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These Company financial statements have been prepared in accordance with applicable UK accounting and financial reporting standards and the Companies Act 1985.
The Company financial statements have been prepared on a historical cost basis, except for the revaluation of financial instruments from 1 April 2005 onwards.
These Company financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Company operates.
The Company has not presented its own profit and loss account as permitted by section 230 of the Companies Act 1985. The Company has taken the exemption from preparing a cash flow statement under the terms of FRS 1 (revised 1996) ‘Cash flow statements’.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
The Company has adopted FRS 21 ‘Events after the Balance Sheet Date’, FRS 23 ‘The Effects of Changes in Foreign Exchange Rates’, FRS 25 ‘Financial Instruments: Disclosure and Presentation’ and FRS 26 ‘Financial Instruments: Measurement’. The Company has also adopted FRS 29 ‘Financial Instruments: Disclosures’, which replaces the disclosure requirements of FRS 25. The impact of the adoption of these standards is shown in note 1.
Investments held as fixed assets are stated at cost less any provisions for impairment. Impairments are calculated such that the carrying value of the fixed asset investment is the lower of its cost or recoverable amount. Recoverable amount is the higher of its net realisable value and its value in use.
Deferred taxation is provided in full on all material timing differences, with certain exceptions. No provision for deferred taxation is made for any timing differences on non-monetary assets arising from fair value adjustments, except where there is a binding agreement to sell the assets concerned. However, no provision is made where it is more likely than not that any taxable gain will be rolled over into replacement assets.
Deferred tax assets are only recognised to the extent that they are considered recoverable.
Deferred tax balances have not been discounted.
Financial assets, liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities and is recorded at the proceeds received, net of direct issue costs.
Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Trade payables are not interest bearing and are stated at their nominal value.
Interest-bearing loans and overdrafts are recorded at the proceeds received, net of direct issue costs plus accrued interest less any repayments. Prior to 1 April 2005, accrued interest is presented as part of current liabilities and not combined with the principal amounts payable.
Finance charges are recognised in the income statement in the period in which they are incurred.
Derivative financial instruments are recorded as described below.
The Company enters into derivative financial instruments (‘derivatives’) in order to manage its interest rate and foreign currency exposures. The principal derivatives used include interest rate swaps, forward rate agreements, currency swaps, forward foreign currency contracts and interest rate swaptions.
All derivative transactions are undertaken, or maintained, with a view to providing a commercial hedge of the interest or currency risks associated with the Group’s underlying business activities and the financing of those activities.
With effect from 1 April 2005, derivatives are carried in the balance sheet at their fair value.
Prior to 1 April 2005, derivatives used for hedging purposes were not recorded on the balance sheet as assets or liabilities. Monetary assets and liabilities in foreign currencies were retranslated at hedged rates instead of closing rates.
As permitted by the transition provisions of FRS 26, prior year adjustments have not been made to the balance sheet as at 31 March 2005 or the profit and loss account for the year then ended to reflect the adoption of FRS 26 ‘Financial Instruments: Measurement’.
From 1 April 2005, the accounting policy for hedge accounting is as described below. Disclosures on the impact of implementing FRS 26 at 1 April 2005 are set out in note 1.
Changes in the carrying value of financial instruments that are designated and effective as hedges of future cash flows (‘cash flow hedges’) are recognised directly in equity and any ineffective portion is recognised immediately in the income statement. Amounts deferred in equity in respect of cash flow hedges are subsequently recognised in the income statement in the same period in which the hedged item affects net profit or loss.
Changes in the carrying value of financial instruments that are designated as hedges of the changes in the fair value of assets or liabilities (‘fair value hedges’) are recognised in the income statement. An equal and opposite amount is recorded as an adjustment to the carrying value of hedged items, with a corresponding entry in the income statement, to the extent that the change is attributable to the risk being hedged and that the fair value hedge is effective.
Changes in the fair value of derivatives that do not qualify for hedge accounting are recognised in the income statement as they arise.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gains or losses relating to cash flow hedges recognised in equity are initially retained in equity and subsequently recognised in the income statement in the same periods in which the previously hedged item affects net profit or loss. For fair value hedges the cumulative adjustment recorded to its carrying value at the date hedge accounting is discontinued is amortised to the income statement using the effective interest rate method.
If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement immediately.
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not carried at fair value with unrealised gains or losses reported in the income statement.
The notional amounts relating to financial instruments held to manage interest rate and currency profiles for interest rate swaps and forward rate agreements, foreign currency contracts and cross currency swaps at 31 March 2006 amounted to £2,926m and £3,454m respectively.
The Company has guaranteed the repayment of the principal and any associated premium and interest on specific loans due from certain Group undertakings to third parties. As these are guarantees in the event of default or non-performance by the subsidiary, the Company accounts for these guarantees as insurance contracts in accordance with FRS 12.
The Group issues equity-settled share-based payments to certain employees, detailed in the Directors’ Report, the Remuneration Report and in note 31 to the Group accounts.
Equity-settled share-based payments are measured at fair value at the date of grant. The Company has no employees. Equity-settled share-based payments that are made available to employees of the Company’s subsidiaries are treated as increases in equity over the vesting period of the award, with a corresponding increase in the Company’s investments in subsidiaries, based on the Group’s estimate of the number of shares that will eventually vest. Where payments are subsequently received from subsidiaries, these are accounted for as a disposal of investment.
Interim dividends are recognised when they are paid to the Company’s shareholders. Final dividends are recognised when
they are approved by shareholders.