Warner Estate Holdings plc : Annual Financial Report

Warner Estate Holdings PLC

Warner Estate Holdings PLC ("Warner Estate" or "Group"), the property investment and management company has today announced its results for the year ended 31 March 2013.

Performance Summary

·     Total revenue £16.6million (2012: £29.5million). Revenue from continiung operations £8.2million (2012: £8.8million)

·     Total loss before income tax £37.4million (2012: £38.7million loss).

Key Business Events

·      Consensual appointment of joint fixed charge receivers in Warner Estate Investments Limited and Warner Estate Development (Folkestone) Limited to dispose of certain secured property assets to maxmise the return to the lender.

·      Consensual appointment of independent directors and managers in JSE Developments Limited to dispose of the remaining three secured property assets on behalf of the lender.

·      Disposal of 50% equity interest in Agora Shopping Centres Limited, completing the divestment programme of the Group's property investment joint ventures.

Date:  29 July 2013

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Chairman's Statement

The Group's primary focus continues to be negotiations with its lenders, and other key stakeholders, regarding options to realise value for the security still held by those lenders over the asset management business and units in the Ashtenne Industrial Fund, thus providing continuity of asset management services to the funds it manages. The options being discussed would not realise enough value to repay the outstanding debt in full.  As reported over the last year during these negotiations, the Group remains reliant on the continuing support of its lenders, and other key stakeholders, and the outcome of the negotiations will determine the Group's future.

As previously announced the Board believes that there is little or no value to existing shareholders whatever the outcome of these negotiations.

Financing Negotiations and Going Concern

As announced on 20 June 2013, following the completion of a consensual disposal programme with one of its lenders, the Group has reached a mutually satisfactory agreement to release the relevant borrowing Group subsidiary from all of its obligations to that lender including its outstanding debt and interest of £23.2m. This amount is currently included within the group statement of financial position as at 31 March 2013.

The Group's remaining two facilities matured on 31 December 2012 and, as previously anticipated, the Group was unable to meet its repayment obligations at that date.  The lenders have reserved their rights whilst negotiations continue but there can be no certainty as to the final outcome.

As reported at the Half Year the Directors have relinquished control of the Group's remaining property assets to either fixed charge receivers or third party managers.  The Directors have concluded that the assets and liabilities of these subsidiaries should be derecognised in accordance with IAS 27 and the results for the period classified on the consolidated income statement as discontinued operations.

Although the Group has net liabilities the Board is satisfied that, following a review of appropriately stress tested cash flow forecasts and subject to the satisfactory outcome of negotiations with the lenders and other stakeholders, and the continued support of these parties and certain other creditors, the Group will be able to meet its liabilities as and when they fall due for the foreseeable future.  These cash flow forecasts are based on a number of assumptions as set out in Note 1 to the financial statements.  At certain points over the coming months and beyond, the level of cash held by the business will be low and headroom will be marginal. 

Having taken all the above matters into account, together with the key business risks and material uncertainties set out in Note 1 to the financial statements and the status of the ongoing negotiations with the Group's lenders and other stakeholders, the Directors have concluded that, whilst material uncertainties regarding the Group's future exist, which may cast significant doubt over the ability of the Group to continue as a going concern, it remains appropriate to prepare the financial statements on a going concern basis. Accordingly, the consolidated financial statements do not include the adjustments that would result from a failure to remain a going concern.

Results Overview

Asset management income continues to reduce due to the disposal of assets under management and falling gross asset valuations.  Overall the Group made a post tax loss of £37.4million (March 2012: £38.7million loss) made up of £13.5million of losses arising from the discontinued property investment business, a £9.6million fall in the value of investments in the Ashtenne Industrial Fund and the Apia Regional Office Fund, a £0.2milllion fall in the value of unlisted investments, a £14.7million decrease in the fair value of the financial guarantee contract, further explained below, £0.3million relating to impairment of goodwill, a £0.1million asset management operating loss and £1.0 million of finance income relating to investments in funds.

Group borrowings have been reduced to £50.2million (March 2012: £232.9million) as a result of the disposal of investment properties and derecognising debt, although a financial guarantee contract of £53.2million has been provided for as per note 26 to the financial statements.  The financial guarantee contract is the fair value of those liabilities and assets of which the Directors lost control on the appointment of fixed charge receivers on 17 August 2012 and of independent directors and managers on 19 March 2013.  On 23 May 2013, following the year end, the Directors lost control, through the appointment of independent directors, of the subsidiary holding the Group's investment in the Apia Regional Office Fund.  This reduces, on the Group's Statement of Financial Position, the value of investments in funds and decreases the exposure under the financial guarantee contract by £13.4million.  The net cash outflow for the year was £8.4million primarily arising from repayment of bank debt and interest paid in the period.

There will be no payment of a dividend (March 2012: £Nil).

Assets under Management

Assets under management have declined to £593million (March 2012: £1,033million).

Outlook

The Group's objective is to continue to review options to realise value for its lenders and to provide continuity of asset management services to the funds it manages.  The viability of the asset management business is dependent on the continuing support of its lenders and other key stakeholders, the timing and quantum of management fee income and the implementation of further cost savings.

Philip Warner

Chairman

Consolidated Income Statement

For the year ended 31 March 2013

Consolidated Statement of Comprehensive Income

For the year ended 31 March 2013

Statement of Financial Position

As at 31 March 2013

Statement of Changes in Equity

For the year ended 31 March 2013

Statement of Changes in Equity

For the year ended 31 March 2013

Cash Flow Statements

For the year ended 31 March 2013

Notes to the financial statements

1.       Accounting Policies

Basis of preparation

The Financial Statements comprise the consolidated financial statements of Warner Estate Holdings PLC ("the Group") for the year ended 31 March 2013 and have been prepared in accordance with International Financial Reporting Standards ("IFRS") and International Financial Reporting Interpretation Committee ("IFRIC") interpretations endorsed by the European Union ("EU") and with those parts of the Companies Act 2006 ("The Act") applicable to companies reporting under IFRS. The basis of accounting and format of presentation is subject to change following any further interpretative guidance that may be issued by the International Accounting Standards Board ("IASB") and IFRIC from time to time.

The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain assets and liabilities, which are carried at fair value, and in accordance with those IFRS standards and IFRIC interpretations issued and effective as at the time of preparation.

The parent company's financial statements have also been prepared in accordance with IFRS, as applied in accordance with the provisions of the Act. The Directors' have taken advantage of the exemption offered by Section 408 of the Act not to present a separate statement of comprehensive income for the parent company.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the Group's accounting policies. Although these estimates are based on management's best knowledge of the amount, events or actions, actual results ultimately may differ from those estimates.

Going concern

The Group's primary focus continues to be negotiations with its lenders, and other key stakeholders, regarding options to realise value for the security still held by those lenders over the asset management business and units in the Ashtenne Industrial Fund, thus providing continuity of asset management services to the funds it manages. The options being discussed would not realise enough value to repay the outstanding debt in full.  As reported over the last year during these negotiations, the Group remains reliant on the continuing support of its lenders, and other key stakeholders, and the outcome of the negotiations will determine the Group's future.

These financial statements have been prepared on a going concern basis which assumes that a solution will be agreed with the Lenders to resolve the Group's net liability position and the inability of the Group to meet repayment obligations following the maturity of the debt facilities on 31 December 2012. These conditions indicate the existence of a material uncertainty related to events or conditions which may cast significant doubt over the Group's and Company's ability to continue as a going concern and therefore that it may be unable to realise its assets and discharge its liabilities in the normal course of business.

As announced on 20 June 2013, following the completion of a consensual disposal programme with one lender, the Group has reached a mutually satisfactory agreement to release the relevant borrowing Group subsidiary from all of its obligations to that lender including its outstanding debt and interest of £23.2m. This amount is currently included within the group statement of financial position as at 31 March 2013.

The Board is satisfied, following a review of appropriately stress tested cash flow forecasts that, subject to the satisfactory outcome of negotiations with the remaining Lenders and the continued support of the Lenders and certain other creditors, the Group will be able to meet its liabilities as and when they fall due for the foreseeable future.  These cash flow forecasts, based on a number of assumptions, project that the level of cash held by the business will be low and headroom will be marginal, however, the directors believe that the ongoing asset management business can continue to trade into the foreseeable future.

Having taken into account these key assumptions, business risks and uncertainties and the status of the ongoing negotiations with the lenders and other key stakeholders, the Directors have concluded that, whilst the above material uncertainties exist which may cast significant doubt over the ability of the Group to continue as a going concern, it remains appropriate to prepare the financial statements on a going concern basis. Accordingly, the financial statements do not include the adjustments that would result from a failure to remain a going concern.

Standards, interpretations and amendments to published standards that became effective during the year

The following standards and interpretations have become mandatory for the Group during the current accounting period but have not had a material impact on the Group:

· IAS 1 (amendment) 'Financial statement presentation'

· IAS 19 (amendment) 'Employee benefits'

· IFRS 1 (amendment) 'First time adoption'

· IFRS 7 (amendment) 'Financial instruments: Disclosures'

· IFRS 13 'Fair value measurements'

· IFRIC 20 'Stripping costs in the production phase of a surface mine'

Standards, interpretations and amendments to published standards that are not yet effective

The following accounting standards or interpretations are not yet effective and are not expected to have a material impact on the Group. None of

these accounting standards or interpretations has been early adopted by the Group.

· IAS 27 (revised) 'Separate financial statements'

· IAS 28 (revised) 'Associates and joint ventures'

· IAS 32 (amendment) 'First time adoption'

· IFRS 9 'Financial instruments'

· IFRS 10 'Consolidated financial statements'

· IFRS 11 'Joint arrangements'

· IFRS 12 'Disclosure of interests in other entities'

Consolidation

(a)           Subsidiary undertakings

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights.

The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date control ceases.  All inter-company transactions, balances and gains on transactions between Group companies are eliminated upon consolidation. Uniform accounting policies have been adopted across the Group.

On 17 August 2012, joint fixed charge receivers were appointed over the assets of Warner Estate Investment Limited and Warner Estate Development (Folkestone) Limited. The joint fixed charge receivers are responsible for the financial and operating policies of the companies, in order to realise value through the disposal of the assets. This has resulted in a loss of control by the Group and in accordance with IAS 27 'Consolidated and Separate Financial Statements', the assets and liabilities have been derecognised from the consolidated financial statements. The comprehensive income and cash flows to 17 August 2012 have been presented in discontinued operations, as required by IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations'.

On 19 March 2013 control of JSE Developments Limited was ceded to one of the lenders, as an alternative to them exercising their right to appoint a fixed charge receiver. The previous directors resigned from the company and were replaced by appointees of the lender with the objective of disposing of the remaining assets. In accordance with IAS 27 'Consolidated and Separate Financial Statements', the assets and liabilities have been derecognised from the consolidated financial statements. The comprehensive income and cash flows to 19 March 2013 have been presented in discontinued operations, as required by IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations'.

In accordance with IFRS 5, the Group classifies subsidiaries within a disposal group where they are held available for sale or if the business assets and liabilities within the entities are subject to a programme of divestment and cessation. A disposal group is measured at the lower of its carrying amount at initial recognition and its fair value less costs to sell.

(b)           Interests in joint ventures

Interests in jointly controlled entities are accounted for using the equity method.  Unrealised gains and losses on transactions between the Group and its joint ventures are eliminated to the extent of the Group's interest in the joint ventures.  The Group's share of profit of joint ventures represents the Group's share of the joint venture's profit after tax. Joint ventures with net liabilities are carried at Nil value in the statement of financial position where there is no commitment to fund the deficit.

Segment reporting

Segmental information is disclosed in the notes to the financial statements reflecting management reporting of financial performance and position as used in operational decision making. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the board that makes strategic decisions.

Plant and equipment

Plant and equipment is initially measured at cost.  After initial recognition, it is carried at cost less subsequent depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that the future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the consolidated statement of income during the financial period in which they are incurred.

Plant and equipment is depreciated by equal annual instalments over their estimated useful lives and are carried at historic cost less accumulated depreciation.The Group estimates a useful life of 3 years for computer equipment and 8 years for other fixtures and fittings.

Where the carrying amount of an item of plant and equipment is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.  Recoverable amount is the higher of fair value less costs to sell and value in use and is determined for an individual asset.  After initial recognition, the item is carried at its cost less any accumulated depreciation and any accumulated impairment losses.

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date.

Goodwill

Business combinations are accounted for by applying the purchase method.  The excess of the cost of the business combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities, recognised in accordance with IFRS 3, Business Combinations, constitutes goodwill, and is recognised as an asset.  After initial recognition, goodwill is measured at cost less any accumulated impairment losses, until disposal or termination of the previously acquired business (including planned disposal or termination where there are indications that the value of the goodwill has been permanently impaired), when the profit or loss on disposal or termination will be calculated after charging the book amount of any such goodwill through the consolidated income statement. 

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To the extent that the carrying amount exceeds the recoverable amount, which is the higher of net realisable value and value in use, the asset is written down to its recoverable amount. Any impairment is recognisedin the consolidated income statement and is not subsequently reversed. Net realisable value is the estimated amount at which an asset can be disposed of, less any direct selling costs.

Value in use is the estimate of the discounted future cash flows generated from the asset's continued use, including those resulting from its ultimate disposal. For the purposes of assessing value in use, assets are grouped into cash generating units which represent the lowest levels for which there are separately identifiable cash flows.

Investment properties

(a)           Initial recognition

Property that is held for long-term rental yields or for capital appreciation or both, and that is not occupied by the Group, is classified as investment property.

Investment property comprises freehold land, freehold buildings, land held under operating leases and buildings held under finance leases. When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property remains an investment property and is accounted for as such.

Property that is being constructed or developed for future use as investment property, but which has not previously been classified as such, is classified as property under the course of development. This is recognised at fair value.  Interest is capitalised (before tax relief) on the basis of the average rate of interest paid on the relevant debt outstanding until the date of practical completion.  On completion the property is transferred to investment property.

Land held under operating leases is classified and accounted for as investment property when the rest of the definition of investment property is met. In such cases, the operating lease is accounted for as if it were a finance lease.

Investment property is measured initially at its cost, including related transaction costs.

(b)           Fair value

After initial recognition, investment property is carried at fair value. Fair value is based on active market prices, adjusted, if necessary, for any difference in the nature, location or condition of the specified asset. These valuations are reviewed at each financial reporting period end by the Directors.  Investment property that is being redeveloped for continuing use as investment property, or for which the market has become less active, continues to be measured at fair value.

The fair value of investment property reflects, among other things, rental income from current leases and assumptions about rental income from future leases in the light of current market conditions.

The fair value also reflects, on a similar basis, any cash outflows that could be expected in respect of the property.

Some of those outflows are recognised as a liability, including finance lease liabilities in respect of land classified as investment property; others, including contingent rent payments, are not recognised in the financial statements, unless they qualify as a provision.

(c)            Subsequent expenditure

Subsequent expenditure is charged to the asset's carrying amount only when it is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the cost of the item can be measured reliably. All repairs and maintenance costs are charged to the consolidated income statement during the financial period in which they are incurred.  Gross borrowing costs associated with direct expenditure on properties under development or undergoing major refurbishment are capitalised.  With specific developments, the amount capitalised is the gross interest incurred on those borrowings less any investment income arising on their temporary investment.  Interest is capitalised as from the commencement of the development work until the date of practical completion. The capitalisation of finance costs is suspended if there are prolonged periods when development activity is interrupted. Interest is also capitalised on the purchase cost of a site or property acquired specifically for redevelopment in the short term but only where activities necessary to prepare the asset for redevelopment are in progress.

(d)           Changes in fair value and transfers

Changes in fair values are recorded in the consolidated income statement for investment properties.

If an investment property becomes owner-occupied, it is reclassified as property, plant and equipment, and its fair value at the date of reclassification becomes its cost for accounting purposes. 

Investment properties classified as held for sale

Investment properties are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. In accordance with IFRS 5, assets already carried at fair value with changes in fair value recognised in profit or loss are excluded from the measurement requirements of the IFRS. Therefore, these assets have been accounted for using the fair value model in IAS 40 as prescribed above.

Cash and cash equivalents

Cash and cash equivalents comprises cash balances, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.  Cash and cash equivalents are categorised as loans and receivables.  Bank overdrafts that are repayable on demand and form 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.  Bank overdrafts are disclosed in current and non-current liabilities.

Employee benefits

The Group accounts for pensions under IAS 19 'Employee Benefits'. In respect of the defined benefit pension scheme, obligations are measured at discounted present value while scheme assets are measured at their fair value.

The operating and financing costs of this plan are recognised separately in the consolidated statement of comprehensive income. Service costs are spread systematically over the working lives of the employees concerned with the charge for the period included in operating costs in the consolidated statement of comprehensive income.

Financing costs are recognised in the periods in which they arise and are included in interest expense. Actuarial gains and losses arising from either experience differing from previous actuarial assumptions or changes to those assumptions are recognised immediately in the consolidated statement of comprehensive income.

Contributions to defined contribution schemes are expensed as incurred.

Income taxes

The investment property segment of the Group's business is subject to the Real Estate Investment Trust ("REIT") taxation regime and is therefore exempt from tax. To retain group REIT status, several tests have to be met and certain ongoing criteria must be maintained. The main criteria are as follows:

· at the start of each accounting period, the assets of the tax exempt business must be at least 75% of the total value of the Group's assets;

· at least 75% of the Group's total profits must arise from the tax exempt business; and

· at least 90% of the profit of the property rental business must be distributed.

The Directors intend that the Group should continue as a group REIT for the foreseeable future, with the result that deferred tax is no longer recognised on temporary differences relating to the property rental business.

The asset management segment of the business continues to be subject to tax.

The charge for current taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed.  It is calculated using rates that have been enacted or substantively enacted by the statement of financial position date.  Tax payable upon realisation of fair value gains recognised in prior periods is recorded as a current tax charge with a release of the associated deferred tax.

Deferred tax is provided using the statement of financial position liability method in respect of temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in computation of taxable profit with the exception of deferred tax on fair value gains where the tax basis used is the historic cost.  Provision is made for temporary differences between the carrying value of assets and liabilities in the consolidated financial statements and the values used for tax purposes.  Temporary differences are not provided for when they arise from initial recognition of assets and liabilities that do not affect accounting or taxable profit.

When distributions are controlled by the Group, and it is probable the temporary difference will not reverse in the foreseeable future, deferred tax which would arise on the distribution of profits realised in subsidiaries, associates and joint ventures is not recognised.

Deferred tax is determined using tax rates that have been enacted or substantially enacted by the statement of financial position date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.  It is recognised in the consolidated income statement except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred tax assets and liabilities are offset only when they relate to taxes levied by the same authority, with a legal right to set off and when the Group intends to settle them on a net basis.

Financial guarantee contract

In accordance with IAS 39 'Financial Instruments: Recognition and Measurement', a financial guarantee contractis defined as a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.  A financial guarantee contract is initially recognised at fair value and subsequently remeasured in accordance with IAS 37 ' Provisions, Contingent Liabilities and Contingent Assets'.

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated.

(a)           Onerous contracts

Provision is made in respect of costs incurred on vacant leasehold properties or for leasehold properties sublet at a level which renders the properties loss-making over the length of the lease, being the net cash outflow committed to be incurred over the lives of the leases.  Any increase or decrease in the provision is taken to the consolidated income statement for each financial period.  The provision is assessed on a property by property basis taking account of individual cash flows. Cash flows are discounted using the risk free rate.

(b)           Dilapidations

Where the Group, as lessee, is contractually required to restore a leased property to an agreed condition, prior to release by a lessor, provision is made for such dilapidation costs as they are identified.

Share-based payments

The cost of granting share options and other share based remuneration to employees and directors is recognised through the consolidated income statement with reference to the fair value at the date of the grant.  The Group has used the Black-Scholes option valuation model and a stochastic model to establish the relevant costs.  The resulting values are amortised through the consolidated income statement over the vesting period of the options and other grants.  The charge is reversed if it appears probable that applicable performance criteria will not be met.

Own shares held in connection with employee share plans or other share based payment arrangements are treated as treasury shares and deducted from equity.  No profit or loss is recognised in the consolidated income statement on their sale, re-issue or cancellation.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and is stated net of sales taxes and value added taxes. Revenue includes 'Rental and similar income', 'Service charge and similar income' and 'Revenue from asset management activities'. Revenue is recognised as follows:

(a)           Rental and similar income

Rental income from operating lease income is recognised on a straight-line basis over the lease term.

When the Group provides incentives to its customers, the cost of incentives are recognised over the lease term, on a straight-line basis, as a reduction of rental income.

(b)           Service charge and similar income

Service and management charge income is recognised on a gross basis in the accounting period in which the services are rendered.  Where the Group is acting as an agent, the commission rather than gross income is recorded as revenue.

(c)            Revenue from asset management activities

Management fees earned are calculated on an accruals basis.  Asset management income is recognised in the accounting period in which the services are rendered.

Performance fees are recognised, in line with the asset management contracts, at the end of the performance period to which they relate, based on the outperformance of relevant benchmarks.  The performance period is normally three years.  Where performance subsequently falls short of these benchmarks, fees are repayable, up to the amount received for the previous two years.  Where there is a reasonable likelihood that part of a performance fee will be repaid the estimated repayment will not be recognised until the outcome can be reliably estimated.

Other income

(a)          Income from investments

Dividend income from investments is recognised when the shareholders' rights to receive payment have been established.Distribution income from funds is recognised on an accruals basis.

(b)           Gains / losses from property disposals

Profits or losses arising from the sale of trading and investment properties are included in the consolidated income statement of the Group where an exchange of contracts has taken place under which any minor outstanding conditions not affecting the transfer of risks and rewards are entirely within the control of the Group.  Profits or losses arising from the sale of trading and investment properties are calculated by reference to their carrying value and are included in operating profit.

(c)            Other interest income

Other interest income is accrued on a time basis, by reference to the principal outstanding and the effective interest rate.

Leases

(a)           A Group company is the lessee

(i)            Operating lease - leases in which substantially all risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. Payments, including prepayments, made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight-line basis over the period of the lease.

(ii)           Finance lease - leases of assets where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease commencement date at the lower of the fair value of the leased property and the present value of the minimum lease payments. The investment properties acquired under finance leases are carried at their fair value.

The corresponding rental obligations, net of finance charges, are included in current and non-current borrowings. The interest element of the finance cost is charged to the consolidated income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

(b)           A Group company is the lessor

(i)            Operating lease - properties leased out under operating leases are included in investment properties and investment properties classified as held for sale in the consolidated statement of financial position.

(ii)           Finance lease - when assets are leased out under a finance lease, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable accrues as finance income. Lease income is recognised over the term of the lease using the net investment method before tax, which reflects a constant periodic rate of return.

Financial instruments and hedging activities

Derivatives

The Group may use derivatives to help manage its interest rate risk. In accordance with its treasury policy, the Group does not hold or issue derivatives for trading purposes.

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.None of the derivatives currently held are designated as hedging instruments and accordingly any gain or loss is recognised in the consolidated income statement in the period in which it arises.

Hedge accounting

The Group's derivative financial instruments do not qualify for hedge accounting and changes in the fair value of derivative financial instruments are recognised in the consolidated income statement as they arise.

Financial assets

The Group classifies its financial assets in the following categories: financial assets at fair value through the profit and loss and loans and receivables.  There are no held-to-maturity investments and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and reviews this designation at each reporting date.

Purchases and sales of investments are recognised on the trade date; the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. 

(a)           Financial assets at fair value through the profit and loss

This category has two sub-categories: financial assets held for trading, and those designated at fair value through the profit and loss at inception. A financial asset is classified in the first category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also classified as held for trading unless they are designated as hedges. Assets in the second category are classified as current assets if they are expected to be realised within 12 months of the statement of financial position date.

Realised and unrealised gains and losses arising from changes in the fair value of the 'financial assets at fair value through the profit and loss' category are included in the consolidated income statement in the period in which they arise.

The fair values of listed investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models refined to reflect the issuer's specific circumstances. For unlisted investments in shares, fair value is based on underlying net assets. Changing the assumptions to other reasonably possible alternative assumptions would not change the fair value significantly. For investments in funds, fair value is measured as the unit price of the holding at the statement of financial position date.

(b)           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 arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. They are included in current assets, except for maturities greater than 12 months after the statement of financial position date. These are classified as non-current assets. Loans and receivables are included in trade and other receivables in the statement of financial position.

The Group assesses at each statement of financial position date whether there is objective evidence that a financial asset or a group of financial assets is impaired.

Trade and other receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment. A provision for impairment in trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The changes to the provision are recognised in the consolidated income statement.

Trade and other payables

Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

Investments in subsidiary undertakings

Investments in subsidiary undertakings are carried in the company's statement of financial position at cost less any provision for impairment.

Impairment

The carrying amounts of the Group's and Company's financial assets (where applicable) and non-financial assets, other than investment properties and investment properties classified as held for sale, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. An impairment loss is recognised in the consolidated income statement whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its fair value less costs to sell and its value in use. The value in use is determined as the net present value of the future cash flows expected to be derived from the asset, discounted using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Non-financial assets other than goodwill, which have suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversedonly to the extent that the asset's carrying amount after the reversal does not exceed the amount that would have been determined, net of applicable depreciation, if no impairment loss had been recognised.

Borrowings

Borrowings are initially recognised at the fair value of consideration received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the statement of financial position date.

Exit fees are accrued and recognised in the consolidated income statement over the period of borrowing based on the position at the balance sheet date.

Share capital

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds

Where any Group company purchases the Company's equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs, (net of tax) is deducted from equity attributable to the Company's equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, are included in equity attributable to the Company's equity holders.

Warrants reserve

Warrants issued are classified as non-distributable reserves.

The Group issued warrants to two of its lenders entitling them to subscribe for ordinary shares in the Group. These have been accounted for at fair value on the date of issue

Critical accounting estimates and judgements

The preparation of the Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and disclosure of contingencies at the date of the Consolidated Financial Statements.  If in the future such estimates and assumptions, which are based on management's best judgement at the date of the Consolidated Financial Statements, deviate from the actual circumstances, the original estimates and assumptions will be modified, as appropriate, in the period in which the circumstances change.  The following policies are considered to be of greater complexity and / or particularly subject to the exercise of judgement. These judgements involve assumptions or estimates in respect of future events. Actual results may differ from estimates.

(a)     Financial guarantee contract

The Group statement of financial position includes financial guarantee contracts in respect of debt liabilities, offset by the net value of assets and liabilities transferred to the lenders control and cash payments made against the debt.  Judgement is involved in assessing the amounts to be realised from the disposal of assets which mainly comprise land and buildings valued at expected sales proceeds less costs of sale, and also assessing the likely full costs of discharging all residual liabilities.

(b)     Provisions

The Group statement of financial position includes provisions in respect of onerous lease contracts, dilapidations and other property exposures.  Judgement is involved in assessing the level of future rental income and costs arising from the relevant properties and the performance and longevity of sub-lease arrangements.

(c)     Estimate of fair value of investment properties and investment properties classified as held for sale

The best evidence of fair value is current prices in an active market for similar lease and other contracts. In the absence of such information, the Group determines the amount within a range of reasonable fair value estimates, considering information from a variety of sources including:

i)       current prices in an active market for properties of a different nature, condition or location (or subject to different lease or other contracts), adjusted to reflect those differences;

ii)      recent prices of similar properties in less active markets, with adjustments to reflect any changes in economic conditions since the date of the transactions that occurred at those prices; and

iii)     discounted cash flow projections based on reliable estimates of future cash flows, derived from the terms of any existing lease and other contracts, and (where possible) from external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows.

If information on current or recent prices of assumptions underlying the discounted cash flow approach investment properties is not available, the fair values of investment properties are determined using discounted cash flow valuation techniques. The Group uses assumptions that are mainly based on market conditions existing at each statement of financial position date.

The principal assumptions underlying management's estimation of fair value are those related to: the receipt of contractual rentals; expected future market rentals; void periods; maintenance requirements; and appropriate discount rates.  These valuations are regularly compared to actual market yield data and actual transactions by the company and those reported by the market.

The expected future market rentals are determined on the basis of current market rentals for similar properties in the same location and condition.

2.        Discontinued operations

The Group's debt facilities matured on 31 December 2012 and, as previously anticipated, the Group was unable to meet repayment obligations at that date. The lenders have reserved their rights whilst negotiations continue, but there can be no certainty as to the final outcome.

From the Group's perspective, the ultimate aim of these negotiations is to complete the disposal of the investment property business and continue thereafter as an asset management business, initially based on the asset management contracts for the Ashtenne Industrial Fund and the Apia Regional Offices Fund.

The Group agreed with its lenders last year to market and dispose of secured properties in order to repay some of the outstanding debt. In accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations', the assets and liabilities, comprehensive income and cash flows of the companies which own these properties are presented as discontinued operations.

On 17 August 2012, joint fixed charge receivers were appointed over the assets of Warner Estate Investment Limited and Warner Estate Development (Folkestone) Limited. The joint fixed charge receivers are responsible for the financial and operating policies of the companies, in order to realise value through the disposal of the assets. This has resulted in a loss of control by the Group and in accordance with IAS 27 'Consolidated and Separate Financial Statements', the assets and liabilities have been derecognised from the consolidated financial statements. The comprehensive income and cash flows to 17 August 2012 have been presented in discontinued operations. £48.7million was provided for as a financial guarantee contract arising from the group cross guarantee and being the estimated fair value of the residual amount of that lender's loan at 17 August 2012, after deducting the other assets and liabilities which have been derecognised, which is considered to be an on going liability of the Group. An updated evaluation at 31 March 2013 has increased this liability by £14.7million.

On 19 March 2013 control of JSE Developments Limited was ceded to one of the lenders, as an alternative to them exercising their right to appoint a fixed charge receiver. The previous directors resigned from the company and were replaced by appointees of the lender with the objective of disposing of the remaining assets. In accordance with IAS 27 'Consolidated and Separate Financial Statements', the assets and liabilities have been derecognised from the consolidated financial statements. The comprehensive income and cash flows to 19 March 2013 have been presented in discontinued operations and £8.8million of net assets have been offset against the financial guarantee contract as described above. On 23 May 2013, after the year end, the same process has been applied to Warner Estate, Limited as control of this company has been lost as at that date.

A payment of £1.4million was made to the same lender in the year, by another subsidiary company.  This was also offset against the financial guarantee contract, giving it a total estimated liability of £53.2million, as at 31 March 2013.

The Group continues negotiations with the lenders in relation to the remaining assets over which they have security. The associated assets and liabilities, comprehensive income and cash flows of the companies that own these properties are presented as discontinued operations.

On 30 August 2012, at a meeting of the members of Principal Leasehold Properties Limited, a group company with a number of onerous leases assigned to it, resolutions were passed to wind up the company voluntarily and to appoint joint liquidators for this purpose. This has resulted in a loss of control by the Group and in accordance with IAS 27 'Consolidated and Separate Financial Statements', the assets and liabilities of this company have been derecognised from the consolidated financial statements. The comprehensive income and cash flows to 30 August 2012 have been presented in discontinued operations. £3.2 million has been provided for in continuing operations, being the estimate of the liability of the onerous lease portfolio, which will remain a liability of the parent company until settled or discharged.

The post tax loss of discontinued operations has been disclosed in the consolidated income statement, with comparison against prior periods.

The cash flows of discontinued operations have been presented in the consolidated cash flow statement and note 31.

The following table presents the assets and liabilities of the various disposal groups within Warner Estate Holdings PLC, classified as assets and liabilities held for sale in the consolidated statement of financial position.

The investment properties reported above have a cost of £1.3million and are used as security against Group loans.

Following the year end, on 18 June 2013, one lender agreed to release the relevant Group subsidiary, Lancaster Investments Limited, from all of its obligations to that lender, including outstanding debt and accrued interest of £23.2 million. The release is conditional on the appointment of a liquidator to Lancaster Investments Limited and will reduce the net liabilities classified as held for sale reported above.

3.      Segmental Reporting

Business Segments

Operating segments are determined based on the internal reporting and operational management of the Group. The Group is organised into Asset Management, Investment in Funds, Discontinued Property Investment and Unallocated and Other Continuing Activities.

Asset Management involves managing property assets and receiving a contractual fee for the service. Investment in Funds represents income distributions to the Group and fair value gains and losses to the investments. Discontinued Property Investment principally involved engaging in acquiring freehold or leasehold properties in the UK. Unallocated and Other Continuing Activities includes residual income and costs from ongoing property investment activities and fair value adjustments to unlisted investments and the financial guarantee contract , neither of which are directly nor reasonably attributable to the individual segments.

(a)           Rents receivable includes £Nil (2012: £1.0million) which represents rent allocated to rent free periods.

(b)           Service charge and similar income includes monies received from tenants in respect of service charge costs the tenants bear on their properties. Service charge costs not recovered ("void costs") are included within service charge expense and similar charges of £0.6million (2012: £0.9million).

4.      Employees

The amounts above are net of £0.8million (2012: £0.9million) relating to staff costs recharged to certain joint ventures and funds.

Retirement Benefit Obligations

The Group operates and contributes to pension schemes for certain Directors and employees and makes some discretionary allowances.  The costs charged to the consolidated income statement for the year to 31 March 2013 in respect of these amounted to £0.3million (2012: £0.5million).  Pension premiums paid in advance were £Nil (2012: £Nil).

The Group has a closed funded defined benefit scheme in the UK, The Warner Estate Group Retirement Benefits Scheme. There is one member and one deferred member and the costs charged to the consolidated income statement for the year to 31 March 2013 in respect of these amounted to £Nil (2012: £Nil).  A full valuation was carried out at 31 March 2013 by a qualified independent actuary.

It has been agreed with the Trustees in March 2013, that the Group will cease contributions (2012: £0.2million).

The discount rate used to calculate the funding target is equal to the yield on fixed interest gilts of appropriate term at the valuation date plus 2% per annum for active and deferred members over the period to retirement. The inflation assumption is derived from the difference between the yield on fixed interest gilts and the yield on indexed-linked gilts at the valuation date.

Warner Estate Holdings PLC employs a building block approach in determining the long term rate of return on pension plan assets. Historical markets are studied and assets with higher volatility are assumed to generate higher returns consistent with widely accepted capital market principles. The assumed long-term rate of return on each asset class is set out within this note. The overall expected rate of return on assets is then derived by aggregating the expected return for each asset class over the actual asset allocation for the Scheme as at 31 March 2013.

Actuarial gains and losses are recognisedthrough the consolidated statement of comprehensive income.

The following assumptions were made by the Group:

Mortality assumptions are based on standard mortality tables which allow for future mortality improvements. The assumptions are that a member currently aged 60 will live on average for a further 29 years if they are male and for a further 30 years if they are female. For a member who retires in future at age 60 the assumptions are that they will live on average for a further 31 years after retirement if they are male and for a further 32 years after retirement if they are female.

The market value of the assets of the Scheme together with the expected rates of return at the beginning and end of the year were as follows:

None of the Scheme assets are property related.

Reconciliation of Funded Status to Statement of Financial Position

Changes to the Present Value of the Defined Benefit Obligation

*Includes changes to the actuarial assumptions.

Changes to the Fair Value of Scheme Assets

Actual Return on Scheme Assets

Analysis of Consolidated Income Statement Charge

Current service cost is recognised within property management and asset management expenses. Interest cost and expected return on Scheme assets are recognised in finance income.

Analysis of Amounts Recognised in Consolidated Statement of Comprehensive Income

History of Asset Values, Defined Benefit Obligation, Deficit in Scheme and Experience Gains and Losses

The estimated amounts of contributions expected to be paid to the Scheme during the year to March 2014 are £Nil (2012: £0.2million).

5.       Directors' Remuneration

A summary of Directors' remuneration, including disclosures required by the Companies Act 2006 and those specified by the Financial Conduct Authority, is contained in the Directors' Remuneration Report on pages 12 to 17.

6.       Auditors' Remuneration

During the year the following amounts were charged to the consolidated statement of income in respect of auditors' remuneration:

The 2012 figures relate to fees charged by the previous auditors.

7.       Finance Income

Dividends from listed investments, unlisted investments and distributions from funds represent income from financial assets at fair value through profit and loss.

8.             Finance expense for discontinued operations

Interest payable on loans and overdrafts, accrued exit fees and charges in respect of raising finance represent expenses on financial liabilities at amortised cost.

9.      Taxation

The standard rate of Corporation Tax in the UK changed from 26% to 24% with effect from 1 April 2012. Accordingly, the company's profits for this accounting period are taxed at an effective rate of 24%.

10.           Loss of Warner Estate Holdings PLC

The Company has taken advantage of the exemption provided by Section 408 of the Companies Act 2006 from presenting its own income statement. Loss attributable to members includes £125.0 million (2012: £39.0 million loss) which has been dealt with in the accounts of the Company.

11.     Dividends

No final dividend is proposed by the Board.

12.     Earnings Per Share

Basic losses per share on continuing operations of 43.7p  (2012: 7.7p) are calculated on the loss for the period from continuing operations of £23.9million (2012:  £4.2million) and the weighted average of 54,692,155 (2012: 55,180,538) shares in issue throughout the period. 

Basic losses per share on discontinued operations of 24.7p (2012: 62.5p) are calculated on the loss for the period from discontinued operations of £13.5million (2012:  £34.5million) and the weighted average of 54,692,155 (2012: 55,180,538) shares in issue throughout the period. 

Total basic losses per share of 68.4p (2012: losses 70.2p) are calculated on the loss for the period of £37.4million (2012:  loss £38.7million) and the weighted average of 54,692,155 (2012: 55,180,538) shares in issue throughout the period. 

Dilution by employee incentive shares and share warrants would decrease the loss per share, so only the basic loss per share has been reported.

13.           Goodwill

Goodwill is not amortised but is subject to an half yearly impairment test. Goodwill of £0.5million is derived from the cash generating unit ("CGU") defined as the asset management business of Ashtenne Asset Management Limited. The recoverable amount of the asset management business has been used to assess whether the goodwill is impaired. The recoverable amount of the CGUs has been calculated based on the value-in-use calculations.  These calculations use cash flow projections based on financial projections approved by management covering the period to the termination of the asset management contract. Year 1 is based on the budget as approved by management. This is determined by past experience and management's expectations of the current market conditions. Cash flows beyond year 1 are based on the assumption of Nil growth in management fee income and no increase or decrease in associated administrative costs. A discount rate of 10 % has been used to calculate the recoverable amount. The impairment arises from the Group reassessing a number of factors including the maturity of the contract in 2016 and the potential impact on management fees of uncertain capital values given that the fees of this business are based on gross asset values.

14.     Investment Properties

Investment properties have been analysed between non-current and held for sale as follows:

All repairs and maintenance costs are charged to the consolidated income statement during the financial period in which they are incurred.  Therefore, no costs in respect of repairs and maintenance are included within the above figures (2012: £Nil).

On an historical cost basis the investment properties which have been included above at valuation would have been shown at cost as £Nil (2012: £251.7million).

Investment properties valued at £Nil (2012: £162.1million) are used as security for Group loans.

The remaining property asset under the charge of this lender was disposed of on 8 May 2013, which means that the Group has disposed of all property assets under its control.

15.     Plant and Equipment

Plant and equipment include fixtures, fittings and equipment.

16.     Investments in Joint Ventures

Investments in joint ventures have been fully written down in prior years and there have been no movements in the current or comparative year.

The Group disposed of its 50% equity interest in Agora Shopping Centres Limited in the year.  Agora Max Limited and Greater London Office Limited are dormant, did not hold any property assets in the year or provide any income to the group.

Details of transactions between the Group and joint ventures are as set out below.There are no outstanding loan balances between the Group and its joint ventures.

17.           Investments in Funds