documenting differences between the Group’s current accounting
policies and IFRS, detailed planning for the move to IFRS,
identification of implementation methodologies, the specification
of IT requirements and raising awareness of IFRS throughout the
Group. Additionally, the team is assisting functions to consider
the wider business impacts of the move to IFRS and the convergence
of current UK GAAP with IFRS. This work is advancing to plan. The
main risks and uncertainties relate to the standards that have not
yet been fully finalised. However, the Group is confident that it
will be able to meet requirements for financial reporting during
the year to 31 March 2006.
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