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.