Basis of Preparation
Both the consolidated and Company financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and effective at 30 June 2018, and in accordance with IFRS Interpretations Committee interpretations and the Companies Act 2006 as it applies to companies reporting under IFRS and Article 4 of the IAS Regulation and in accordance with the historical cost convention as modified by the revaluation of derivative financial instruments.
The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the reporting period. Whilst these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates (refer to note 1).
The financial statements have been prepared on a going concern basis.
Redrow plc is a public listed company, listed on the London Stock Exchange and domiciled in the UK.
The principal accounting policies have been applied consistently other than for the effect of applying new standards.
The principal accounting policies are outlined below:
Impact of New Standards and Interpretations
a) New and amended standards adopted by the Group. The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 July 2018:
- IFRS 9 'Financial instruments'.
- IFRS 15 'Revenue from contracts with customers'.
- IFRS 9 'Financial instruments' came into effect for accounting periods beginning on or after 1 January 2018 and replaces IAS 39. It affects the classification, measurement, impairment and de-recognition of financial instruments. There is no material effect to the Group from applying IFRS 9.
- IFRS 15 'Revenue from contracts with customers' became effective for accounting periods beginning on or after 1 January 2018. This standard is a converged standard replacing IAS 18 'Revenue', IAS 11 'Construction Contracts' and a number of revenue related interpretations from the IASB and FASB. It establishes a comprehensive framework for determining how and when revenue is recognised. Under IFRS 15 there has been no change to the point of revenue recognition for the Group as the transfer of control and the contractual performance obligations are deemed satisfied on the legal completion of the homes or the built segment of homes in respect of certain Housing Association and Private Rented Sector contracts. The Group does not recognise revenue on the proceeds from the disposal of properties taken in part exchange against a new home. The net profit or loss on disposal is shown within gross profit. The gross proceeds and net profit/loss are immaterial. This treatment has not changed under IFRS 15 as the Group considers properties taken in part exchange to be incidental to its main activity and therefore outside the scope of IFRS 15.
b) The following new standards and amendments to standards have been issued but are not effective for the financial year beginning 1 July 2017 and have not been early adopted:
- IFRS 16 ‘Leases’. This standard replaces the current guidance in IAS 17 and is a far-reaching change in accounting by lessees in particular. Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 now requires lessees to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. The IASB has included an optional exemption for certain short-term leases and leases of low-value assets. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Group has a number of operating leases, mainly in relation to cars and some office properties, which will be required to be brought onto the balance sheet together with corresponding assets. IFRS 16 'Leases' will be effective for the Group from 1 July 2019. The Group intends to use the modified retrospective method to implement IFRS 16. Under this approach comparative information is not restated. Rather, at the date of the initial application of this standard, the Group will recognise the cumulative effect of initial application as an adjustment to the opening balance of equity as at 1 July 2019. This is not material with fixed assets and liabilities increasing by £8m and £8m respectively.
Basis of Consolidation
The consolidated financial statements incorporate the financial statements of Redrow plc and all its subsidiaries, together with the Group’s share of the results and share of net assets of jointly controlled entities i.e. the financial statements of Redrow plc and entities controlled by Redrow plc (and its subsidiaries). Control is achieved where Redrow plc has the power to govern the financial and operating policies of an entity. Redrow plc’s accounting reference date is 30 June. Consistent with the normal monthly reporting process, the actual date to which the balance sheet has been drawn up is 30 June 2019 (2018: 1 July 2018). For ease of reference, all references to the year or 12 months and financial position are for the year ended 30 June and as at 30 June.
The Group has taken advantage of the exemption provided under Section 408 of the Companies Act 2006 not to present Redrow plc’s Company income statement. The profit for the financial year is dealt with in the statement of changes in equity.
Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair value at the date of acquisition. Any excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets represents goodwill. Goodwill is subject to an annual impairment review, with any reduction in value being taken straight to the income statement. Adjustments are made as necessary to the financial statements of subsidiaries to ensure consistency with the policies adopted by the Group.
All inter-company transactions and balances between Group companies are eliminated on consolidation.
b. Interests in joint ventures
The Group applies IFRS 11 to all joint arrangements. Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. Redrow plc has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method.
Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses and movements in other comprehensive income. When the Group’s share of losses in a joint venture equals or exceeds its interests in the joint ventures, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures.
Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interest in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Revenue and Profit Recognition
Revenue represents the fair value received and receivable in respect of the sale of residential housing and land and of commercial land and developments net of value added tax and discounts. This is recognised on the transfer of control to the customer on legal completion.
In respect of social housing, the Group enters into contracts for the sale of social housing either at an agreed price or at a discount to open market value. Payment for these properties is made by the purchaser, either on legal completion of the unit or, in certain circumstances on a staged basis. Revenues in all cases are recognised on the transfer of control to the customer on legal completion of the built segment of homes.
Profit is recognised on legal completion.
The main operation of the Group is focused on housebuilding.
As it operates entirely within the United Kingdom, the Group has only one business and geographic segment. This is consistent with the information provided for internal reporting purposes to the Chief Operating Decision Maker (the Board). The Group has no key customers.
Exceptional items are those which in the opinion of the Board, are material by size or nature, non-recurring and of such significance that they require separate disclosure.
Net Financing Costs
Interest income is recognised on a time apportioned basis by reference to the principal outstanding and the effective interest rate. Interest costs are recognised in the income statement on an accruals basis in the period in which they are incurred.
Income and Deferred Tax
Income tax comprises current tax and deferred tax.
Current tax is based on taxable profits for the year and any appropriate adjustment to tax payable in respect of prior years. Taxable profit differs from profit before tax as shown in the income statement as it excludes income or expenditure items which are never chargeable or allowable for tax or which are chargeable or deductible in other accounting periods.
Deferred tax is provided in full, using the balance sheet liability method, on temporary differences arising between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the calculation of taxable profit.
Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax liabilities are recognised for all temporary differences. Deferred tax is calculated at the rates enacted at the balance sheet date.
Deferred tax is credited or charged in the income statement, consolidated statement of comprehensive income, or retained earnings as appropriate.
Intangible Assets - Computer Software
Acquired computer software licences are capitalised on the basis of costs incurred to bring to use the specific software and are amortised over their estimated useful lives of three years, charged to administrative expenses. These are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable.
Property, Plant and Equipment
Freehold property comprises offices or other buildings held for administrative purposes. Freehold property is shown at cost less the subsequent depreciation of buildings.
All other property, plant and equipment is stated at historic cost less depreciation. Historic cost includes any costs directly attributable to bringing the assets to the location and condition necessary for them to be capable of operating in the manner intended by management.
Land is not depreciated. Depreciation on other assets is charged so as to write off the cost of assets to their residual values over their estimated useful lives, on a straight line basis as follows:
|Buildings within freehold property||50 years|
|Plant and machinery||5–10 years|
|Fixtures and fittings||3–5 years|
The assets’ useful lives are reviewed and adjusted if appropriate at each balance sheet date.
These are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable.
The gain or loss arising on the disposal of an asset represents the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.
Investment in Subsidiary Companies
In the parent company books, the investment in its subsidiaries is held at cost less any impairment.
Leases in which substantially all of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Rentals payable under operating leases are charged to work in progress or income on a straight line basis over the term of the relevant lease.
Inventories are stated at the lower of cost and net realisable value less cash on account (which represents payments made against work in progress, excluding private customer deposits).
Cost comprises land and associated acquisition costs, direct materials and subcontract work, other direct costs and those overheads (based on normal operating capacity) that have been incurred in bringing the inventories to their present location and condition, excluding borrowing costs. These include infrastructure and development costs such as roads and sewers, including contributions to other community benefits such as schools, medical centres and community centres.
Total land costs are allocated to the private housing on a development as, in the case of amenity land and social housing land, neither has sufficient contribution from sales of the precise area of the land to cover the land costs and are a planning requirement of the development.
Provisions are established to write down land where the estimated net sales proceeds less costs to complete exceed the current carrying value. Adjustments to the provisions will be required where selling prices or costs to complete change.
Net realisable value for land was assessed by estimating selling prices and cost (including sales and marketing expenses), taking into account current market conditions.
This net realisable value provision will be closely monitored for adequacy and appropriateness as regards under and over provision to reflect circumstances at future balance sheet dates. Any material change to the underlying provision will be reflected through cost of sales as an exceptional item.
Expenditure relating to forward land options, conditional contracts and land owned without planning is initially recognised in inventory at cost. It is reviewed regularly for impairment.
a. Pension obligation
The Group operates two pension schemes for its staff. The Redrow Staff Pension Scheme (the ‘Scheme’) closed to the accrual of new benefits with effect from 1 March 2012, with new benefits now being provided via the Redrow Group Personal Pension Plan (the ‘GPP’). The Scheme is externally invested and comprises two sections: a defined benefit section and a defined contribution section. A defined benefit plan is a pension plan which defines an amount of pension benefit that an employee will receive on retirement. It is funded through payments to trustee administered funds, determined by actuarial valuations carried out on at least a triennial basis. A defined contribution plan is a pension plan under which the Group pays agreed contributions into a separate fund for each employee and any subsequent pension payable to a specific employee is determined by the amount accumulated in their individual fund. The GPP is also a type of defined contribution plan.
The asset/(liability) recognised in the balance sheet in respect of the defined benefit section of the scheme is the present value of the defined benefit obligation at the balance sheet date, less the fair value of plan assets. The defined benefit obligation is determined using the projected unit credit method on an annual basis by an independent scheme actuary.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity as they arise in full via the statement of comprehensive income.
Scheme service costs are charged to cost of sales and administrative expenses as appropriate and scheme finance costs are included in net financing costs. Past service costs are recognised immediately in income.
In respect of the defined contribution section of the Scheme and the GPP, contributions are recognised as an employee benefit expense when they are due. The Group has no further payment obligations in respect of the above once the contributions have been paid.
b. Bonus plans
The Group recognises a liability and an expense for bonuses where contractually obliged.
c. Share-based payments
Equity settled share-based payments are measured at fair value on the date of grant and expensed on a straight line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest.
d. Termination benefits
Termination benefits are payable when employment is terminated by the Group before normal retirement date by redundancy. These benefits are recognised by the Group in the period in which it becomes demonstrably committed to terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal.
a. Land creditors
Deferred payments arising from land creditors are held at discounted present value using the effective interest method, in accordance with IFRS 9. The difference between the fair value and the nominal value is amortised over the deferment period via financing costs.
The interest rate applied is an equivalent loan rate available on the date of the land purchase.
b. Derivative financial instruments and hedge accounting
Derivative financial instruments are initially recorded at fair value and the fair value is remeasured to fair value at each reporting date.
The Group’s use of financial derivatives is governed by an interest rate risk management framework adopted by the Board which sets parameters to ensure an appropriate level of hedging is maintained to manage interest rate risk in respect of borrowings.
The policy prohibits any trading in derivative financial instruments or their use for speculative purposes.
The effective portion of changes in the fair value of derivative financial instruments which are designated and which qualify as cash flow hedges are recognised directly in equity in a hedge reserve. The gains or losses relating to the ineffective portion are recognised in the income statement immediately they arise.
c. Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date which are classified as non-current assets. Loans and receivables include ‘trade receivables’ and ‘other receivables’ and cash and cash equivalents in the balance sheet.
Trade receivables are held at discounted present value less any impairment. The amount is then increased to settlement value over the settlement period via financing income.
d. Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand, forming an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
e. Borrowings and trade payables
Interest bearing borrowings and trade payables are recorded when the proceeds are received, net of transaction costs incurred and subsequently at amortised cost. Any difference between the proceeds, net of transaction costs and the redemption value is recognised in the income statement over the period of the borrowings.
New property deposits from private customers are held within Trade and Other payables until the legal completion of the related property or the rescission of the sale contract.
Onerous contracts are contracts in which the unavoidable costs in meeting the obligations under the contract exceed the economic benefits expected to be received under it. Provision is made to reflect management’s best current estimate of the least net cost of either fulfilling or exiting the contract.
Ordinary shares are classed as equity.
Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are declared.