Great Portland Estates PLC 15 July 2005 15 July 2005 The effect of IFRS on the financial reporting of Great Portland Estates Introduction On 7 June 2002, the European Parliament approved a Regulation requiring all listed companies in the European Union to prepare consolidated financial statements under International Financial Reporting Standards ("IFRS") for financial periods beginning on or after 1 January 2005. Great Portland Estates plc ("GPE") will report its results under IFRS for the year ending 31 March 2006; its first results to be reported under the new standards will be for the six months ending 30 September 2005. In order to comply with IFRS in 2006, GPE will need to provide comparative numbers. The purpose of this paper is to show how balance sheets and income statements previously prepared under UK generally accepted accounting practice ("UK GAAP") will change under IFRS, and to explain the adjustments to reconcile the figures from one basis of accounting to the other. The main reconciling items are explained in Appendix 1, and their effects on the balance sheet and income statement are set out as follows: Appendix 2 - Balance Sheet at 31 March 2005 Appendix 3 - Income Statement for the year ended 31 March 2005 Appendix 4 - Balance Sheet at 30 September 2004 Appendix 5 - Income Statement for the six months ended 30 September 2004 To view these appendices please copy and paste the following link into a browser: http://www.rns-pdf.londonstockexchange.com/rns/9049o_-2005-7-14.pdf Basis of Preparation The figures have been restated on the basis of our interpretation of all IFRS currently applicable, and are unaudited. It is possible that conventions which differ from our current interpretation will evolve within the property sector, and IFRS are subject to ongoing amendment; accordingly, the amounts disclosed in this paper may be subject to revision. IFRS 1 First-time Adoption of International Financial Reporting Standards allows choices for first time adoption of IFRS and a number of specific exceptions from the full retrospective adoption of certain IFRS. Two of those choices are material to GPE: we have chosen to apply IAS 39 Financial Instruments: Recognition and Measurement fully and have restated the comparative information accordingly; and we have opted to bring onto the group balance sheet the full net liabilities of the Group's pension fund at each balance sheet date and to account for any movement in full in those net liabilities either in the income statement or in reserves, as appropriate, in the year which they occur. Key Changes The main differences between UK GAAP and IFRS for the financial statements under review are: Head leases - leasehold investment property and long-term liabilities are increased by an estimation of future ground rents payable, and the majority of ground rents payable in the year are disclosed as interest payable; Lease incentives - amortised over the term of the lease, or to the first break option date, in each case typically longer than under UK GAAP; Events after the balance sheet date - a proposed dividend is no longer considered to be an adjusting post-balance sheet event, but is instead a deduction from reserves in the year in which it is paid; Convertible bond - the convertible bond is split between debt and equity; Pension fund - the net assets of the Group's pension fund are included within the group balance sheet, and any changes thereto are taken to the income statement or to reserves; Hedge accounting - the fair value of derivatives are recorded in the balance sheet and the movement in their value is taken to reserves or to the income statement; Property revaluations - surpluses or deficits on investment property revaluations are shown on the face of the income statement rather than as a movement in reserves; only a valuation movement above the cost of a development property is still taken direct to the revaluation reserve; and Deferred tax - contingent capital gains tax implicit within a property valuation is accrued as a deferred tax liability. Presentation of Financial Statements Under IFRS, the profit and loss account is renamed the income statement, but there is no set format or layout of financial statements prepared under IFRS akin to those of Schedule 4 Companies Act 1985; these will develop over time through industry practice. Accordingly, the presentations set out in Appendices 2 to 5 do not necessarily represent how the income statements and balance sheets will look, but have been designed to demonstrate as clearly as possible the specific differences between UK GAAP and IFRS. There are, however, some presentational changes arising out of IFRS: investment property will be split between completed properties and those under development; property acquired for development will not be classified as investment property until completed, but will nevertheless be revalued throughout the term of the development as at present; and service charge and other income will be shown separately on the face of the income statement. Performance Reporting The effect of adopting IFRS as at 31 March 2005, and for the year then ended, on our key performance measures are set out below: UK GAAP Change IFRS Net assets £543.3m £(28.3)m £515.0m Diluted adjusted net assets* £604.0m £(30.4)m £573.6m Adjusted net gearing* 49% 2% 51% Diluted adjusted net assets per share* 333p (16)p 317p Diluted adjusted triple net assets per share* 303p 4p 307p Earnings per share 14.3p 21.4p 35.7p Adjusted earnings per share** 11.3p (0.5)p 10.8p * Excluding deferred tax on accelerated capital allowances under both UK GAAP and IFRS. ** Excluding exceptional items, profits or losses on sales of investment property and deferred tax on capital allowances (under UK GAAP), and, additionally, excluding surpluses or deficits on revaluation of investment property, and the associated contingent CGT (under IFRS). Occupational Finance Leases GPE has 248 tenants under 324 occupational leases with a weighted average lease length of 6.4 years. IAS 17 Leases has required a review of each lease to establish whether it should be accounted for as an operating lease in the same way as under UK GAAP, or as a finance lease. Based on that review, GPE will not be required to account for any of its occupational leases as finance leases. Cash Flow The introduction of IFRS will not affect the cash flows of the business. The presentation of the cash flow statement for GPE will not differ significantly from that under UK GAAP and, therefore, an analysis of the cash flow statement does not fall within the scope of this paper. Dividend Policy and Distributable Reserves At 31 March 2005 GPE had distributable reserves of £176.6 million, after declaring a full year dividend of £17.3 million in aggregate. As the individual company financial statements of GPE and each of its subsidiary undertakings will continue to be prepared under UK GAAP, the introduction of IFRS will not affect GPE's distributable reserves. Accordingly, the dividend policy of the Group is not affected by the introduction of IFRS. Taxation As the financial statements of GPE and each of its subsidiary undertakings will continue to be prepared under UK GAAP, the introduction of IFRS will have no impact on the taxation status or tax payments of the Group. Contact: Great Portland Estates plc John Whiteley Finance Director 020 7612 1434 Finsbury Edward Orlebar 020 7251 3801 Gordon Simpson 020 7251 3801 This information is provided by RNS The company news service from the London Stock Exchange