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 which the Directors consider to be appropriate for the reasons outlined below.
As a precaution against an extended lockdown, the Group increased its available banking facilities by £100m in April 2020. As a result, the Group has a £350m Revolving Credit Facility (RCF) (2019: £250m) provided by an established syndicate of six banks being Barclays Bank PLC, Lloyds Bank Plc, The Royal Bank of Scotland Plc, Santander UK PLC, HSBC UK Bank PLC and Svenska Handelsbanken AB (PUBL). This expires in December 2022 and is a committed unsecured facility. No change to the RCF covenants was made as a result of the increase to £350m. As at 15 September 2020, £260m of this facility was undrawn. It is likely that the RCF will be renewed prior to its expiry in December 2022.
In addition the Group has a further £13m of committed, unsecured facilities also expiring in December 2022 and £3m of unsecured, uncommitted facilities.
The Group also gained eligibility as an issuer for the Government’s COVID Corporate Funding Facility (CCFF) with an issuer limit of £300m. Given the timely return to work and the effectiveness of measures to protect its cash flow, the Group has not used the CCFF and our forecasts do not assume the utilisation of this facility.
In the interests of cash conservation the Board took the decision not to pay the interim dividend due to be paid in April 2020 and no final dividend for financial year 2020 will be paid.
The Directors have prepared forecasts including cashflow forecasts for a period of 26 months from the date of approval of these financial statements to 30 December 2022. These forecasts indicate that the Group will have sufficient funds to meet its liabilities as they fall due, taking into account the following severe but plausible downside assumptions:
- A 20% price reduction on all unexchanged private legal completions for FY21 and a 10% price reduction on all unexchanged social legal completions for FY21;
- A 10% price reduction on all unexchanged private legal completions for FY22 and a 5% price reduction on all unexchanged social legal completions for FY22;
- FY23 legal completions at May 2020 budgeted prices; and
- A reduction in sales rate to 0.4 per budgeted active outlet per week from July 2020 to Sept 2021, representing a 43% reduction from average rates over the last three years.
These downside assumptions reflect the further potential impact of COVID 19 being increased economic uncertainty, further Government lockdown restrictions and increasing rates of unemployment and consumer confidence levels.
Allowing for the above downside scenario, the model shows the Group has adequate levels of liquidity from its committed facilities and complies with all its banking covenants throughout the forecast period. The Directors therefore consider that the Group has adequate resources in place for the forecast period and have therefore adopted the going concern basis of accounting in preparing these financial statements.
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 and apart from a change in accounting policy in respect of Inventories. Inventories were previously stated net of cash on account (payments on account from social and private rented sector customers). These payments are now disclosed in Trade and Other payables and the 2019 comparatives have been restated.
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 2019:
IFRS 16 'Leases'
- IFRS 16 'Leases' became effective for accounting periods beginning on or after 1 January 2019. IFRS 16 requires lessees to recognise a lease liability reflecting future lease payments and a ‘right of use asset’ for virtually all lease contracts. 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 applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17. The right of use asset at the date of transition was equal to the lease liability of £8m.
b) The following standards have been issued but have not been applied by the Group in these financial statements. These amendments to standards and interpretations had no significant impact on the financial statements:
- IFRIC 23 ‘Uncertainty over Income Tax Treatments’
- Amendments to IFRS 4 ‘Insurance Contracts’
- Amendments to IFRS 9 ‘Financial Instruments’
- Amendments to IAS 28 ‘Investments in Associates and Joint Ventures’
- Amendments to IAS 19 ‘Plan Amendment, Curtailment or Settlement’
c) The following new standards and amendments to standards have been issued but are not effective for the financial year beginning 1 July 2019 and have not been early adopted:
- Amendments to IFRS 3 ‘Definition of a Business’
- Amendments to IAS 1 and IAS 8 ‘Definition of Material’
- IFRS 17 ‘Insurance Contracts‘
- Amendments to IAS 1 ‘Classification of Liabilities as Current or Non-current’
- Amendments to IFRS 9, IAS 39 and IFRS 17 ‘Interest Rate Benchmark Reform’
- Various standards Amendments to References to the Conceptual Framework in IFRS Standards
The amendments to standards and interpretations noted above are expected to have no significant impact on the financial statements.
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 28 June 2020 (2019: 30 June 2019).
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 cash and non-cash incentives. 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.
Certain sales of social housing units comprise two separate contracts, one for the sale of land (once foundations are in place, otherwise known as ‘Golden brick’) and the other on completion of the buildings. There is a judgement as to whether a) the sale of land is a separate performance obligation for the purposes of revenue recognition and b) whether revenue should be recognised over time or on a point in time basis. The Group has determined that the land and building contracts comprise one performance obligation which is recognised at a point in time, being completion of the social housing units. In making this judgement the Directors note that this is a prudent basis of revenue recognition but mindful of evolving practice in the sector will keep this policy under review. If the land was identified as a separate performance obligation, the construction of the building on that land would meet the criteria for revenue recognition over time, accelerating revenue and related margin.
The impact of treating the land and buildings as separate performance obligations and/or recognising revenue on an over time basis would not be material in either the current or prior year.
Profit is recognised on legal completion.
Part Exchange Properties
Part exchange is consistently a de minimis proportion of our business. It is incidental to our main operation and hence this is shown on a net expense basis within cost of sales.
The main operation of the Group is focused on housebuilding. The Executive Management Team (who are the Chief Operating Decision Maker as defined in IFRS 8 'Operating Segments') regularly reviews the Group's performance and balance sheet position at both a consolidated and divisional level. Each division is an operating segment as defined by IFRS 8 in that the Executive Management Team evaluates performance and allocates resources at this level.
All the divisions have been aggregated into one reporting segment on the basis that they all operate entirely within the United Kingdom and share similar economic characteristics including:
• sales demand subject to the same macro economic factors eg. mortgage availability and Government policy;
• debt is raised centrally and the cost of capital is the same at each division; and
• national supply agreements for key inputs such as materials are negotiated centrally and in place across the Group
Within the Operating Review, the Group has provided information on land holdings (page 14) and homes revenue proportions (page 19) by geographical area being North, Central, South and Greater London. The Executive Management Team do not consider these to be separate reportable segments because, as stated above, they review the whole operations at a consolidated and divisional level when assessing performance and allocating resources.
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.
At the inception of a contract, the Group assesses whether a contract is, or contains, a lease.
The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's weighted average incremental borrowing rate. The lease term comprises the non-cancellable period of the contract, together with periods covered by an option to extend the lease where the Group is reasonably certain to exercise that option. The lease liability is measured by increasing the carrying amount to reflect interest on the lease liability, and reducing it by the lease payments made. The lease liability is remeasured when the Group changes its assessment of whether it will exercise an extension or termination option.
The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low value assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
The Company presents right-of-use assets separately as 'Lease right of use assets' and lease liabilities as 'Trade and other payables' in the statement of financial position.
Inventories are stated at the lower of cost and net realisable value.
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. Inventories (excluding land) are at standard cost. Abnormal costs are expensed to cost of sales as incurred.
Land includes refundable land contract exchange deposits.
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.
The Group enters into a number of arrangements for the purchase of land. Where such arrangements are conditional on a future event the Group recognises option fees and other initial costs as they fall due, which are included initially in inventory and subject to regular impairment analysis, but does not recognise the full cost of the land until the option to purchase the land has been executed. Where the Group enters into an unconditional contract on deferred payment terms the land purchased is recognised at contract inception together with a related liability, discounted at an appropriate rate. The related land creditors are shown as due within or after one year in line with the contractual payment terms, as the Directors believe this information is important in assessing the Group’s liquidity and timing of future cash flows and debt profile. In line with industry practice in the cash flow statement the settlement of land creditors is shown as an operating cash flow as the Directors believe the financing of land purchases is integral to the Group’s management of working capital.
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, having reassessed any appropriate service and non-marked performance conditions.
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.
Deferred payments arising from land creditors are considered as financing rather than operational in nature. However, in line with industry practice, the Group treats cash paid in respect of land, including land creditors, as operating rather than financing cashflows.
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, where considered to be receivable within the Group's normal operating cycle of c4 years after the balance sheet date; otherwise they are classified as non-current assets. Loans and receivables include ‘trade receivables’ and ‘other receivables’ 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.
f. Deposits and payments on account
New property deposits from private customers are held within Trade and Other payables until the legal completion of the related property when revenue is recognised or the rescission of the sale contract.
Payments on account from social and private rented sector (PRS) customers are held within Trade and Other Payables until legal completion of the related properties when revenue is recognised.
Deposits received in advance are typically held for a period of up to 18 months before the associated performance obligations are satisfied and the revenue is recognised.
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 at the point at which there is a legal obligation to make a distribution to shareholders.