FIH Group Plc
Annual Report 2011

Plain-text annual report

Falkland Islands Holdings plc Annual Report 2011 Contents 1 Financial Highlights 2 Chairman’s Statement 4 Managing Director’s Business Review 10 Managing Director’s Financial Review 14 Board of Directors and Secretary 15 Directors’ Report 20 Independent Auditor’s Report 21 Consolidated Income Statement 22 Consolidated Statement of Comprehensive Income 23 Consolidated Balance Sheet 24 Company Balance Sheet 25 Consolidated Cash Flow Statement 26 Company Cash Flow Statement 27 Consolidated Statement of Changes in Shareholders’ Equity 27 Company Statement of Changes in Shareholders’ Equity 28 Notes to the Financial Statements 72 Directors and Corporate Information Financial Highlights FOR THE YEAR ENDED 31 MARCH 2011 FALKLAND ISLANDS HOLDINGS PLC 1 Turnover from continuing operations Profit before tax Underlying profit before tax* Diluted earnings per share before amortisation and non-trading items Dividend per share Cash flow from operations Net asset value per share *Defined as profit before tax, amortisation and non-trading items. 2011 £m 31.84 2.33 2.73 20.6p 9.5p 0.82 332p 2010 £m 29.22 5.67 2.69 21.7p 9.0p 2.35 376p Change % 9.0 (59) 1.5 (5.1) 5.6 (65) (12) Turnover (£m) from continuing operations Underlying profit before tax* (£m) 32.25 31.84 29.22 2.69 2.73 2.31 2.01 1.65 15.62 17.21 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Diluted earnings per share (pence) before amortisation and non-trading items Dividend per share (pence) 18.8 17.1 13.9 21.7 20.6 9.50 9.00 8.00 8.00 7.00 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2 ANNUAL REPORT 2011 Chairman’s Statement David Hudd Chairman I am pleased to report that, despite tough trading conditions in the UK, the year ended 31 March 2011 saw another encouraging performance from the Group, with underlying pre-tax profits increasing for the sixth consecutive year to a record level of £2.73 million. intangibles and non-trading Results Underlying profits before tax (excluding amortisation, impairment of items) increased by 1.5% to £2.73 million (2010: £2.69 million). There were no sales of any Falkland Oil and Gas Limited (“FOGL”) shares during the year (2010: profit of £3.1 million) and, with the absence of non-trading income, reported profits before tax were £2.3 million (2010: £5.7 million). Underlying earnings per share were 20.9p (2010: 22.0p) and reported earnings per share, after taking account of the amortisation of intangibles, were 17.7p (2010: 58.2p). The effective tax rate on underlying earnings has returned to a more normal level (30.1%) after benefitting last year from a number of non- recurring items. Dividends The Board is pleased to recommend a final dividend of 5.5p per share which, together with the Group’s interim dividend of 4p per share, makes a total dividend for the year of 9.5p per share, an increase of 5.6% (2010: 9.0p per share). If approved by shareholders at the Annual General Meeting on 8 September 2011, the 5.5p per share final dividend will be paid on 14 October 2011 to shareholders on the register at the close of business on 16 September 2011. Operations All of the Group’s trading businesses were profitable in the year. Trading at The Falkland Islands Company Limited (“FIC”) was buoyant as the Group benefitted from the recent expansion of its retail operations and the boost to demand created by oil exploration. The revenue and contribution from FIC rose to record levels despite substantial increases in shipping costs from the UK. At Momart, despite a modest growth in overall revenues, the squeeze on museum budgets and related pricing pressure saw a contraction in the core exhibition business, although this was partially offset by growth in the commercial gallery sector. The Group’s passenger ferry business at Gosport performed well, maintaining revenue and profitability despite a small decline in passenger numbers. FOGL The Group’s holding of 12 million FOGL shares was unchanged during the year. At 31 March 2011, the market value of the holding was £10.7 million (89.3p per FOGL share) compared with £15.5 million at 31 March 2010 (129.5p per FOGL share). Following the withdrawal of BHP Billiton in March 2011, FOGL is the operator and now has an undivided interest in its licences and has secured the necessary licence extensions from the Falkland Islands’ Government. In April 2011, FOGL raised £32 million and contracted the Leiv Eiriksson deep water rig to drill two wells, with the first expected to spud in the first quarter of 2012. FOGL is now funded for a deep well on its Loligo prospect, which has mean prospective resources of 4.7 billion barrels, and for a second well on either Loligo (as an appraisal well), or on one of its other high ranked prospects. We were founder shareholders in FOGL in 2002 and since then we have recouped our entire cost of investment and have recycled over £3 million from share sales into our trading businesses. We have undertaken to retain our entire holding of 12 million shares through the current drilling programme. Your Board will continue to manage the affairs of the Group to maximise value and will be developing for alternative strategies appropriate exploration outcomes in the Falklands. FALKLAND ISLANDS HOLDINGS PLC 3 In summary, current economic conditions in the UK remain difficult but the Group’s businesses are well established and we expect them to demonstrate continued resilience in the current year. Whilst interest in the FOGL drilling programme is likely to have greater influence on the Group’s share price than the trading performance of the Group, it is worth noting that if a commercial oil discovery is confirmed by any one of the five companies active in Falkland Islands’ waters, the prospects for FIC will be transformed. Trading in the year to date has been satisfactory and in line with the Board’s expectations. David Hudd Chairman 23 June 2011 Assets The Group’s balance sheet remains strong. At 31 March 2011, shareholders’ funds were £30.6 million (2010: £34.2 million), cash balances were £2.1 million (2010: £3.8 million) and total borrowings were reduced to £4.2 million (2010: £5.3 million). Net assets per share at 31 March 2011, including intangibles, were 332p (2010: 376p per share). Staff On behalf of shareholders I would like to thank our colleagues throughout the Group for their continued hard work and commitment which has enabled us to produce a good result. Outlook In the Falklands, with oil exploration continuing, general economic confidence and demand should be maintained. The four deep water wells due to be drilled in late 2011 and early 2012 should provide further stimulus to the Falklands economy and our FIC business, although the dramatic growth seen in the year ended 31 March 2011 is expected to moderate and rising inflation is putting pressure on margins. The UK market for exhibitions appears to be stabilising, although competition for business is fierce and margins at Momart are expected to remain under pressure in the current year. The commercial gallery market is stronger and further growth is anticipated. Momart’s market leading position is intact and we remain confident about its prospects for improvement. The arrival of Portsmouth Harbour Ferry Company’s (“PHFC”) new pontoon and landing stage at Gosport this month provides a secure operating platform for the foreseeable future. The pontoon is being leased from Gosport Borough Council over a 50 year period with the additional lease rental and depreciation costs being recovered by increased fares. Even after these increases, the ferry continues to offer compelling value for money, convenience and reliability and will continue to provide the Group with a good cash flow and income stream. 4 ANNUAL REPORT 2011 Managing Director’s Business Review Underlying operating profits (before amortisation, impairment of intangibles and non-trading items) were impacted by the weaker UK economy and fell by 6.4% to £2.9 million (2010: £3.1 million) as margins, in particular at Momart, were squeezed. However, with net interest costs reduced to just £0.2 million (2010: £0.4 million), underlying pre-tax profits increased by 1.5% to £2.73 million (2010: £2.69 million). Review of operations A summary of Group revenue and operating profit by business is shown below: Group revenue Year ended 31 March 2011 £m 2010 £m Change % Falkland Islands Company 14.92 12.43 20.0 Portsmouth Harbour Ferry 3.73 3.72 Momart Total 13.19 13.07 31.84 29.22 0.3 0.9 9.0 John Foster Managing Director Group Overview Despite subdued demand in the UK, Group revenues increased by 9.0% to £31.8 million (2010: £29.2 million) due principally to buoyant trading conditions in the Falkland Islands. Oil exploration activity commenced in Falklands’ waters in early 2010 and the additional demand for local services and supplies allowed FIC to benefit from the recent modernisation and expansion of its retail operations. As a result revenue from FIC increased by 20% in the year. In contrast in the UK, where demand remained weaker, Momart and PHFC saw more restricted revenue growth of just 0.9% and 0.3% respectively. Group revenue 2011 Underlying operating profit 2011 Momart 41% FIC 47% PHFC 12% 2010 2010 Momart 44% FIC 43% PHFC 13% Momart 18% PHFC 27% FIC 55% Momart 31% FIC 43% PHFC 26% FALKLAND ISLANDS HOLDINGS PLC 5 Underlying operating profit Year ended 31 March Falkland Islands Company Portsmouth Harbour Ferry Momart Total 2011 £m 1.61 0.79 0.53 2.93 2010 £m Change % 1.38 0.80 0.95 3.13 16.7 (1.3) (44.2) (6.4) Each of the Group’s businesses is reviewed in detail below: Falkland Islands Company (“FIC”) FIC produced very encouraging results, taking advantage of the stimulus from oil exploration. Revenues grew 20% and operating profits increased 16.7% to a record £1.61 million (2010: £1.38 million). Operating results Year ended 31 March Revenues Retail Automotive Freight Property sales Other services 2011 £m 2010 £m Change % 9.72 1.91 0.69 0.45 2.15 8.07 1.43 0.99 0.36 1.58 20.5 33.6 (30.3) 25.0 36.1 20.0 Total FIC revenue 14.92 12.43 Underlying FIC operating profit 1.61 1.38 16.7 Underlying operating profit margin (%) 10.8 11.1 (0.3) The year under review started slowly with another poor illex squid catch and low fishing licence revenues. However, the arrival in Falkland waters of the Ocean Guardian oil rig in February 2010 stimulated the economy with local supplies and services in demand. In May 2010 confidence was lifted further when Rockhopper Exploration PLC announced an oil discovery in the North Falklands basin. The continuation of a drilling programme throughout the year by Rockhopper and Desire Petroleum together with seismic programmes conducted by Falkland Oil and Gas Limited (”FOGL“), Argos Resources and Borders & Southern generated significant additional spending and created a positive backdrop for trading. Tourists outside the West Store in Stanley. FIC revenues 2011 Property sales 3% Other services 19% Automotive 13% Retail 65% 2010 Property sales 3% Other services 21% Automotive 12% Retail 64% 6 ANNUAL REPORT 2011 Managing Director’s Business Review CONTINUED FIC‘s retail business benefitted from the increase in demand; with a 50% increase in its selling space in November 2009 and the introduction in November 2010 of a new Peacocks’ clothing offer within the West Store, retail sales increased by over 20% compared to 2009/10 and margins were lifted by a wider product range, improved sales mix and better availability. Sales growth was most notable in FIC’s “warehouse” sales to local businesses and oil rig suppliers which increased by over 42% to £1.8 million. Retail supermarket sales from the West Store, the main driver of retail volume, increased by 16%, helped by Peacocks’ clothing sales, and the tourist focussed Capstan gift shop saw its sales up by 12%. The year saw a further reduction in the number of cruise ship visitors to the Falkland Islands, following the sharp declines seen in the previous year. However, FIC’s tourism and trips business, Penguin Travel, had a record year benefitting from the strength of its relationship with leading cruise line operator Holland & America Lines. Growth was also seen at Right-Lines, FIC’s general store at the MPA military base, where a modest extension of the sales area saw revenues increase by 16%. Increased construction activity boosted sales at FIC’s builders merchant “Home Builder” which increased by an encouraging 24% compared to the prior year. The automotive business also had a better year with a recovery in sales of fleet vehicles for the military and their contractors and more used vehicle sales. We sold 78 vehicles (2010: 41) and sales rose by 33% to £1.9 million. Falkland Island Shipping (formerly Darwin Shipping) experienced sharply increased freight tariffs from the Ministry of Defence for space on their Falklands supply ships. This reduced the competitiveness of FIC’s third party freight business and revenues from shipping freight fell by over 30% with a commensurate reduction in contribution. FIC’s fishing agency had a slightly better year with a strong finish linked to a more promising illex catch in March 2011. Agency revenues improved by 15% but remained well below the levels seen in some previous years. FIC’s insurance broking operation once again made progress and saw an increase in both revenue and contribution in the year. Stevedoring activities benefitted from oil exploration cargoes and revenue increased by 39%. During the year the conversion of the Upland Goose Hotel into heritage seafront cottages at Marmont Row was completed. Two of these properties were subsequently sold with the sale of a third due to complete in July 2011. One other older property on the edge of Stanley was sold during the year, bringing total revenues from property sales to £0.45 million (2010: £0.36 million). FIC has retained nine of the twelve Marmont properties which are all being rented to companies involved in oil exploration thereby maximising rental income and capital appreciation. Marmont Row heritage seafront cottages in Stanley. FALKLAND ISLANDS HOLDINGS PLC 7 The annual fare increase became effective on 1st June 2010 with the standard daily adult return fare rising by 4.3% to £2.40 and the price for a book of 10 trip tickets for regular travellers lifted by 5.2% to £10.00. At this level ferry fares continued to offer excellent value for money whilst still allowing the company to maintain its policy of offering discounted ticket prices for seniors and children under 16. The overall fare increases put through in June 2010 of 4.5% effectively offset the impact of the decline in passenger numbers and resulted in revenues from ferry fares rising 2.6% to £3.59 million. Other revenue of £0.14 million (2010: £0.22 million) was earned principally from PHFC’s programme of summer leisure cruises in the Solent area. Revenues declined in the year as demand for leisure trips weakened but they produced a small positive contribution and form an important part of the ferry company’s service to the community. Ferry overheads increased during the year with inflationary rises in wages, salaries and fuel costs. As a result, PHFC’s underlying operating profit decreased marginally by 1.3% to £0.79 million (2010: £0.80 million). New pontoon at Gosport, installed in June 2011. Portsmouth Harbour Ferry Company (“PHFC” ) PHFC performed satisfactorily with stable revenues and operating profits in difficult market conditions. Operating results Year ended 31 March Revenues Ferry fares Other revenue Total PHFC revenue Underlying PHFC operating profit Underlying operating profit margin (%) 2011 £m 2010 £m Change % 3.59 0.14 3.73 3.50 0.22 3.72 2.6 (36.4) 0.3 0.79 0.80 (1.3) Passenger numbers (000s) 3,421 3,516 21.2 21.5 (0.3) (2.7) In line with the local economy the number of ferry passengers continued to see a modest decline although the year on year reduction slowed to 2.7% (2010: 4.2%). As in the prior year, ferry travel at weekends linked to discretionary retail and leisure activity was most affected with an overall decline of 6.3%. However, daily commuting remained relatively robust with the fall in the number of weekday journeys restricted to just 1.6%. During the year agreement was reached with Gosport Borough Council (“GBC”) to replace the ageing pontoon at Gosport with a modern structure. Local contractors, Trant Construction, were appointed in summer 2010 using specialist pontoon fabricator Ravestein, in Holland. 8 ANNUAL REPORT 2011 Managing Director’s Business Review CONTINUED The new pontoon is scheduled for installation in June 2011. The initial cash cost was met by GBC and PHFC will now lease the pontoon from them under a finance lease for a period of 50 years as the sole ferry operator. Under the new arrangements PHFC will be responsible for maintenance, insure the pontoon and pay a quarterly rental to the Council to cover the finance and capital costs. The resultant increase in operating costs arising from the new pontoon will be met by a one off increase in fares from June 2011 with adult return fares increasing by 12.5% (30p) to £2.70 and senior and child daily 10 trip tickets up to £7.50 or 75p per crossing. Even after these necessary fare increases, the Board believes that the ferry still offers excellent value to passengers compared to alternative modes of transport. The ferry service was able to maintain its exceptional record of reliability with over 99.9% of some 70,000 ferry trips (operating 364 days per annum) departing on time. This impressive level of reliability and the exemplary safety record of the ferry service are founded on the very high levels of commitment and expertise of the ferry’s staff who are proud to be a part of the community they serve. Momart Operating results Year ended 31 March 2011 £m 2010 £m Change % Revenues Museums and public exhibitions Commercial gallery services Storage 6.67 5.00 1.52 7.73 3.86 1.48 Total Momart revenue 13.19 13.07 (13.7) 29.5 2.7 0.9 Underlying Momart operating profit Underlying operating profit margin (%) 0.53 0.95 (44.2) 4.0 7.3 (3.3) The Group’s art handling and logistics business, Momart, had a more difficult year. Revenues in the first half were lower by 7.6% although they improved in the second half, increasing by 8.8% to produce a 0.9% increase in revenue for the year as a whole. In a difficult trading environment margins declined and operating profits fell back to just £0.53 million (2010: £0.95 million). Management changes have been made at Momart, the costs of which are reflected in the results. Momart revenues 2011 Storage 12% Commercial gallery services 38% Museums and public exhibitions 50% 2010 Storage 11% Commercial gallery services 30% Museums and public exhibitions 59% Exhibitions As indicated in our interim announcement, the UK art handling market saw a sharp reversal in the early part of the financial year and Momart’s Exhibitions’ revenues fell by over 30% in the first half as institutional budgets came under pressure and fierce price competition developed in the face of weaker demand. Pressure on margins continued in the second half but sales volumes recovered, helped in part by the large Gauguin exhibition at the Tate Modern in October and others including the “Cult of Beauty”, the travelling “Maharaja” exhibition at the V&A, the Gossaert exhibition at the National Gallery and the British Sculpture and Watteau exhibitions at the Royal Academy. As a result Exhibition revenues in the second half saw a modest 1.9% year on year increase to just over £4 million, well ahead of the disappointing £2.6 million of revenue seen in the first half. Despite this recovery, for the year as a whole Exhibitions’ revenues fell by over 13% and the associated squeeze on margins was largely responsible for the overall decline in company profitability. At £6.67 million, Exhibition sales in year were over 27% below the record level of museum related revenues experienced in 2008/9. The exhibitions market is expected to remain stable in the near term, albeit with continuing FALKLAND ISLANDS HOLDINGS PLC 9 FOGL The Group owns a significant shareholding in AIM quoted oil exploration company FOGL. Details of the Group’s shareholding in FOGL are set out below: Year ended 31 March 2011 2010 Number of shares held 12,000,000 12,000,000 FOGL share price 89.3p 129.5p Market value of holding £10.7m £15.5m Cost £2.0m £2.0m During the year FOGL’s share price varied between a high of 244p and low of 76p and at 31 March 2011 the Group’s shareholding represented 8.2% of FOGL’s share capital. Following a successful share placing by FOGL in April 2011, to raise funding for its 2012 drilling programme, FOGL’s to 207.2 million shares and the Group’s unchanged holding of 12 million shares represented an interest of 5.8% in the enlarged share capital. Under IFRS, the investment is shown at market value using the bid price. share capital increased Trading outlook We remain cautious about the immediate prospects for the Group. In the UK the economic backdrop remains problematic with generally weak consumer demand exacerbated by on-going cuts in the budgets of government funded institutions. Although the picture is more encouraging in the Falkland Islands, after a step change in 2010/11 the current year will see rising freight, fuel and labour costs and this will put pressure on margins. Continued strong growth will therefore depend on further positive news on oil exploration. The Group’s financial position remains strong with modest borrowings of £4.2 million, low interest charges and a healthy cash position. We remain confident about the prospects for the Group over the medium term and with the leading market positions of the Group’s trading businesses we are well placed to take full advantage of any growth in the UK economy. John Foster Managing Director 23 June 2011 Momart was the contracted transport and logistics agency for the Gauguin exhibition at Tate Modern in October 2010. pressure on margins, with recovery anticipated in the medium term. Gallery Services The commercial art market continued to grow through the year. Linked to renewed confidence, particularly in emerging markets, commercial activity grew strongly with record auction sales seen in both India and Hong Kong. This trend was confirmed once more by the continued success in established markets of the major international fairs including, Art Basel in June, Frieze in London in October and Miami Basel in December. The company’s commercial Gallery Services division was again actively involved in a number of high profile overseas exhibitions of Damien Hirst’s work and this was complemented by increased activity with private collectors and major UK commercial galleries such as White Cube and Haunch of Venison. Gallery Services’ sales grew strongly in the first half with revenues ahead by 38%, helped by large commercial exhibitions of Damien Hirst’s works in Berlin and Monaco. In the second half growth continued albeit at a more moderate rate with revenues ahead by over 21%, taking annual revenues for the division to £5.0 million, an increase of 29.5% on 2009/10. Storage Storage revenues increased by 2.7% in the year to £1.52 million with a marked recovery seen in the second half generated by activity in the commercial art market and by large collectors. Storage revenue accounted for 11.5% of revenue in the year (2010: 11.3%). 10 ANNUAL REPORT 2011 Managing Director’s Financial Review Summary income statement Year ended 31 March 2011 £m 2010 £m Change % Total revenue 31.84 29.22 Operating profit 2.93 3.13 9.0 (6.4) Net financing costs (0.20) (0.45) (55.6) Underlying profit before tax Add / (deduct) non-trading and exceptional items Profit on the sale of FOGL shares Profit on the surrender of lease Revaluation of interest rate collar 2.73 2.69 1.5 – – – 3.09 0.25 0.04 Amortisation of intangibles (0.40) (0.40) (0.40) 2.98 Reported pre-tax profit During the year there were no sales of any of the Group’s shares in FOGL and there was no non-trading income (2010: £3.3 million). After charging £0.4 million for the amortisation of intangible assets (2010: £0.4 million) reported profit before tax for the Group was £2.33 million (2010: £5.67 million). Taxation The Group pays corporation tax on its UK earnings at the standard rate of 28% while in the Falkland Islands the Group pays tax at the rate of 25%. However, because of double taxation arrangements, Falkland Islands earnings are ultimately taxed at the UK rate of 28%. There is no Capital Gains Tax in the Falkland Islands. For the year ended 31 March 2011 due largely to the lower taxable profits on property sales and a deferred tax asset being recognised for the first time in 2010 in respect of share based payments, the Group’s effective tax rate on its underlying trading activities increased to 30.1% (2010: 26.2%). Profit before tax as reported 2.33 5.67 Earnings per share Revenue and operating profit These are discussed in detail in the Review of Operations commencing on page 4. Net financing costs The Group’s net financing costs fell sharply to £0.20 million (2010: £0.45 million) as bank borrowings were reduced and with the closing out of its interest rate collar in the prior year, the Group was able to take full advantage of lower bank interest rates. Underlying pre-tax profit With operating profit lower by just £0.2 million and reduced financing costs, the Group’s underlying pre-tax profits grew £0.04 million (1.5%) to a record level of £2.73 million. Underlying pre-tax profit excludes the amortisation of intangible assets, and any non-trading items which in the prior year included profit on sale of shares, profits from the early surrender of a lease, and fair value movements on derivative financial instruments. During the year there were no exceptional non-trading items. Year ended 31 March Underlying profit as above 2011 £m 2010 £m Change % 2.73 2.69 1.5 Tax thereon (0.82) (0.71) (15.5) Underlying profit after tax 1.91 1.98 (3.5) Average number of shares in issue (thousands) Diluted EPS 9,237 9,147 20.6p 21.7p 1.0 (5.1) With a small increase in the number of shares in issue and a higher effective tax rate, fully diluted earnings per share derived from underlying profits decreased by 5.1% to 20.6p (2010: 21.7p). Balance sheet The Group’s balance sheet had net assets as at 31 March 2011 of £30.6 million (2010: £34.2 million) borrowings of £4.2 million (2010: £5.3 million) and cash balances of £2.1 million (2010: £3.8 million). The carrying value of intangible assets was reduced by normal annual amortisation charges of £0.4 million to £13.1 million as at 31 March 2011 (2010: £13.5 million). FALKLAND ISLANDS HOLDINGS PLC 11 The net book value of property, plant and equipment was unchanged at £7.5 million after capital expenditure of £0.8 million and depreciation of £0.8 million in the year. The Group’s investment properties comprise land and commercial and residential properties in the Falkland Islands held for rental. The net book value of the properties at 31 March 2011 after the disposal and sale of a small older property on the edge of Stanley was at £1.0 million (2010: £1.1 million). The Directors estimate that the fair value of the property portfolio at 31 March 2011 was £2.5 million. The Group also owns 670 acres of land in Stanley which is included in investment properties at its net book value of £0.7 million (2010: £0.7 million). Due to the restricted market for freehold land in the Falklands it is not possible to determine its fair value. The Group’s holding of 12 million shares in FOGL is shown under “Financial assets – available-for-sale equity securities”. The Group’s shareholding remained unchanged during the year and at 31 March 2011 represented 8.2% of FOGL’s share capital. Under IFRS, the investment is shown at market value which at 31 March 2011, with a FOGL share price of 89.3 pence per share, amounted to £10.7 million (2010: £15.5 million). However, following a successful share placing by FOGL in April 2011 to raise funding for its 2012 drilling programme, FOGL’s share capital increased to 207.2 million shares and the Group’s shareholding represented 5.8% of the enlarged share capital. Deferred tax assets relating to future pension liabilities decreased marginally to £0.55 million. Non-property related inventories increased from £3.5 million to £4.2 million at 31 March 2011. Of this £0.3 million of the £4.2 million relates to work in progress at Momart (2010: £0.4 million) and the balance of £3.9 million represented stock held for resale in the Group’s retail operations in the Falkland Islands, which rose by £0.8 million due to increased trading activity and additional retail selling space. Property related inventories are shown at cost and represent expenditure incurred to complete the conversion of the former Upland Goose Hotel in Marmont Row back into a terrace of heritage cottages on the waterfront in Stanley. After final conversion work costing £0.3 million and the sale of two properties with a net book value of £0.3 million the total cost of completed properties at 31 March 2011 was unchanged at £1.2 million (2010: £1.2 million). Trade and other receivables balances increased from £4.5 million to £5.8 million as at 31 March 2011 due principally to an increase in sales on credit terms to business customers in the Falkland Islands. At 31 March 2011 the Group retained cash balances on deposit with UK banks of £2.1 million (2010: £3.8 million). During the year the Group made loan repayments of £1.1 million and at 31 March 2011 had bank borrowings and finance leases outstanding of £4.2 million (2010: £5.3 million). £1.1 million of these loans are due for repayment in the coming year and are shown under current liabilities. Income tax payable within the next 12 months was £0.6 million (2010: £0.7 million) reflecting the increase in the Group’s taxable profits offset by increased payments on account to HMRC during the year. Trade and other payables increased from £8.2 million to £8.3 million at 31 March 2011 reflecting increased trading activity. As at 31 March 2011 the liability due in respect of the Group’s defined benefit pension schemes decreased to £2.1 million (2010: £2.2 million). The scheme in the Falkland Islands is unfunded and liabilities are met as they fall due from operating cash flow. The net present value of the liability due in respect of the Falkland Islands scheme increased by £0.1 million in the year to £2.1 million due principally to a reduction in long term interest rates. At PHFC an enhanced cash offer was made to eligible deferred members which resulted in a permanent reduction of scheme liabilities of £0.15 million. Following this buy out exercise, at 31 March 2011 the scheme’s net deficit had been almost eliminated; net liabilities were reduced by £0.2 million to £0.02 million. The net deferred tax liabilities at 31 March 2011 decreased compared to the prior year to £1.4 million (2010: £1.6 million). Net assets per share decreased to 332p at 31 March 2011 (2010: 376p) reflecting a decrease in the carrying value of the Group’s holding in FOGL. Cash flows The Group’s cash position was satisfactory throughout the year. Bank loans outstanding were reduced by £1.1 million to £4.0 million and after paying dividends of £0.8 million (2010: £1.1 million) and corporation tax of £1.0 million (2010: £0.7 million) the Group retained cash balances of £2.1 million at year end. 12 ANNUAL REPORT 2011 Managing Director’s Financial Review CONTINUED Cash generation from operations remained healthy but reduced by £1.6 million to £0.8 million in the year (2010: £2.4 million). EBITDA decreased marginally, in line with the £0.2 million reduction in underlying operating profit, but working capital levels increased sharply in response to the strong growth seen at FIC. The Group’s Operating Cash Flow can be summarised as follows: Year ended 31 March Underlying PBT Depreciation Interest payable EBITDA Share based payments Increase in working capital Tax paid Other Net cash flow from operating activities Proceeds from sale of shares in FOGL Draw down of loan Proceeds from shares issued under option schemes Less: Dividends paid Capital expenditure Net bank interest paid Loan repayments Liquidation of financial derivative Deferred consideration re Momart Net outflows from financing etc. Net cash flow Cash balance b/fwd Cash balance c/fwd 2011 £m 2010 £m 2.7 0.9 0.2 3.8 0.2 (2.0) (1.0) (0.2) 0.8 – – 0.3 (0.8) (0.8) (0.1) (1.1) – – (2.5) (1.7) 3.8 2.1 2.7 0.9 0.4 4.0 0.2 (1.4) (0.7) 0.3 2.4 3.6 0.4 – (1.1) (1.4) (0.3) (0.8) (0.4) (1.6) (1.6) 0.8 3.0 3.8 During the year the Group paid dividends of £0.8 million and received £0.3 million from the proceeds of shares issued following the exercise of share options. Investment in fixed assets continued with £0.8 million of expenditure to strengthen the Group’s operating base (2010: £1.4 million); £0.4 million was invested in Stanley with further improvements to the West Store and FIC’s general store at the MPA military base. At Momart two replacement vehicles were acquired and at PHFC capital expenditure was kept to a minimum in advance of the substantial investment to come in the new pontoon. In addition to fixed asset expenditure, final conversion works on Marmont Row were completed at a cost of £0.3 million and these properties are included in inventories as assets held-for-sale. With steadily reducing borrowings and low variable interest rates, bank interest paid over the year decreased to £0.1 million (2010: £0.3 million). Scheduled loan repayments of £1.1 million were made during the year and at 31 March 2011 total bank borrowings had reduced to £4.0 million. With net outflows from financing and investment of £2.5 million (2010: £1.6 million) the Group’s net cash flow for the year was an outflow of £1.7 million (2010: £0.8 million inflow) leaving cash balances of £2.1 million at year end (2010: £3.8 million). Business drivers, risk factors and key performance indicators Business drivers The Group’s businesses are affected by general economic conditions in their markets; inflation, employment levels, interest rates and government spending programmes all have an impact on demand for their services. The Group’s businesses in the Falkland Islands and Gosport have strong ties to the local communities they serve and activity is linked in turn to the local demand for their goods and services. In addition, demand is boosted by tourist activity and both locations have benefited from increasing tourist numbers in recent years. In the Falkland Islands the strength of the economy is closely linked to the fortunes of the fishing industry, in particular the success of the unpredictable illex squid season which runs from February to May, and more recently to oil exploration activity. In the year ended 31 March 2011 the expansion of oil exploration had a positive impact on the local economy and this benefit is expected to continue in the current year. If the programme proves unsuccessful this stimulus will cease and activity will revert to more normal levels whereas if commercial quantities of oil are found the positive impact on the Falkland Islands economy will be very significant. At Momart activity in the art market is closely correlated with the performance of the wider global economy albeit with a time lag. In the commercial art market, levels of disposable income among high net worth individuals are a key driver and in the museums sector government grants and corporate sponsorship are important sources of funding in addition to public admissions revenue which is on an increasing trend. Pressures on institutional budgets FALKLAND ISLANDS HOLDINGS PLC 13 have increased as the full extent of government fiscal problems both in the UK and overseas become clear. In the longer term this may lead to the out-sourcing of specialist services by museums and institutions but in the near term a further reduction in the level of government subsidised exhibitions seems likely. Income generated from travelling international exhibitions is an important source of revenue for museums and galleries and is attractive as a means of informal diplomacy for those nations with major cultural inventories although in the near term privately sponsored exhibitions are likely to prove more common than government funded activity. The commercial art market is still continuing to develop with the emergence of new buyers, patrons and artists in the Middle East, Far East and Russia. Risk factors PHFC and FIC are both sensitive to changes in local economic conditions. The level of local competition also affects their performance. In the Falkland Islands, FIC faces competition in almost every area of its operations but due to the company’s long history and accumulated expertise, in most sectors in which it operates FIC has a leading market position. The situation is fluid and maintaining leadership depends on continued innovation, investment and a commitment to excellence in customer service. Argentina continues to make a claim against the UK’s sovereignty of the Falkland Islands and in early 2010 imposed restrictions on vessels heading to or from the Falklands passing through Argentinian waters. However, the British government has re-affirmed its sovereignty in unequivocal terms and key trade and logistic links with the UK are unaffected. The existing tension with Argentina is not considered likely to lead to any significant threat to the independence of the Falkland Islands in the foreseeable future although Argentina’s continuing protests have set back the development of further commercial links to the Falkland Islands’ South American neighbours. Although there is no other directly competing service to PHFC, customers do have a choice and are able to travel by car or public transport round the harbour. Maintaining and promoting the relative attractions of using the ferry whether for commuting to work, shopping or for tourism is a key focus of PHFC’s strategy and we will continue to work closely with local authorities and other public transport providers to reinforce its position as a faster, more cost effective, and environmentally friendly alternative to travelling by car. For Momart the physical security of artworks is of paramount importance and the company goes to great lengths to guard against the risk of theft or damage to the works in its care. Beyond physical security and the resulting risk to the company’s reputation, the risks faced by Momart tend to be those global factors which could impact the global art market. In particular the reduction in the personal wealth of collectors and investors will be likely to result in a contraction of personal or institutional budgets which would lead to a reduction in the movement and display of art. The emergence of new competitors could also impact the business adversely. In addition, because much of Momart’s business involves working with overseas partners, volatility in the Sterling/Dollar and Sterling/Euro exchange rates has a direct effect on its cost base and profitability. Key performance indicators At Group level management attention is focussed on revenue, costs and the contribution generated by each sub group of businesses. In the Falkland Islands businesses like-for-like revenue growth is a key measure of performance, especially for the retail outlets which account for 2/3rds of revenues. In addition to sales trends, gross margins by product and general costs are also kept under close review. At PHFC, passenger numbers and the average fare yield are monitored on a weekly basis. Other key concerns are ferry reliability and passenger safety as well as a focus on costs and net profitability. At Momart, forward sales projections are monitored and updated and these are an important predictive indicator which facilitates forward planning. In addition, order intake and the conversion rate in bidding for contracts are reviewed on a regular basis. Direct costs and the gross contribution of individual contracts are monitored closely as are the level of indirect costs and the overall amount of overtime being worked. John Foster Managing Director 23 June 2011 14 ANNUAL REPORT 2011 Board of Directors and Secretary David Hudd (66) Chairman David joined the Board on 4 March 2002 and is Chairman of the Nominations Committee. He is a Chartered Accountant and was a partner in Price Waterhouse until 1982. Since then, he has been Chairman or Chief Executive of a number of listed companies. He is non-executive Deputy Chairman of Falkland Oil and Gas Limited. John Foster (53) Managing Director John joined the Board on 26 January 2005. He is a Chartered Accountant and previously served as Finance Director for software company Macro 4 plc and toy retailer, Hamleys plc. Prior to joining Hamleys, he spent three years in charge of acquisitions and disposals at FTSE 250 company Ascot plc and before that worked for nine years as a venture capitalist with a leading investment bank in the City. Mike Killingley (60) Non-executive Director Mike was appointed to the Board on 26 July 2005, having previously been appointed non-executive Chairman of the Portsmouth Harbour Ferry Company Limited, following the Company’s successful bid. He is a Chartered Accountant and was a partner of KPMG (and predecessor firms) from 1984 to 1998. He is currently non-executive Chairman of Beale plc, a listed Company. He was previously non-executive Chairman of Southern Vectis plc and Conder Environmental plc, both listed on AIM. He is Chairman of the Audit Committee and a member of the Remuneration Committee. Jeremy Brade (49) Non-executive Director Jeremy joined the Board on 9 September 2009. He is a Director and Private Equity Partner at J O Hambro Capital Management Limited, where he has worked since 2001. Jeremy had previously been with the Foreign and Commonwealth Office (FCO) where he served at the British High Commission in New Delhi and as the representative of Cyrus Vance and Lord Owen at the International Conference on the Former Yugoslavia. Prior to joining the Diplomatic Service, Jeremy was an Army Officer. Mike Beck (36) Company Secretary Mike was appointed Company Secretary on 21 June 2011. He is a Chartered Accountant. Directors’ Report FALKLAND ISLANDS HOLDINGS PLC 15 The Directors present their Annual Report and the financial statements for the Company and for the Group for the year ended 31 March 2011. Results and dividend The Group’s result for the year is set out in the consolidated income statement on page 21. The Group profit for the year after taxation amounted to £1,620,000 (2010: £5,256,000). Basic earnings per share were 17.7p (2010: 58.2p). The Directors recommend a dividend of 5.5p per share (2010: 5.0p) which, if approved by shareholders at the forthcoming Annual General Meeting, will be paid on 14 October 2011 to shareholders on the register at close of business on 16 September 2011. The proposed dividend has not been included in creditors as it was not approved before the year end. Dividends paid during the year comprise a dividend of 5.0p per share in respect of the year ended 31 March 2010 and an interim dividend of 4.0p per share in respect of the current year. Principal activities and business review The business of the Group during the year ended 31 March 2011 was general trading in the Falkland Islands, the operation of a ferry across Portsmouth Harbour and the provision of international arts logistics and storage services. The principal activities of the Group are discussed in more detail in the Business and Financial Reviews on pages 4 to 13 which should be considered as part of the Directors’ Report for the purposes of the requirements of the enhanced Directors’ Report guidance. The principal activity of the Company is that of a holding company. Directors There have been no changes to the Board during the year. Directors’ interests The interests of the Directors in the issued shares and share options over the shares of the Company are set out below under the heading “Directors’ interests in shares” on pages 17 and 18. During the year no Director had an interest in any significant contract relating to the business of the Company or its subsidiaries other than his own service contract. Health and safety The Group is committed to the health, safety and welfare of its employees and third parties who may be affected by the Group’s operations. The focus of the Group’s effort is to prevent accidents and incidents occurring by identifying risks and employing appropriate control strategies. This is supplemented by a policy of investigating and recording all incidents. Employees The Board is aware of the importance of good relationships and communication with employees. Where appropriate, employees are consulted about matters which affect the progress of the Group and which are of interest and concern to them as employees. Within this framework, emphasis is placed on developing greater awareness of the financial and economic factors which affect the performance of the Group. Employment policy and practices in the Group are based on non-discrimination and equal opportunity irrespective of age, race, religion, sex, colour and marital status. In particular, the Group recognises its responsibilities towards disabled persons and does not discriminate against them in terms of job offers, training or career development and prospects. If an existing employee were to become disabled during the course of employment, every practical effort would be made to retain the employee’s services with whatever retraining is appropriate. The Group’s pension arrangements for employees are summarised in note 24 on pages 54 to 59. Share capital and substantial interests in shares During the year 123,326 share options were exercised (2010: 91,300). Further information about the Company’s share capital is given in note 26 on pages 61 to 63. Details of the Company’s executive share option scheme and employee ownership plans can be found on pages 17 and 18 and in note 25 on pages 59 and 60. 16 ANNUAL REPORT 2011 Directors’ Report CONTINUED The Company has been notified of the following substantial interests in 3% or more of the issued ordinary shares of the Company as at 31 March 2011: L S Licht Sir Harry Solomon Dolphin Fund plc Payments to suppliers Number of shares Percentage of shares in issue 750,000 333,677 387,109 8.13 3.62 4.20 The policy of the Company and each of its trading subsidiaries, in relation to all its suppliers, is to settle the terms of payment when agreeing the terms of the transaction and to abide by those terms, provided that it is satisfied that the supplier has provided the goods or services in accordance with agreed terms and conditions. The Group does not follow any code or standard payment practice. As a holding company, the Company had no trade creditors at either 31 March 2011 or 31 March 2010. Charitable and political donations Charitable donations made by the Group during the year amounted to £17,223 (2010: £28,737), largely to local community charities in Gosport and the Falkland Islands. Disclosure of information to auditors The Directors who held office at the date of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware; and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Auditors A resolution proposing the re-appointment of KPMG Audit plc will be put to shareholders at the Annual General Meeting. Annual General Meeting The Company’s Annual General Meeting will be held at the London offices of Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB at 3.00pm on 8 September 2011. The Notice of the Annual General Meeting and a description of the special business to be put to the meeting are considered in a separate circular to Shareholders which accompanies this document. Details of Directors’ remuneration and emoluments The remuneration of non-executive Directors consists only of annual fees for their services both as members of the Board and of Committees on which they serve. An analysis of the remuneration and taxable benefits in kind (excluding share options) provided for and received by each Director during the year to 31 March 2011 and in the preceding year follows: Salary £’000 Bonuses £’000 Benefits £’000 Pensions share options £’000 £’000 Gains in respect of David Hudd John Foster Mike Killingley Sir Harry Solomon Jeremy Brade 100 163 35 – 30 328 20 80 – – – 100 – – – – – – – 26 – – – 26 4 4 – – – 8 2011 Total £’000 124 273 35 – 30 462 2010 Total £’000 363 268 35 15 14 695 FALKLAND ISLANDS HOLDINGS PLC 17 Directors’ interests in shares As at 31 March 2011, the share options of executive Directors may be summarised as follows: Opening balance Total as at 31 March 2010 Issued in year Exercised in year Date of grant Number of shares D L Hudd Number of shares J L Foster Exercise price Exercisable from Expiry date 10 Feb 2005 14 June 2005 5 July 2007 7 Aug 2007 15 July 2009 21 Dec 2010 2 Aug 2010 – 57,692 £5.20 49,411 14,117 £4.25 3,780 3,780 £2.50 – 27,517 £3.30 44,550 44,550 £2.90 10 Feb 2008 14 June 2008 1 Aug 2010 7 Aug 2010 15 July 2012 9 Feb 2015 13 June 2015 31 July 2017 6 Aug 2017 14 July 2019 97,741 20,000 147,656 20,000 £3.421/2 21 Dec 2013 20 Dec 2020 (3,780) (3,780) £2.50 Total as at 31 March 2011 113,961 163,876 The mid-market price of the Company’s shares on 31 March 2011 was 330p and the range in the year was 280p to 555p. The Directors’ options extant at 31 March 2011 totalled 277,837 and represented 3.0% of the Company’s issued share capital. Under the Company’s executive share option scheme, executive Directors and senior executives have been granted options to acquire ordinary shares in the Company after a period of three years from the date of the grant. All outstanding options have been granted at an option price of not less than market value at the date of the grant. The exercise of options is conditional upon the achievement of certain performance conditions determined by the Remuneration Committee. During September 2010 the Remuneration Committee undertook a review of the performance conditions attached to the options granted to Mr Foster in August 2007. As stated in last year’s Directors’ Report, the condition attached to these options required that compound annual growth (“CAGR”) in the share price of the Company should be at least 10% over the three years from the date of grant. The Remuneration Committee review concluded that the performance of the Company’s share price over the three years following the dates of grant had been unduly influenced by events concerning Falkland Oil and Gas Limited, in which the Company has a substantial shareholding. As a consequence the Remuneration Committee concluded that the performance conditions attached to these options would not, without alteration, achieve their intended purpose of providing appropriate incentive to Mr Foster. The Remuneration Committee, which comprises the two non-executive directors of the Company therefore recommended to the Board that, in view of the growth in earnings per share of over 78% achieved in the 3 years to 31 March 2010 the performance condition applied to the options granted to Mr Foster on 7 August 2007 over 27,517 shares at £3.30 should be regarded as satisfied and that these options should be regarded as vested. These recommendations have been adopted by the full Board (with the exception of the Director affected) and the terms of these options have therefore been amended as stated above. The options granted to Mr Hudd and Mr Foster in July 2009 may normally only be exercised subject to the satisfaction of performance criteria relating to the growth in the Company’s total shareholder return (“TSR”) over the three year period commencing 19 July 2009 (the “Performance Period”) relative to the TSR growth of all companies in the FTSE AIM All-Share Index (the “Index”) over the same period (the “TSR Condition”). 18 ANNUAL REPORT 2011 Directors’ Report CONTINUED The TSR Condition provides for the options to become exercisable as follows: Percentage by which the Company’s TSR growth exceeds the Index’s TSR growth during the Performance Period Percentage of Option shares which become exercisable 20% or more 10% Less than 10% 100% 10% 0% More than 10% but less than 20% Between 10% and 100% on a straight-line basis The options granted to Mr Hudd and Mr Foster in December 2010 may only be exercised conditional upon the growth in earnings per share over a period of three consecutive financial years (starting no earlier than the year in which the option is granted) being greater than the increase in the United Kingdom Retail Price Index over that period plus 5% pa. In addition to the share options set out above, the interests of the Directors, their immediate families and related trusts in the shares of the Company were as shown below: David Hudd John Foster Mike Killingley Jeremy Brade Ordinary shares Ordinary shares as at 31 March 2011 as at 31 March 2010 100,000 15,000 10,000 4,000 82,382 10,000 10,000 2,000 FALKLAND ISLANDS HOLDINGS PLC 19 Statement of Directors’ responsibilities in respect of the Directors’ Report and financial statements The Directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the European Union and applicable laws and have elected to prepare the Company financial statements on the same basis. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of their profit or loss for that period. In preparing each of the Group and Company financial statements, the Directors are required to: (cid:129) (cid:129) (cid:129) (cid:129) select suitable accounting policies and then apply them consistently; make judgments and estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRSs as adopted by the EU; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Approved by the Board and signed on its behalf by: Mike Beck Secretary 23 June 2011 Kenburgh Court 133-137 South Street Bishop’s Stortford Hertfordshire CM23 3HX 20 ANNUAL REPORT 2011 Independent Auditor’s Report to the members of Falkland Islands Holdings plc We have audited the financial statements of Falkland Islands Holdings plc for the year ended 31 March 2011 set out on pages 21 to 71. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the EU and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an Auditor’s Report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 19, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (“APB’s”) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm. Opinion on financial statements In our opinion: (cid:129) the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 March 2011 and of the Group’s profit for the year then ended; (cid:129) (cid:129) the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and (cid:129) the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion: (cid:129) the details of the Directors’ Remuneration and emoluments which we were engaged to audit has been properly prepared in accordance with schedule 8 to the Companies Act 2006 The Large and Medium-sized companies and Groups (Accounts and Reports) Regulations 2008, as if those requirements were to apply to the Company; and (cid:129) the information given in the Directors’ Report for the financial period for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: (cid:129) adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or (cid:129) the Parent Company financial statements and the details of the Directors’ remuneration are not in agreement with the accounting records and returns; or (cid:129) certain disclosures of Directors’ remuneration specified by law are not made; or (cid:129) we have not received all the information and explanations we require for our audit. T M Widdas (Senior Statutory Auditor) For and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants St Nicholas House Park Row Nottingham NG1 6FQ 23 June 2011 Consolidated Income Statement FOR THE YEAR ENDED 31 MARCH 2011 FALKLAND ISLANDS HOLDINGS PLC 21 Before Amortisation amortisation & non-trading Before Amortisation amortisation & non-trading Notes 3 Revenue Cost of sales Gross profit & non-trading items 2011 £’000 31,841 (19,294) 12,547 Other administrative expenses (9,627) Amortisation of intangible items (note 5) 2011 £’000 Total 2011 £’000 & non-trading items 2010 £’000 items (note 5) 2010 £’000 – – – – 31,841 29,224 (19,294) (17,237) 12,547 11,987 (9,627) (8,868) – – – – Total 2010 £’000 29,224 (17,237) 11,987 (8,868) assets – (398) (398) – (398) (398) Operating expenses (9,627) (398) (10,025) (8,868) (398) (9,266) Gain on disposal of available-for-sale equity securities Compensation for early vacation of leasehold premises Other income 4 Other operating income – – 15 15 – – – – – – 15 15 – – 15 15 3,089 3,089 245 – 245 15 3,334 3,349 Operating profit 2,935 (398) 2,537 3,134 2,936 6,070 Finance income Finance expense 8 Net financing costs 117 (324) (207) – – – 117 (324) 111 (557) (207) (446) 45 – 45 156 (557) (401) Profit / (loss) before tax from continuing operations 2,728 (398) 2,330 2,688 2,981 5,669 9 Taxation (821) 111 (710) (705) 292 (413) Profit / (loss) for the year attributable to equity holders of the Company 1,907 (287) 1,620 1,983 3,273 5,256 10 Earnings per share Basic Diluted 20.9p 20.6p 17.7p 17.5p 22.0p 21.7p 58.2p 57.5p 22 ANNUAL REPORT 2011 Consolidated Statement of Comprehensive Income FOR THE YEAR ENDED 31 MARCH 2011 (Loss) / gain on valuation of available-for-sale equity securities (4,832) 6,828 Transfer to the income statement on sale of available-for-sale equity securities – (1,683) 2011 £’000 2010 £’000 Share-based payments Repurchase of equity interest PHFC actuarial loss on pension scheme FIC actuarial loss on pension scheme Movement on deferred tax asset relating to pension schemes Effect of tax rate changes on deferred tax asset relating to pension schemes Other comprehensive (expense) / income Profit for the year Total comprehensive (expense) / income 207 – (10) (82) 24 (43) 240 (75) (55) (195) 124 – (4,736) 5,184 1,620 5,256 (3,116) 10,440 Consolidated Balance Sheet AS AT 31 MARCH 2011 Notes 11 12 13 15 Non-current assets Intangible assets Property, plant and equipment Investment properties Financial assets – available-for-sale equity securities 16 Non-current assets held-for-sale 17 Other financial assets 18 Deferred tax assets Total non-current assets Current assets Trading inventories Property inventories Inventories Trade and other receivables 19 20 17 Other financial assets 21 Cash and cash equivalents Total current assets TOTAL ASSETS Current liabilities 22 Interest-bearing loans and borrowings Income tax payable 23 Trade and other payables Total current liabilities Non-current liabilities Interest-bearing loans and borrowings Employee benefits 22 24 18 Deferred tax liabilities Total non-current liabilities TOTAL LIABILITIES Net assets 26 Capital and reserves Equity share capital Share premium account Other reserves Retained earnings Financial assets fair value revaluation reserve Total equity FALKLAND ISLANDS HOLDINGS PLC 23 2011 £’000 2010 £’000 13,111 13,509 7,489 1,721 7,483 1,777 10,710 15,542 20 60 554 20 52 621 33,665 39,004 4,215 1,204 5,419 5,811 252 2,062 3,489 1,220 4,709 4,535 206 3,810 13,544 13,260 47,209 52,264 (1,058) (569) (8,334) (1,218) (683) (8,219) (9,961) (10,120) (3,104) (2,130) (1,413) (6,647) (4,055) (2,237) (1,615) (7,907) (16,608) (18,027) 30,601 34,237 922 7,618 1,162 12,150 8,749 30,601 910 7,324 1,162 11,260 13,581 34,237 These financial statements were approved by the Board of Directors on 23 June 2011 and were signed on its behalf by: J L Foster Director 24 ANNUAL REPORT 2011 Company Balance Sheet AS AT 31 MARCH 2011 Notes Non-current assets 14 20 18 20 21 22 21 Financial assets – investments in subsidiaries Other receivables Deferred tax Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets TOTAL ASSETS Current liabilities Interest-bearing loans and borrowings Bank overdraft Income tax payable 23 Trade and other payables Total current liabilities Non-current liabilities 22 23 Interest-bearing loans and borrowings Other payables Total non-current liabilities TOTAL LIABILITIES Net assets 26 Capital and reserves Called up share capital Share premium account Other reserves Retained earnings Total equity 2011 £’000 2010 £’000 31,426 31,297 4,042 2,916 8 – 35,476 34,213 30 – 30 15 360 375 35,506 34,588 (800) (928) (1,418) (27) (376) – 70 (413) (2,621) (1,271) (2,337) (3,140) (390) (871) (2,727) (4,011) (5,348) (5,282) 30,158 29,306 922 7,618 6,910 910 7,324 6,910 14,708 14,162 30,158 29,306 These financial statements were approved by the Board of Directors on 23 June 2011 and were signed on its behalf by: J L Foster Director Registered company number: 03416346 Consolidated Cash Flow Statement FOR THE YEAR ENDED 31 MARCH 2011 FALKLAND ISLANDS HOLDINGS PLC 25 Notes Cash flows from operating activities Profit for the year Adjusted for: (i) Non-cash items: Depreciation Fixed asset impairment Amortisation Amortisation of loan fees Notional interest charge on deferred consideration Expected return on pension scheme assets Interest cost on pension scheme liabilities Net settlement gain recognised on pension transfers Gain on remeasurement of derivative financial instruments Settlement of equity interest Equity-settled share-based payment expenses Non-cash items adjustment (ii) Other items: Bank interest receivable Bank interest payable Gain on disposal of available-for-sale equity securities Profit on disposal of investment property Enhanced transfer value exercise payments Income tax expense Other adjustments Operating cash flow before changes in working capital and provisions Increase in trade and other receivables Decrease / (increase) in property inventories Increase in other inventories Increase in trade and other payables Decrease in provisions and employee benefits Changes in working capital and provisions Cash generated from operations Income taxes paid Net cash flow from operating activities Cash flows from investing activities: Purchase of property, plant and equipment Purchase of investment properties Proceeds from the disposal of property, plant and equipment Acquisition of subsidiary, net of cash acquired Proceeds from the sale of available-for-sale equity securities Interest received Net cash flow from investing activities Cash flow from financing activities: Increase in other financial assets Repayment of secured loans Proceeds from new loans Interest paid Liquidation of financial derivative contracts Proceeds from the issue of ordinary share capital Dividends paid Net cash flow from financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at start of year 21 Cash and cash equivalents at end of year 2011 £’000 2010 £’000 1,620 5,256 846 – 398 30 – (29) 144 (10) – – 207 907 (30) 398 30 48 (17) 149 – (45) (75) 240 1,586 1,605 (4) 138 – (80) (140) 710 624 3,830 (1,276) 16 (726) 115 (134) (2,005) 1,825 (1,008) 817 (815) – 99 – – 4 (712) (54) (1,141) – (138) – 306 (826) (1,853) (1,748) 3,810 2,062 (16) 330 (3,089) – – 413 (2,362) 4,499 (111) (581) (919) 306 (137) (1,442) 3,057 (708) 2,349 (1,358) (55) 72 (1,621) 3,584 16 638 (41) (755) 376 (330) (361) 14 (1,084) (2,181) 806 3,004 3,810 26 ANNUAL REPORT 2011 Company Cash Flow Statement FOR THE YEAR ENDED 31 MARCH 2011 Notes Cash flows from operating activities Profit / (loss) for the year Adjusted for: Net financing costs Amortisation of loan fees Notional interest charge on deferred consideration Loss on re-measurement of financial instruments Equity-settled share-based payment expenses Settlement of equity interest Income tax credit / (expense) 2011 £’000 2010 £’000 1,165 (330) 102 30 – – 78 – 19 286 30 48 (45) 46 (75) (84) Operating profit before changes in working capital and provisions 1,394 (124) (Increase) / decrease in trade and other receivables Decrease in trade and other payables Increase in provisions Cash generated from operations Income taxes refunded / (paid) Net cash flow from operating activities Cash flows from investing activities: Acquisition of subsidiary Net cash flow from investing activities Cash flow from financing activities: Proceeds from new loan Proceeds from inter-company borrowing Repayment of inter-company borrowing Repayment of secured loan Interest paid Liquidation of financial derivative contracts Proceeds from the issue of ordinary share capital Dividends paid Net cash flow from financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at start of year 21 Cash and cash equivalents at end of year (15) (37) – 1,342 70 1,412 – – – – (1,607) (961) (102) – 306 4 – 168 48 (70) (22) (1,621) (1,621) 242 3,648 – (459) (286) (361) 14 (826) (1,084) (3,190) 1,714 (1,778) 360 (1,418) 71 289 360 Consolidated Statement of Changes in Shareholders’ Equity FOR THE YEAR ENDED 31 MARCH 2011 FALKLAND ISLANDS HOLDINGS PLC 27 Shareholders’ funds at the beginning of the year Profit for the year Share-based payments Change in fair value of available-for-sale financial assets 2011 £’000 2010 £’000 34,237 24,867 1,620 5,256 207 240 (4,832) 6,828 Transfer to the income statement on sale of available-for-sale equity securities – (1,683) Actuarial loss on pension net of tax Effect of tax rate changes on deferred tax asset relating to pension schemes Repurchase of equity interest Total comprehensive (expense) / income Dividends paid Proceeds from the issue of ordinary share capital Shareholders’ funds at the end of the year (68) (43) – (126) – (75) (3,116) 10,440 (826) (1,084) 306 14 30,601 34,237 Company Statement of Changes in Shareholders’ Equity FOR THE YEAR ENDED 31 MARCH 2011 Shareholders’ funds at the beginning of the year Profit / (loss) for the year Share-based payments Repurchase of equity interest Total comprehensive income / (expense) Dividends paid Proceeds from the issue of ordinary share capital Shareholders’ funds at the end of the year 2011 £’000 2010 £’000 29,306 30,541 1,165 207 – 1,372 (330) 240 (75) (165) (826) (1,084) 306 14 30,158 29,306 28 ANNUAL REPORT 2011 Notes to the Financial Statements FOR THE YEAR ENDED 31 MARCH 2011 1 Accounting policies General information Falkland Islands Holdings plc (the “Company”) is a company incorporated and domiciled in the UK. Reporting entity The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the “Group”). The Parent Company financial statements present information about the Company as a separate entity and not about its group. Basis of preparation Both the Parent Company financial statements and the Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRS”). On publishing the Parent Company financial statements here together with the Group financial statements, the Company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements. The management and development of the Group’s property portfolio in the Falkland Islands is a significant part of the Group’s trading activity. Accordingly, receipts from the disposal of investment property and property developments and rents received from its portfolio of residential and commercial properties are reported as a trading activity within turnover. Associated gains and losses on the disposal of rental properties and property developments are accordingly recognised within gross profit. Judgements made by the Directors in the application of these accounting policies that have a significant effect on the financial statements and estimates with a significant risk of material adjustment next year are discussed in note 31. The financial statements are presented in pounds sterling, rounded to the nearest thousand. They are prepared on the historical cost basis except that available-for-sale financial instruments and derivative financial instruments are stated at their fair value. The Directors are responsible for ensuring that the Group has adequate financial resources to meet its projected liquidity requirements and also for ensuring forecast earnings are sufficient to meet the covenants associated with the Group’s banking facilities. As in prior years the Directors have reviewed the Group’s medium term forecasts and considered a number of possible trading scenarios and are satisfied the Group’s existing resources (including committed banking facilities) are sufficient to meet its needs. As a consequence the Directors believe the Group is well placed to manage its business risk. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Managing Director’s Business Review and Financial Review on pages 4 to 13. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described in the Managing Director’s Financial Review. In addition, note 27 to the financial statements includes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. The Group has considerable financial resources. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook. After making enquiries the Directors have a reasonable expectation that the Company and Group have adequate reserves to continue in operational existence for the foreseeable future, and have continued to adopt the going concern basis in preparing the financial statements. Basis of consolidation The consolidated financial statements comprise the financial statements of Falkland Islands Holdings plc and its subsidiaries (the “Group”). A subsidiary is any entity Falkland Islands Holdings plc has the power to control the financial and operating policies of so as to obtain benefits from its activities. The financial statements of subsidiaries are prepared for the same reporting period as the Parent Company. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. FALKLAND ISLANDS HOLDINGS PLC 29 1 Accounting policies CONTINUED Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. All intra-company balances and transactions, including unrealised profits arising from intra-group transactions, are eliminated in full in preparing the consolidated financial statements. Unrealised losses are eliminated but only to the extent that there is no evidence of impairment. Investments in subsidiaries not classified as held-for-sale within the Company balance sheet are stated at cost. Presentation of income statement Due to the non-prescriptive nature under IFRS as to the format of the income statement, the format used by the Group is explained below. Operating profit is the pre-finance profit of continuing activities and acquisitions of the Group, and in order to achieve consistency and comparability, is analysed to show separately the results of normal trading performance (“underlying profit”), individually significant charges and credits and amortisation of intangible assets on acquisition. Such items arise because of their size or nature, and in 2011 comprise: (cid:129) Amortisation of intangible assets. In 2010 such items comprised: (cid:129) Gain on disposal of equity securities (cid:129) Compensation for early vacation of leasehold premises (cid:129) Gain on liquidation of derivative financial instrument contracts (cid:129) Amortisation of intangible assets. Foreign currencies Transactions in foreign currencies are translated to the functional currencies of Group entities at exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency using the relevant rates of exchange ruling at the balance sheet date and the gains or losses thereon are included in the income statement. Non-monetary assets and liabilities are translated using the exchange rate at the date of the initial transaction. Property, plant and equipment Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Cost comprises purchase price and directly attributable expenses. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows: Freehold buildings Long leasehold land and buildings Vehicles, plant and equipment Ships 20 – 50 years 50 years 4 – 10 years 15 – 30 years The carrying value of assets and their useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. If an indication of impairment exists, the assets are written down to their recoverable amount and the impairment is charged to the income statement in the period in which it arises. Freehold land and assets-in-construction are not depreciated. 30 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 1 Accounting policies CONTINUED Investment properties Investment properties are properties held either to earn rental income or for capital appreciation or for both. Investment properties are stated at cost less any accumulated depreciation (calculated on useful economic lives in line with accounting policy, property, plant and equipment above) and any impairment losses. Intangible assets Goodwill Goodwill arises on the acquisition of subsidiaries. Acquisitions prior to 1 April 2006 In respect to acquisitions prior to transition to IFRS, goodwill is recorded on the basis of deemed cost, which represents the amount recorded under previous Generally Accepted Accounting Principles (“GAAP”) as at the date of transition. The classification and accounting treatment of business combinations which occurred prior to transition has not been reconsidered in preparing the Group’s opening IFRS balance sheet at 1 April 2006. Acquisitions on or after 1 April 2006 Goodwill on acquisition is initially measured at cost, being the excess of the cost of the business combination over the acquirer’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities of the acquired business. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortised but reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: Trade name Customer relationships Non-compete agreements Computer software 20 years 6 – 10 years 5 years Acquired computer software is capitalised as an intangible asset on the basis of the cost incurred to acquire and bring the specific software into use. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The estimated useful life of computer software is five years. Impairment of non-financial assets At each reporting date the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists or the asset requires annual impairment testing, the Group makes a formal estimate of the recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. Impairment losses are recognised in the income statement. Recoverable amount is the greater of an asset’s or cash-generating unit’s fair value less cost to sell or value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses are reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. FALKLAND ISLANDS HOLDINGS PLC 31 1 Accounting policies CONTINUED Finance income and expense Net financing costs comprise interest payable, interest receivable, and foreign exchange gains and losses that are recognised in the income statement. Interest income and interest payable are recognised as a profit or loss as they accrue, using the effective interest method. Financial instruments Certain financial instruments held by the Group are classified as being available-for-sale and are stated at fair value, with any resultant gain or loss being recognised directly in equity, except for impairment losses. When these items are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in profit and loss. Financial instruments classified as available-for-sale are initially recognised at fair value less directly attributable transaction costs. The Group does not use derivative financial instruments for speculative purposes. Derivative financial instruments are initially measured at fair value. Changes in the fair value of derivative financial instruments are recognised in the income statement as they arise. The Group has not applied hedge accounting to its derivative financial instruments. Employee share awards The Group provides benefits to certain employees (including Directors) in the form of share-based payment transactions, whereby the employee renders service in return for shares or rights over future shares (“equity settled transactions”). The cost of these equity settled transactions with employees is measured by reference to an estimate of their fair value at the date on which they were granted using an option input pricing model taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. The cost of equity settled transactions is recognised, together with a corresponding increase in reserves, over the period in which the performance conditions are fulfilled, ending on the date that the option vests. Where the Company grants options over its own shares to the employees of subsidiaries, it recognises, in its individual financial statements, an increase in the cost of investment in its subsidiaries equal to the equity settled share-based payment charge recognised in its consolidated financial statements with the corresponding credit being recognised directly in equity. Inventories Inventories are stated at the lower of cost and net realisable value. Cost includes all costs incurred in bringing each product to its present location and condition, as follows: The cost of raw materials, consumables and goods for resale comprises purchase cost, on a first-in, first-out basis and where applicable includes expenditure incurred in transportation to the Falkland Islands. Work-in-progress and finished goods cost includes direct materials and labour plus attributable overheads based on a normal level of activity. Construction-in-progress and properties-held-for-sale relating to the Group’s property trading portfolio in the Falkland Islands are stated at the lower of cost and net realisable value. Net realisable value is estimated at selling price in the ordinary course of business less costs of disposal. Revenue Revenue is measured at the fair value of the consideration received or receivable and represents the amount receivable by the Group for goods supplied and services rendered in the normal course of business, net of discounts and excluding VAT. Revenue principally arises from retail sales, the provision of ferry services and the provision of storage and transportation services for fine art works. In the Falkland Islands revenue also includes proceeds from property sales, property rental income, insurance commissions, revenues billed for shipping and agency activities and port services. Revenue from sale of goods is recognised at the point of sale or dispatch, whilst that of the ferry, fine art logistics and other services is recognised when the service is provided. Revenue from property sales is recognised on completion. 32 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 1 Accounting policies CONTINUED For fine art exhibition logistical work undertaken the amount of profit attributable to the stage of completion of a contract is recognised when the outcome of the contract can be seen with reasonable certainty, typically upon successful opening. Turnover for such contracts is stated at the cost appropriate to their stage of completion plus attributable profit, less amounts already recognised. Provision is made for losses as soon as they are foreseeable. Pensions Defined contribution pension schemes The Group operates three defined contribution schemes. The assets of the schemes are held separately from those of the Group in independently administered funds. The amount charged to the income statement represents the contributions payable to the schemes in respect to the accounting period. Defined benefit pension schemes The Group also operates two pension schemes providing benefits based on final pensionable pay, one of which is unfunded. The assets of the funded scheme are held separately from those of the Group. The Group’s net obligation in respect of each defined benefit pension plan is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to its present value; and any unrecognised past service costs and the fair value of the plan assets (at bid price) are deducted. The liability discount rate is the yield at the balance sheet date on AA credit-rated bonds that have maturity dates approximating the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the asset recognised is limited to the net total of any unrecognised past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan. The current service cost and costs from settlements and curtailments are charged against operating profit. Past service costs are spread over the period until the benefit increases vest. Interest charged on the scheme liabilities and the expected return on scheme assets are included in other finance costs. Actuarial gains and losses are recognised in full in the period in which they arise in the statement of comprehensive income. Trade and other receivables Trade receivables are carried at amortised cost, less provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the income statement. Trade and other payables Trade and other payables are stated at their cost less payments made. Dividends on funds presented within shareholders’ funds Dividends unpaid at the balance sheet date are only recognised as liabilities at that date to the extent that they are appropriately authorised and are no longer at the discretion of the Company. Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash balances and call deposits with an original maturity of three months or less. 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. Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less directly attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. Income tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement, except to the extent that it relates to items recognised directly in equity, in which case it is recognised directly in equity. FALKLAND ISLANDS HOLDINGS PLC 33 1 Accounting policies CONTINUED Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted, or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary timing differences are not recognised: (cid:129) Goodwill not deductible for tax purposes; and (cid:129) Initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profits. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax is recognised at the tax rates that are expected to be applied to the temporary differences when they reverse, based on rates that have been enacted or substantially enacted by the reporting date. Leased assets Leases in which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases. As lessee Rentals in respect of all operating leases are charged to the income statement on a straight-line basis over the lease term. As lessor Assets under hire purchase agreements are shown in the balance sheet under current assets to the extent they are due within one year, and under non-current assets to the extent that they are due after more than one year, and are stated at the value of the net investment in the agreements. The income from such agreements is credited to the income statement each year so as to give a constant rate of return on the funds invested. Assets held for leasing out under operating leases are included in investment property (where they constitute land and buildings) or in property, plant and equipment (where they do not constitute land and buildings) at cost less accumulated depreciation and impairment losses. Rental income is recognised on a straight-line basis. Lease incentives granted are recognised as an integral part of the total rental income. Finance lease payments Minimum lease payments are apportioned between the finance charge and reduction of the outstanding liability. The finance charge is allocated to each period of the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Non-current assets held for sale and discontinued operations Non-current assets and discontinued operations are classified as held for sale when their carrying values will be recovered principally through sale. They are generally measured at the lower of carrying amount and fair value less costs to sell. Provisions Provisions are recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect is material, provisions are determined by discounting the expected cash flows at an appropriate pre-tax risk free rate. 34 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 1 Accounting policies CONTINUED New accounting standards and interpretations applied During the year the Group has adopted the following standards: Amendments to IFRS 2 Group cash-settled share based payments Amendments to IAS 27(2008) Consolidated and Separate Financial Statements Amendments to IFRS 3 (2008) Business Combinations Amendments to IAS 39 Financial Instruments: Recognition and Measurement IFRIC 17 Distributions of non-cash assets to owners New accounting standards and interpretations not applied During the year, the International Accounting Standards Board (“IASB”) and International Financial Reporting Interpretations Committee (“IFRIC”) have issued the following standards and interpretations with potential application to the Group with an effective date after the end of these financial statements: International Accounting Standards (IAS/IFRS) (accounting periods commencing on or after): Effective date Endorsed Amendments to IFRS 3 (2008) Business Combinations Amendments to IFRS 7 Financial Instruments Disclosures Amendments to IFRS 7 Financial Instruments Disclosures, related to transfer of financial assets IFRS 9 Financial Instruments Amendments to IAS 1 Presentation of Financial Statements IAS 24 Related Party Disclosures Amendments to IAS 27 (2008) Consolidated and Separate Financial Statements Amendments to IAS 34 Interim Financial Reporting International Financial Reporting Interpretations Committee (IFRIC) 1 July 2010 1 January 2011 1 July 2011 1 January 2013 1 January 2011 1 January 2011 1 July 2010 1 January 2011 IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 1 July 2010 The Directors do not anticipate that the adoption of the standards and interpretations listed above will have a material impact on the Group’s or Company’s financial statements in the period of initial application, however additional disclosures will be required. FALKLAND ISLANDS HOLDINGS PLC 35 2 Segmental information Segment information is presented in respect of the Group’s business and geographical segments. The primary reporting format is determined to be by business type: general trading in the Falkland Islands, the provision of ferry services and art logistics and storage. The secondary reporting format is determined to be geographical. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment and intangible assets other than goodwill. Primary reporting format – business 2011 Revenue Segment operating profit before tax, amortisation and non-trading items Amortisation of intangible assets Amortisation and non-trading items Segment operating profit Interest income Interest expense Segment profit before tax Taxation Segment profit after tax Assets and liabilities Segment assets Segment liabilities Unallocated assets and liabilities Segment net assets Other segmental information Capital expenditure: Property, plant, equipment Depreciation – property, plant and equipment Depreciation – investment properties Amortisation Underlying profit before tax Segment operating profit before tax, amortisation and non-trading items (as above) Interest income Interest expense Underlying profit before tax General trading Ferry services Art logistics and storage (Falklands) (Portsmouth) £’000 £’000 (UK) £’000 To tal £’000 14,921 3,734 13,186 31,841 1,613 – – 1,613 88 (129) 1,572 (314) 1,258 790 – – 790 29 (70) 749 (326) 423 532 (398) (398) 134 – (125) 9 (70) (61) 12,856 (7,972) 8,029 (1,993) 12,268 (4,519) 4,884 6,036 7,749 419 326 37 – 1,613 88 (129) 1,572 69 215 – – 790 29 (70) 749 327 268 – 398 532 – (125) 407 2,935 (398) (398) 2,537 117 (324) 2,330 (710) 1,620 33,153 (14,484) 11,932 30,601 815 809 37 398 2,935 117 (324) 2,728 36 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 2 Segmental information CONTINUED 2010 Revenue Segment operating profit before tax, amortisation and non-trading items Amortisation of intangible assets Compensation for early vacation of leasehold premises Unallocated gain on disposal of available-for-sale equity securities Amortisation and non-trading items Segment operating profit Gain on liquidation of financial derivative Interest income Interest expense Segment profit before tax Tax Segment profit after tax Assets and liabilities Segment assets Segment liabilities Unallocated assets and liabilities Segment net assets Other segmental information Capital expenditure: Property, plant, equipment Investment properties Depreciation – property, plant and equipment Depreciation – investment properties Amortisation and goodwill impairment Underlying profit before tax Segment operating profit before tax, amortisation and non-trading items (as above) Interest income Interest expense Underlying profit before tax General trading Ferry services Art logistics and storage (Falklands) (Portsmouth) £’000 £’000 (UK) £’000 To tal £’000 12,434 3,718 13,072 29,224 1,377 800 – – – 1,377 – 78 (138) 1,317 34 1,351 – – – 800 8 21 (85) 744 (246) 498 957 (398) 245 (153) 804 37 12 (334) 519 (201) 318 11,590 (8,084) 8,231 (2,583) 13,045 (5,270) 3,506 5,648 7,775 1,087 55 324 40 – 1,377 78 (138) 1,317 37 – 222 – – 800 21 (85) 736 234 – 321 – 398 957 12 (334) 635 3,134 (398) 245 3,089 2,936 6,070 45 111 (557) 5,669 (413) 5,256 32,866 (15,937) 17,308 34,237 1,358 55 867 40 398 3,134 111 (557) 2,688 2 Segmental information CONTINUED Secondary reporting format – geographic 2011 Revenue Assets and liabilities Segment assets Other segment information Capital expenditure 2010 Revenue Assets and liabilities Segment assets Other segment information Capital expenditure 3 Revenue Sale of goods Rendering of services Property sales in the Falkland Islands Total revenue FALKLAND ISLANDS HOLDINGS PLC 37 United Kingdom £’000 Falkland Islands £’000 Total £’000 16,920 14,921 31,841 20,297 12,856 33,153 396 419 815 United Kingdom £’000 Falkland Islands £’000 Total £’000 16,790 12,434 29,224 21,276 11,590 32,866 271 1,142 1,413 2011 £’000 16,305 15,082 454 2010 £’000 14,214 14,651 359 31,841 29,224 38 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 4 Other operating income Gain on disposal of available-for-sale equity securities Compensation for early vacation of leasehold premises Foreign exchange commission receivable Net settlement gain on transfer of PHFC pension liability Total other operating income 5 Amortisation and non-trading items Gain on disposal of available-for-sale equity securities 1 Compensation for early vacation of leasehold premises 2 Gain on liquidation of derivative financial instrument 3 Amortisation charge on Momart intangible assets acquired Amortisation and non-trading items (charge) / gain Profit before tax as reported Adjusted for: amortisation and non-trading items charge / (gain) Underlying profit before tax 2010 1 Gain on disposal of available-for-sale equity securities 2011 £’000 – – 5 10 15 2011 £’000 – – – (398) (398) 2,330 398 2,728 2010 £’000 3,089 245 15 – 3,349 2010 £’000 3,089 245 45 (398) 2,981 5,669 (2,981) 2,688 On 30 November 2010 the Group sold 3,000,000 Falkland Oil and Gas Limited shares, representing 20% of its holding at that date. The sale generated proceeds of £3.6 million and a gain on disposal of £3.1 million. 2 Compensation for early vacation of leasehold premises An agreement for the payment of compensation to Momart Limited for the early vacation of leasehold premises in April 2008 was settled during the prior year with total compensation received of £245,000. 3 Gain on liquidation of derivative financial instrument In January 2010 the Group elected to liquidate its base rate cap and floor contracts in respect to loans taken out in relation to a ferry delivered in 2005 and the Momart acquisition in March 2008 at a cost of £352,000. IAS 39 had required these derivative financial instruments to be recognised in the balance sheet at fair value as an asset or liability. At 31 March 2009 this gave rise to a liability of £406,000. On liquidation after expensing arrangement fees the Group recognised a gain of £45,000 on termination of the contracts during the prior year. FALKLAND ISLANDS HOLDINGS PLC 39 6 Expenses and auditors’ remuneration Included in profit are the following expenses / (income): Group Company Direct operating expenses arising from investment properties which generated rental income in the period Depreciation Amortisation of intangible assets Foreign currency differences Impairment loss / (gain) on trade and other receivables Cost of inventories recognised as an expense Operating lease payments Auditors’ remuneration: Audit of these financial statements and amounts receivable by auditors and their associates in respect of: Audit of subsidiaries’ financial statements pursuant to legislation Other services relating to taxation All other services Total auditors’ remuneration 2011 £’000 82 846 398 (23) 134 2010 £’000 65 907 398 (38) (48) 8,939 651 7,597 649 2011 £’000 2010 £’000 – – – – – – – 2011 £’000 26 61 23 – 110 – – – – – – – 2010 £’000 25 60 13 – 98 Amounts paid to the Company’s auditors and their associates in respect of services to the Company, other than the audit of the Company’s financial statements, have not been disclosed as the information is required instead to be disclosed on a consolidated basis. 7 Staff numbers and cost The average number of persons employed by the Group (including Directors) during the year, analysed by category, was as follows: Ferry services Falklands Islands: in Stanley Falklands Islands: in UK Art logistics and storage Head office Total average staff numbers Number of employees Number of employees Group Company 2011 2010 2011 2010 41 87 5 109 3 245 41 83 4 104 3 235 – – – – 3 3 – – – – 3 3 40 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 7 Staff numbers and cost CONTINUED The aggregate payroll cost of these persons was as follows: Wages and salaries Share-based payments (see note 25) Social security costs Contributions to defined contribution plans Total employment costs Group Company 2011 £’000 2010 £’000 7,477 7,471 207 655 337 240 650 357 8,676 8,718 2011 £’000 510 78 46 26 660 2010 £’000 546 46 71 25 688 Details of Directors’ remuneration are provided in the Directors’ Report, under the heading “Details of Directors’ Remuneration and Emoluments” on page 16. 8 Finance income and expense Bank interest receivable Finance lease interest receivable Expected return on pension scheme assets Gain on liquidation of derivative financial instrument Total financial income Interest payable on bank loans Interest cost on pension scheme liabilities Amortisation of loan fees Other interest payable Interest attributable to deferred consideration payable Total financial expense Net financing cost Bank interest receivable Interest payable on bank loans Net bank interest Other financing charges (from above) Net financing cost 2011 £’000 4 84 29 – 117 (138) (144) (30) (12) – (324) (207) 2011 £’000 4 (138) (134) (73) (207) 2010 £’000 16 78 17 45 156 (330) (149) (30) – (48) (557) (401) 2010 £’000 16 (330) (314) (87) (401) 9 Taxation Recognised in the income statement Current tax: Current year Adjustments for prior years Current tax expense Deferred tax: Origination and reversal of temporary differences Reduction in tax rate Adjustments for prior years Deferred tax credit Total tax expense Reconciliation of effective tax rate Profit on ordinary activities before tax Tax using the UK corporation tax rate of 28% (2010: 28%) Expenses not deductible for tax purposes Other timing differences Non taxable income on disposals Schedule 23 deduction Marginal relief Lower tax charges overseas Reduction in deferred tax rate Adjustments to tax charge in respect of prior years Total tax expense Tax recognised directly in equity Current tax recognised directly in equity Deferred tax recognised directly in equity Total tax expense / (credit) recognised directly in equity FALKLAND ISLANDS HOLDINGS PLC 41 2011 £’000 823 37 860 (75) (39) (36) (150) 710 2011 £’000 2,330 652 134 10 13 (46) (2) (13) (39) 1 710 2011 £’000 – 19 19 2010 £’000 852 (15) 837 (174) (2) (248) (424) 413 2010 £’000 5,669 1,587 142 (57) (915) (60) (6) (15) – (263) 413 2010 £’000 – (124) (124) 42 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 10 Earnings per share The calculation of basic earnings per share is based on profits on ordinary activities after taxation, and the weighted average number of shares in issue in the period, excluding shares held under the Employee Share Ownership Plan (“ESOP”) (see note 26). The calculation of diluted earnings per share is based on profits on ordinary activities after taxation, and the weighted average number of shares in issue in the period, excluding shares held under the ESOP, adjusted to assume the full issue of share options outstanding, to the extent that they are dilutive. Profit on ordinary activities after taxation Weighted average number of shares in issue Less: shares held under the ESOP Average number of shares in issue excluding the ESOP Maximum dilution with regards to share options Diluted weighted average number of shares Basic earnings per share Diluted earnings per share 2011 £’000 2010 £’000 1,620 5,256 2011 Number 2010 Number 9,176,612 9,068,770 (36,499) (36,499) 9,140,113 9,032,271 96,931 114,328 9,237,044 9,146,599 2011 2010 17.7p 17.5p 58.2p 57.5p To provide a comparison of earnings per share on underlying performance, the calculation below sets out basic and diluted earnings per share based on profits before amortisation and non-trading items. Earnings per share on underlying profit Underlying profit before tax (see note 5) Taxation Profit after tax before non-trading items and amortisation Weighted average number of shares in issue excluding ESOP (from above) Diluted weighted average number of shares (from above) Basic earnings per share on underlying profit Diluted earnings per share on underlying profit 2011 £’000 2,728 (821) 1,907 2010 £’000 2,688 (705) 1,983 9,140,113 9,032,271 9,237,044 9,146,599 20.9p 20.6p 22.0p 21.7p FALKLAND ISLANDS HOLDINGS PLC 43 11 Intangible assets Cost: As at 1 April 2009 Adjustments to fair value As at 31 March 2010 Adjustments to fair value As at 31 March 2011 Accumulated amortisation: As at 1 April 2009 Amortisation for the year As at 31 March 2010 Amortisation for the year At 31 March 2011 Net book value: As at 1 April 2009 As at 31 March 2010 As at 31 March 2011 Customer relationships £’000 Group Non-compete Agreements £’000 Brand names £’000 1,882 2,823 – – 1,882 2,823 – – 1,882 2,823 260 243 503 243 746 1,622 1,379 1,136 151 141 292 141 433 2,672 2,531 2,390 72 – 72 – 72 15 14 29 14 43 57 43 29 Goodwill £’000 Total £’000 11,539 16,316 – – 11,539 16,316 – – 11,539 16,316 1,983 – 1,983 – 1,983 9,556 9,556 9,556 2,409 398 2,807 398 3,205 13,907 13,509 13,111 Amortisation and impairment charges are recognised in other administrative expenses in the income statement. Customer relationships – are on-going relationships, both contractual and otherwise, with customers considered to be of future economic benefit to the Group with estimated economic lives of 6 – 10 years. Brand names – the Momart brand is considered to be of future economic value to the Group with an estimated useful economic life of 20 years. Non-compete agreements – are contractually binding agreements with senior Momart personnel not to compete with the Group for five years in the event of their leaving the Group’s service. Goodwill Goodwill is allocated to the Group’s cash generating units (“CGUs”) which principally comprise its business segments. A segment level summary of goodwill is shown below: Brought forward as at 1 April 2009 Carried forward as at 31 March 2010 Balance as at 31 March 2011 Art logistics and storage £’000 5,577 5,577 5,577 Ferry services (Portsmouth) £’000 3,979 3,979 3,979 Total £’000 9,556 9,556 9,556 44 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 11 Intangible assets CONTINUED Impairment The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. An impairment test is a comparison of the carrying value of the assets of a CGU, based on a value-in-use calculation, to their recoverable amounts. Where the recoverable amount is less than the carrying value an impairment results. During the year the goodwill for each CGU was separately assessed and tested for impairment, with no impairment charges resulting (2010: nil). As part of testing goodwill for impairment detailed forecasts of operating cash flows for the next five years are used, which are based on approved budgets and plans by the Board of Falkland Islands Holdings plc. These forecasts represent the best estimate of future performance of the CGUs based on past performance and expectations for the market development of the CGU. A number of key assumptions are used as part of impairment testing. These key assumptions are made by management reflecting past experience combined with their knowledge as to future performance and relevant external sources of information. Sensitivity analysis as at 31 March 2011 has indicated that no reasonably foreseeable change in the key assumptions used in the impairment model would result in a significant impairment charge being recorded in the financial statements. Discount rates Within impairment testing models cash flows of all CGUs are discounted using a pre tax discount rate of 14.1% (2010: 14.1%). Management have determined that this rate is appropriate as the risk adjustment applied within the discount rate reflects the risks and rewards inherent to each CGU, based on the industry and geographical location it is based within. Both Ferry Services and Art Logistics and Storage have stable core revenue streams and are considered to have a similar risk profile. Long term growth rates Long term growth rates of 2% have been used for all CGUs as part of the impairment testing models. This growth rate does not exceed the long term average growth rate for the UK, in which the CGUs operate. Other assumptions Other assumptions used within impairment testing models include an estimation of long term effective tax rate for the CGUs and the terminal values of the CGUs. The long-term effective rate of tax is consistent with the current UK tax rate. The terminal value is calculated based on the Gordon Growth model. Sensitivity to changes in assumptions Using a discounted cash flow methodology necessarily involves making numerous estimates and assumptions regarding growth, operating margins, tax rates, appropriate discount rates, capital expenditure levels and working capital requirements. These estimates will likely differ from future actual results of operations and cash flows, and it is possible that these differences could be material. In addition, judgements are applied by the Directors in determining the level of cash generating units and the criteria used to determine which assets should be aggregated. A difference in testing levels could further affect whether an impairment is recorded and the extent of impairment loss. Assumptions specific to ferry services (Portsmouth) Value in use was determined by discounting future cash flows in line with the other assumptions discussed above. Management have forecast consistent growth in cash flows of 2% in both the short and long term. The value in use was determined to exceed the carrying amount and no impairment has been recognised. It is not considered that a reasonably possible change in any of these assumptions would generate a different impairment test outcome to the one included in this annual report. Assumptions specific to arts logistics and storage (UK) Value in use was determined by discounting future cash flows in line with the other assumptions as discussed above. Cash flows were projected based on approved budgets and plans which foresee growth rates in excess of 10% over the forecast period. The long term growth rate is projected to be 2% thereafter. The carrying value of the unit was determined to not be higher than its recoverable amount and no impairment was recognised (2010: nil). FALKLAND ISLANDS HOLDINGS PLC 45 12 Property, plant and equipment Cost: As at 1 April 2009 Additions in year Transferred to freehold land and buildings Disposals As at 31 March 2010 Additions in year Disposals As at 31 March 2011 Accumulated depreciation: As at 1 April 2009 Charge for the year Disposals As at 31 March 2010 Charge for the year Disposals As at 31 March 2011 Net book value: As at 1 April 2009 As at 31 March 2010 As at 31 March 2011 The Company has no tangible fixed assets. Group Long leasehold land and buildings £’000 942 22 – – Freehold land and buildings £’000 3,301 652 43 – Vehicles, plant and equipment £’000 Total £’000 4,392 660 12,062 1,358 –– – (99) Ships £’000 3,384 24 – (99) 3,996 964 3,309 5,052 13,321 179 (35) – – – – 636 – 815 (35) 4,140 964 3,309 5,688 14,101 1,590 76 – 1,666 40 (35) 1,671 1,711 2,330 2,469 93 122 – 215 100 – 315 849 749 649 593 143 (58) 678 133 – 811 2,753 5,029 526 – 867 (58) 3,279 5,838 536 – 809 (35) 3,815 6,612 2,791 2,631 2,498 1,639 1,773 1,873 7,033 7,483 7,489 Assets under construction £’000 43 – (43) – – – – – – – – – – – 43 – – 46 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 13 Investment properties As at 1 April 2009 Acquisitions Disposals As at 31 March 2010 Disposals As at 31 March 2011 Accumulated depreciation: As at 1 April 2009 Charge for the year Disposals As at 31 March 2010 Charge for the year Disposals As at 31 March 2011 Net book value: As at 1 April 2009 As at 31 March 2010 As at 31 March 2011 Residential and commercial property £’000 1,131 55 (20) 1,166 (65) 1,101 82 40 (13) 109 37 (46) 100 1,049 1,057 1,001 Group Freehold land £’000 Total £’000 720 1,851 – – 720 – 720 – – – – – – – 55 (20) 1,886 (65) 1,821 82 40 (13) 109 37 (46) 100 720 720 720 1,769 1,777 1,721 Investment properties include residential and commercial property held for rental in the Falklands with a net book value of £1.0 million (2010: £1.1 million) and a fair value of approximately £2.5 million at 31 March 2011 (2010: £2.5 million). This valuation was undertaken by a Director of a subsidiary company who is resident in the Falkland Islands and is considered to have the relevant knowledge and experience to undertake the valuation. The Group also owns 690 acres of freehold land, with an historic cost and net book value of £0.7 million (2010: £0.7 million), for which it is not possible to determine fair value, due to the restricted and limited market for freehold land in the Falkland Islands. Nonetheless the carrying value of land held at historic cost remains sufficiently low to enable Directors to satisfy themselves that no impairment exists at the balance sheet date. The Company does not own any investment properties. FALKLAND ISLANDS HOLDINGS PLC 47 14 Investments in subsidiaries The Group and Company have the following direct and indirect investments in subsidiaries: Country of incorporation Class of shares held Ownership % 2011 2010 The Falkland Islands Company Limited The Falkland Islands Trading Company Limited Falkland Island Shipping Limited UK UK Ordinary shares of £1 Preference shares of £10 Ordinary shares of £1 (formerly Darwin Shipping Limited)* Falkland Islands Ordinary shares of £1 The Portsmouth Harbour Ferry Company Limited Portsea Harbour Company Limited* Clarence Marine Engineering Limited* Gosport Ferry Limited* Momart International Limited Momart Limited* Dadart Limited Erebus Limited* UK UK UK UK UK UK UK Ordinary shares of £1 Ordinary shares of £1 Ordinary shares of £1 Ordinary shares of £1 Ordinary shares of £1 Ordinary shares of £1 Ordinary shares of £1 Falkland Islands Ordinary shares of £1 Preference shares of £1 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% * These investments are not held by the Company but are indirect investments held through a subsidiary of the Company. Company investments in Group undertakings Balance brought forward Cost of share-based payments recognised in subsidiaries Total investment in Group undertakings Company 2011 £’000 2010 £’000 31,297 31,103 129 194 31,426 31,297 The Company’s investment in Erebus Limited comprises the Group’s shareholding in Falkland Oil and Gas Limited (see note 15) and a £921,000 impairment charge was recognised to reflect the fair value of the shareholding as at 31 March 2009. The Company has elected not to reverse any element of this impairment in the current or prior year. 48 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 15 Financial assets – available-for-sale equity securities Non-current: Available-for-sale equity securities 10,710 15,542 Falkland Oil and Gas Limited share price at 31 March 89.3p 129.5p – – – – Group Company 2011 £’000 2010 £’000 2011 £’000 2010 £’000 Available-for-sale financial assets comprise the Group’s holding of 12,000,000 ordinary shares in Falkland Oil and Gas Limited (“FOGL”) which at 31 March 2011 represented an 8.2% interest (2010: 12 million shares; 8.2%). The historic cost of the Group’s investment in FOGL is £1,963,000 (2010: £1,963,000) representing 16p per share. 16 Non-current assets held-for-sale Non-current assets held-for-sale Group Company 2011 £’000 20 2010 £’000 20 2011 £’000 – 2010 £’000 – Non-current assets held-for-sale comprise certain items of artwork accumulated by Momart International Limited prior to acquisition. The assets were recognised at estimated fair value on acquisition and as a result no gain or loss arose on their being classified as held-for-sale. 17 Other financial assets Rents receivable relate to finance leases on the sale of vehicles and customer goods. No allowances for uncollectible minimum lease payments have been deemed necessary. No contingent rents have been recognised as income in the period. No residual values accrue to the benefit of the lessor. Non-current: Finance lease debtors due after more than one year Current: Finance lease debtors due within one year Total other financial assets Group 2011 £’000 2010 £’000 60 52 252 312 206 258 The difference between the gross investment in the hire purchase leases and the present value of future lease payments due represents unearned finance income of £60,000 (2010: £52,000). The cost of assets acquired for the purpose of letting under hire purchase agreements by the Group during the period amounted to £434,000 (2010: £309,000). The aggregate rentals receivable during the year in respect of hire purchase agreements were £415,000 (2010: £316,000). FALKLAND ISLANDS HOLDINGS PLC 49 Group 2011 £’000 372 252 60 312 2010 £’000 310 206 52 258 Group Assets Liabilities 2011 £’000 32 – 113 119 39 554 857 2010 £’000 43 – 70 105 57 621 896 2011 £’000 721 995 – – – – 2010 £’000 780 1,106 – – – – 1,716 1,886 (857) 859 (896) 990 17 Other financial assets CONTINUED Gross investment in hire purchase leases Present value of future lease payments due: within 1 year after more than 1 year within 5 years 18 Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Property, plant and equipment Intangible assets Inventories Other financial liabilities Share-based payments Pension Tax assets / liabilities Net of tax assets Net tax liabilities The deferred tax asset of £554,000 (2010: £621,000) shown as a non-current asset in the balance sheet relates to the Group’s pension scheme liabilities (see note 24). All other deferred tax assets are shown net against the non-current deferred tax liability shown in the balance sheet. Other temporary differences Net tax asset Company Assets Liabilities 2011 £’000 8 8 2010 £’000 – – 2011 £’000 – – 2010 £’000 – – 50 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 18 Deferred tax assets and liabilities CONTINUED Movement in deferred tax in the year 1 April 2010 £’000 737 1,106 (70) (105) (57) (621) 990 Recognised in income £’000 (48) (111) (43) (14) 18 48 (150) Group Recognised Acquired in business 31 March in equity combinations £’000 £’000 – – – – – 19 19 – – – – – – – 2011 £’000 689 995 (113) (119) (39) (554) 859 Property, plant and equipment Intangible assets Inventories Other financial liabilities Share-based payments Pension Deferred tax movements Unrecognised deferred tax assets A deferred tax asset of £158,000 (2010: £158,000) in respect of capital losses has not been recognised as it is not considered more likely than not that there will be suitable taxable profits in the foreseeable future from which the underlying capital losses will reverse. Other temporary differences Deferred tax movements Movement in deferred tax in the prior year Property, plant and equipment Intangible assets Inventories Other financial liabilities Share-based payments Pension Deferred tax movements Company 1 April 2010 £’000 – – Recognised in income £’000 8 8 Recognised 31 March in equity £’000 – – 2011 £’000 8 8 1 April 2009 £’000 1,034 1,217 (52) (145) – (516) Recognised in income £’000 (297) (111) (18) 40 (57) 19 1,538 (424) Group Recognised Acquired in business in equity combinations £’000 £’000 – – – – – (124) (124) – – – – – – – 31 March 2010 £’000 737 1,106 (70) (105) (57) (621) 990 FALKLAND ISLANDS HOLDINGS PLC 51 18 Deferred tax assets and liabilities CONTINUED Other financial liabilities Deferred tax movements 19 Inventories Work-in-progress Goods-in-transit Goods for resale Trading inventories Construction-in-progress Property held-for-sale Property inventories Total inventories Goods-in-transit are retail provisions in transit to the Falkland Islands. The Company has no inventories. Company 1 April 2009 £’000 122 122 Recognised in income £’000 (122) (122) Recognised 31 March Group in equity £’000 – – 2011 £’000 250 646 3,319 4,215 – 1,204 1,204 5,419 2010 £’000 – – 2010 £’000 403 614 2,472 3,489 91 1,129 1,220 4,709 52 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 20 Trade and other receivables Non-current: Amount owed by subsidiary undertakings – – 4,042 2,916 Group Company 2011 £’000 2010 £’000 2011 £’000 2010 £’000 Current: Trade and other receivables Income tax Prepayments and accrued income Trade and other receivables 21 Cash and cash equivalents / bank overdrafts Group Company 2011 £’000 2010 £’000 2011 £’000 2010 £’000 4,368 64 1,379 5,811 3,265 – 1,270 4,535 – – 30 30 – – 15 15 Group Company 2011 £’000 2010 £’000 2011 £’000 2010 £’000 Cash and cash equivalents in the balance sheet and cash flow statement 2,062 3,810 (1,418) 360 FALKLAND ISLANDS HOLDINGS PLC 53 22 Interest-bearing loans and borrowings This note provides information about the contractual terms of the Group and Company’s interest-bearing loans and borrowings, which are stated at amortised cost. For more information regarding the maturity of the Group and Company’s interest-bearing loans and borrowings and about the Group and Company’s exposure to interest rate and foreign currency risk, see note 27. Non-current liabilities: Secured bank loans Finance lease liabilities Total non-current interest-bearing loans and borrowings Current liabilities: Secured bank loans Finance lease liabilities Total current interest-bearing loans and borrowings Net debt Total interest-bearing loans and borrowings Less: cash balances (see note 21) Net debt Finance lease liabilities Future minimum lease payments due: within one year After more than one year but within five years Total minimum lease payments due Group Company 2011 £’000 2010 £’000 2011 £’000 2010 £’000 2,971 133 3,104 1,000 58 1,058 3,974 81 4,055 1,128 90 1,218 2,337 3,140 – – 2,337 3,140 800 – 800 928 – 928 Group Company 2011 £’000 4,162 (2,062) 2,100 2010 £’000 5,273 (3,810) 1,463 2011 £’000 3,137 1,418 4,555 2010 £’000 4,068 (360) 3,708 Group Company 2011 £’000 58 133 191 2010 £’000 90 81 171 2011 £’000 2010 £’000 – – – – – – 54 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 23 Trade and other payables Non-current: Amount owed to subsidiary undertakings – – 390 871 Group Company 2011 £’000 2010 £’000 2011 £’000 2010 £’000 Current: Trade payables Other creditors, including taxation and social security Accruals and deferred income Total trade and other payables Group Company 2011 £’000 2010 £’000 5,349 753 2,232 8,334 5,437 1,068 1,714 8,219 2011 £’000 – 59 317 376 2010 £’000 – 57 356 413 24 Employee benefits: pension plans The Group operates three defined contribution pension schemes. In addition it also operates two defined benefit pension schemes, both of which have been closed to new members and to future accrual. Defined contribution schemes The Group operates three defined contribution pension schemes. The pension cost charge for the year represents contributions payable by the Group to the schemes and amounted to £337,000 (2010: £357,000). The Group anticipates paying contributions amounting to £247,000 during the year ending 31 March 2012. There were no outstanding or prepaid contributions at either the beginning or end of the financial year. Defined benefit pension schemes A summary of the fair value of the net pension schemes deficit is set out below: Pension scheme deficit: Falkland Islands Company Limited Scheme Portsmouth Harbour Ferry Company Limited Scheme Deferred tax Net pension scheme deficit 2011 £’000 2010 £’000 (2,107) (23) (2,130) 554 (2,013) (224) (2,237) 621 (1,576) (1,616) Following the announcement by the United Kingdom Government on 8 July 2010 of their intention to use CPI rather than RPI to calculate statutory minimum increases in both deferred pensions and pensions in payment, the Company has given due consideration, including discussions with its legal advisors as to the impact of this change and has concluded that it has no impact on the liability at 31 March 2011. FALKLAND ISLANDS HOLDINGS PLC 55 24 Employee benefits: pension plans CONTINUED Falkland Islands Company Limited Scheme The Falkland Islands Company Limited operates a defined benefit pension scheme for certain employees which is unfunded and was closed to new members in 1988. This scheme was closed to further accrual on 31 March 2007. Benefits are payable on retirement at the normal retirement age. The latest full actuarial valuation was carried out at 31 March 2005 and was updated for IAS 19 purposes to 31 March 2011 by a qualified independent actuary, Lane Clark & Peacock LLP. The major assumptions used in this valuation were: Rate of increase in salaries Rate of increase in pensions in payment and deferred pensions Discount rate applied to scheme liabilities Inflation assumption 2011 2010 2.6% 3.0% 5.5% 3.5% 2.7% 3.0% 5.6% 3.7% The assumptions used by the actuary are chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. Scheme liabilities The present value of the scheme’s liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, were: Value at 2011 £’000 Value at 2010 £’000 Value at 2009 £’000 Value at 2008 £’000 Value at 2007 £’000 Present value of scheme liabilities (2,107) (2,013) (1,797) (1,863) (2,136) Related deferred tax asset Net pension liability 548 558 449 465 534 (1,559) (1,455) (1,348) (1,398) (1,602) Movement in deficit during the year: Deficit in scheme at beginning of the year Pensions paid Other finance costs Actuarial loss Deficit in scheme at end of the year 2011 £’000 2010 £’000 (2,013) (1,797) 98 (110) (82) 98 (119) (195) (2,107) (2,013) 56 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 24 Employee benefits: pension plans CONTINUED Analysis of amounts included in other finance costs: Interest on pension scheme liabilities Analysis of amount recognised in statement of comprehensive income: Experience (losses) / gains arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities Actuarial gain recognised in statement of comprehensive income History of experience gains and losses: 2011 £’000 (110) 2011 £’000 (7) (75) (82) 2010 £’000 (119) 2010 £’000 89 (284) (195) 2011 2010 2009 2008 2007 Experience (losses) / gains on scheme liabilities: Amount (£’000) (7) 89 (2) (18) (3) Percentage of year end present value of scheme liabilities (0.3%) 4.4% 0.1% 1.0% 0.1% Total amount recognised in statement of comprehensive income: Amount (£’000) Percentage of year end present value of (82) (195) 50 301 118 scheme liabilities (3.9%) 9.7% (2.8%) (16.2%) (5.5%) Portsmouth Harbour Ferry Company Plc (1975) Retirement Fund This Company operated a defined benefit scheme. The scheme has been closed for many years and none of the current employees are earning benefits under the scheme. Actuarial reports for IAS 19 purposes as at 31 March 2011 and 31 March 2010 were prepared by a qualified independent actuary, Alexander Forbes Limited. 24 Employee benefits: pension plans CONTINUED The major assumptions used in the valuations were: Rate of increase in pensions in payment and deferred pensions Discount rate applied to scheme liabilities Inflation assumption FALKLAND ISLANDS HOLDINGS PLC 57 2011 2010 3.5% 5.5% 3.5% 3.7% 5.6% 3.7% The assumptions used by the actuary are chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. Scheme assets The fair value of the scheme’s assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the scheme’s liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, were: Equities Fixed interest Other Total market value of assets Present value of scheme liabilities Deficit in the scheme Related deferred tax asset Net pension liability Value at 2011 £’000 Value at 2010 £’000 Value at 2009 £’000 Value at 2008 £’000 Value at 2007 £’000 301 101 30 432 (455) (23) 6 (17) 328 64 18 410 (634) (224) 63 (161) 185 50 18 253 (492) (239) 67 (172) 207 37 36 280 (477) (197) 54 (143) 156 20 34 210 (591) (381) 114 (267) The expected rates of return on the assets in the scheme were: Equities Fixed interest Other Long term Long term rate of return rate of return 2011 2010 7.2% 5.5% 4.0% 7.4% 5.6% 4.2% 58 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 24 Employee benefits: pension plans CONTINUED Movement in deficit during the year: Projected benefit obligations: Projected benefit obligations at beginning of the year Interest thereon Distributions Settlement gain Experience loss Projected benefit obligations at end of the year Plan assets: Plan assets at beginning of the year Distributions Contributions Return on assets Actuarial (loss) / gain Plan assets at end of the year Deficit in scheme at end of the year Analysis of amounts included in other finance costs: Expected return on pension scheme assets Interest on pension scheme liabilities Included in other finance costs Analysis of amount recognised in statement of comprehensive income: Actual return less expected return on scheme assets Changes in assumptions underlying the present value of scheme liabilities Actuarial loss recognised in statement of comprehensive income 2011 £’000 (634) (34) 65 150 (2) (455) 410 (65) 66 29 (8) 432 (23) 2011 £’000 29 (34) (5) 2011 £’000 (8) (2) (10) 2010 £’000 (493) (30) 30 – (141) (634) 254 (30) 83 17 86 410 (224) 2010 £’000 17 (30) (13) 2010 £’000 86 (141) (55) FALKLAND ISLANDS HOLDINGS PLC 59 24 Employee benefits: pension plans CONTINUED History of experience gains and losses: 2011 2010 2009 2008 2007 Difference between the expected and actual return on scheme assets: Amount (£’000) (8) 86 (99) 3 Percentage of year end scheme assets (1.9%) 21.0% 39.0% 15.8% Experience gains and losses on scheme liabilities: Amount (£’000) Percentage of year end present value of scheme liabilities Total amount recognised in statement of comprehensive income: Amount (£’000) Percentage of year end present value of – – – – (1) 0.2% – – (4) 1.0% – – (10) (55) (86) 147 61 scheme liabilities 2.2% 8.7% 17.4% 773.7% (17.1%) 25 Employee benefits: share-based payments Costs arising under IFRS 2 in respect of options issued to Directors and employees, are charged to the income statement and credited to retained earnings. The following options were outstanding at 31 March 2011: Date of issue 27 Jul 01 10 Feb 05 14 Jun 05 14 Jun 05 18 Jun 07 7 Aug 07 4 Dec 07 3 Apr 08 Number 5,000 57,692 52,500 63,528 10,000 27,517 55,000 7,562 30 Jul 08 (SAYE) 136,940 8 Apr 09 15 Jul 09 9 Dec 09 21 Dec 10 93,353 104,100 26,000 121,898 761,090 Exercise price £ 1.391/2 5.20 4.25 4.25 3.09 3.30 3.19 3.65 3.531/4 2.071/2 2.90 3.90 3.421/2 Share price at grant date £ Fair value per share £ Total fair value £ Earliest exercise date Latest exercise date Not valued for IFRS 2 purposes 27 Jul 04 26 Jul 11 5.20 4.25 4.25 2.821/2 3.321/2 3.40 3.75 4.00 2.071/2 2.90 3.971/2 3.371/2 2.47 1.66 2.14 0.82 0.73 1.19 1.31 1.35 0.56 0.72 1.45 1.24 142,499 10 Feb 08 9 Feb 15 87,150 14 Jun 08 13 Jun 15 135,950 14 Jun 08 13 Jun 15 8,200 18 Jun 10 17 Jun 17 20,087 65,450 9,906 7 Aug 10 6 Aug 17 4 Dec 10 3 Dec 17 3 Apr 11 2 Apr 18 184,869 30 Jul 11 29 Jul 18 52,278 74,952 37,700 8 Apr 12 7 Apr 19 15 Jul 12 14 Jul 19 9 Dec 12 8 Dec 19 151,154 21 Dec 13 20 Dec 20 970,195 60 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 25 Employee benefits: share-based payments CONTINUED The fair values of the options are estimated at the date of grant using appropriate option pricing models and are charged to the profit and loss account over the expected life of the options. The following table gives the assumptions made in determining the fair value of the options subject to the provisions of IFRS 2 currently in issue. Expected volatility is determined by reference to past performance of the Company’s share price. Expected volatility (%) Risk-free interest rate (%) Expected life of options (years) Dividend yield (%) Share price at grant date (£) Expected volatility (%) Risk-free interest rate (%) Expected life of options (years) Dividend yield (%) Share price at grant date (£) 18 Jun 07 5 Jul 07 7 Aug 07 4 Dec 07 3 Apr 08 31 5.60 6.5 2.50 40 5.70 3.0 2.30 33 5.30 6.5 2.10 2.821/2 3.021/2 3.321/2 33 4.50 6.5 2.10 3.40 34 4.20 6.5 2.10 3.75 30 Jul 08 8 Apr 09 15 Jul 09 9 Dec 09 21 Dec 10 35 4.80 3.0 2.00 4.00 37 2.90 6.5 3.90 2.071/2 38 3.40 6.5 2.80 2.90 40 3.14 6.5 2.00 44 2.90 6.5 2.40 3.971/2 3.371/2 Share options issued without share price conditions attached have been valued using the Black-Scholes model. Share price options issued with share price conditions attached have been valued using a Monte Carlo simulation model making explicit allowance for share price targets. During the year ended 31 March 2011 123,236 options (2010: 91,300) were exercised over ordinary shares. Options issued prior to 6 November 2002 are not subject to the provisions of IFRS 2. The number and weighted average exercise prices of share options are as follows: Weighted average exercise price (£) 2011 Number of options 2011 Weighted average exercise price (£) 2010 Outstanding at the beginning of the year 3.24 827,833 Forfeited during the year Exercised during the year Granted during the year Lapsed during the year Outstanding at the year end Vested options exerciseable at the year end – 2.49 3.43 3.18 3.40 4.05 – (123,236) 121,898 (65,405) 761,090 271,237 3.16 3.65 1.80 2.70 3.00 3.24 4.24 Number of options 2010 890,943 (64,438) (91,300) 229,453 (136,825) 827,833 203,720 FALKLAND ISLANDS HOLDINGS PLC 61 26 Capital and reserves Reconciliation of movement in capital and reserves – Group Financial assets fair value revaluation reserve £’000 Called up share capital £’000 Share premium account £’000 Other reserves £’000 Balance as at 1 April 2009 906 8,436 7,206 1,162 Profit for the year Share-based payments Dividends Issue of shares Premium on shares issued in the year, net of expenses Transfer to profit and loss on disposal of available-for-sale financial assets Change in fair value of available-for- sale financial assets Actuarial loss on pension, net of tax Repurchase of equity interest – – – 4 – – – – – – – – – – (1,683) 6,828 – – – – – – 10 – – – 108 – – – – – – – – – Balance as at 31 March 2010 910 13,581 7,324 1,162 Profit for the year Share-based payments Dividends Issue of shares Premium on shares issued in the year, net of expenses Change in fair value of available-for- sale financial assets Actuarial loss on pension, net of tax Effect of tax rate changes on deferred tax asset relating to pension schemes – – – 12 – – – – – – – – – (4,832) – – – – – – 294 – – – – – – – – – – – Retained earnings £’000 7,157 5,256 240 Total equity £’000 24,867 5,256 240 (1,084) (1,084) – – – – (126) (183) 11,260 1,620 207 (826) – – – (68) (43) 4 10 (1,683) 6,828 (126) (75) 34,237 1,620 207 (826) 12 294 (4,832) (68) (43) Balance as at 31 March 2011 922 8,749 7,618 1,162 12,150 30,601 62 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 26 Capital and reserves CONTINUED Reconciliation of movement in capital and reserves – Company Balance as at 1 April 2009 Loss for the year Share-based payments Dividends Issue of shares Premium on shares issued in the year, net of expenses Repurchase of equity interest Called up share capital £’000 906 – – – 4 – – Share premium account £’000 Other reserves £’000 Retained earnings £’000 Total equity £’000 7,206 6,910 15,519 30,541 – – – – 10 108 – – – – – – (330) 240 (330) 240 (1,084) (1,084) – – (183) 14,162 1,165 207 (826) – – 4 10 (75) 29,306 1,165 207 (826) 12 294 Balance as at 31 March 2010 910 7,324 6,910 Profit for the year Share-based payments Dividends Issue of shares Premium on shares issued in the year, net of expenses Balance as at 31 March 2011 – – – 12 – 922 – – – – 294 7,618 – – – – – 6,910 14,708 30,158 A profit of £1,165,000 (2010 loss: £330,000) has been dealt with in the accounts of the Parent Company. As permitted by Section 408 of the Companies Act 2006, the Company has not presented its individual income statement. Share capital In issue as at 1 April Issued for cash In issue as at 31 March – fully paid Allotted, called up and fully paid Ordinary shares of 10p each Ordinary shares 2011 2010 9,097,178 9,060,796 123,236 36,382 9,220,414 9,097,178 2011 £’000 2010 £’000 922 910 FALKLAND ISLANDS HOLDINGS PLC 63 26 Capital and reserve CONTINUED By special resolution at an Annual General Meeting on 9 September 2010 the Company adopted new articles of association principally to take account of the various changes in company law brought in by the Companies Act 2006. As a consequence the Company no longer has an authorised share capital. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. On 31 March 2000, an Employee Share Ownership Plan was established. At 31 March 2011 the plan held 36,499 (2010: 36,499) ordinary shares at a cost of £68,542 (2010: £68,542). The market value of the shares at 31 March 2011 was £120,446 (2010: £122,418). Shares held in the ESOP have had their rights to dividends waived, as in prior years. There were 136,940 (2010: 227,081) share options outstanding under the Company’s Saving Related Share Option Scheme (“Save As You Earn”) at 31 March 2011. For more information on share options please see note 25. Dividends The following dividends were recognised in the year: Final: 5.0p (2010 Final: 8.0p) per qualifying ordinary share Interim: 4.0p (2010 Interim: 4.0p) per qualifying ordinary share 2011 £’000 459 367 826 2010 £’000 723 361 1,084 After the balance sheet date a final dividend of 5.5p (£507,000) per qualifying ordinary share (2010: 5.0p, £459,000) was proposed by the Directors. The dividend has not been provided for. 64 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 27 Financial instruments (i) Fair values of financial instruments Investments in equity securities The fair value of available-for-sale financial assets is determined by reference to their quoted bid price at the balance sheet date. Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance sheet date if the effect is material. Trade and other payables The fair value of trade and other payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance sheet date if the effect is material. Cash and cash equivalents The fair value of cash and cash equivalents is estimated as its carrying amount where the cash is repayable on demand. Where it is not repayable on demand then the fair value is estimated at the present value of future cash flows, discounted at the market rate of interest at the balance sheet date. Interest-bearing borrowings Fair value, which after initial recognition is determined for disclosure purposes only, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the balance sheet date. IAS 39 categories and fair values The fair values of financial assets and financial liabilities are not materially different to the carrying values shown in the consolidated balance sheet and Company balance sheet. The following table shows the carrying value for each category of financial instrument: Group Company 2011 £’000 2010 £’000 Available-for-sale financial assets at fair value 10,710 15,542 Financial liabilities at amortised cost Interest-bearing borrowings at amortised cost Trade and other receivables (8,334) (4,162) 5,811 (8,219) (5,273) 4,535 2011 £’000 – (377) (3,137) 30 2010 £’000 – (414) (4,068) 15 (ii) Credit risk Financial risk management Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and investment securities. Group The Group’s credit risk is primarily attributable to its trade receivables. The maximum credit risk exposure of the Group comprises the amounts presented in the balance sheet, which are stated net of provisions for doubtful debt. A provision is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of future cash flows. Management has credit policies in place to manage risk on an ongoing basis. These include the use of customer specific credit limits. Company The majority of the Company’s receivables are with subsidiaries. The Company does not consider these counter-parties to be a significant credit risk. FALKLAND ISLANDS HOLDINGS PLC 65 27 Financial instruments CONTINUED Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. Therefore, the maximum exposure to credit risk at the balance sheet date was £6,742,000 (2010: £8,828,000) being the total trade receivables, other financial assets and cash and cash equivalents in the balance sheet. The maximum exposure to credit risk for trade receivables at the balance sheet date by geographic region was: Falkland Islands Europe North America United Kingdom Other Trade receivables The Company has no trade receivables. Credit quality of financial assets and impairment losses Group Not past due Past due 0 – 30 days Past due 31 – 120 days More than 120 days Gross 2011 £’000 Impairment 2011 £’000 2,686 848 518 575 4,627 – – – (259) (259) Group Company 2011 £’000 2010 £’000 2011 £’000 2010 £’000 2,034 1,413 592 441 1,190 111 4,368 Net 2011 £’000 2,686 848 518 316 187 261 1,232 172 3,265 Gross 2010 £’000 1,735 1,194 263 198 4,368 3,390 – – – – – – Impairment 2010 £’000 – – – (125) (125) – – – – – – Net 2010 £’000 1,735 1,194 263 73 3,265 The movement in the allowances for impairment in respect of trade receivables during the year was: Balance as at 1 April 2010 Impairment loss recognised Impairment loss reversed Balance as at 31 March 2011 Group Company 2011 £’000 125 238 (104) 259 2010 £’000 173 – (48) 125 2011 £’000 2010 £’000 – – – – – – – – The allowance account for trade receivables is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amounts considered irrecoverable are written off against the trade receivables directly. No further analysis has been provided for cash and cash equivalents, trade receivables from Group companies, other receivables and other financial assets as there is limited exposure to credit risk and no provisions for impairment have been recognised. 66 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 27 Financial instruments CONTINUED (iii) Liquidity risk Financial risk management Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Group and Company At the beginning of the period the Group had outstanding bank loans of £5.1 million. All payments due during the year with respect to these agreements were met as they fell due. The Group continues to maintain a £2.0 million Revolving Credit facility to fund working capital requirements which was undrawn at the year end. The Group manages its cash balances centrally at head office and prepares rolling cash flow forecasts to ensure funds are available to meet its secured and unsecured commitments as and when they fall due. Liquidity risk – Group The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the effects of netting agreements: 2011 Non-derivative financial instruments: Secured bank loans Finance leases Trade and other payables Carrying amount £’000 3,971 191 8,334 Contractual cash flows 1 year or less 1 to 2 years 2 to 5 years £’000 £’000 £’000 £’000 5 years and over £’000 4,147 191 8,334 1,058 58 8,334 9,450 1,038 2,051 133 – – – 1,171 2,051 12,496 12,672 2010 Non-derivative financial instruments: Secured bank loans Finance leases Trade and other payables Carrying amount £’000 5,102 171 8,219 Contractual cash flows 1 year or less 1 to 2 years 2 to 5 years £’000 £’000 £’000 £’000 5,596 171 8,219 1,347 81 8,219 9,647 1,147 2,192 90 – – – 1,237 2,192 13,492 13,986 – – – – 5 years and over £’000 910 – – 910 FALKLAND ISLANDS HOLDINGS PLC 67 27 Financial instruments CONTINUED Liquidity risk – Company The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the effects of netting agreements: Carrying amount £’000 3,137 376 3,513 Carrying amount £’000 4,068 413 4,481 Contractual cash flows 1 year or less 1 to 2 years 2 to 5 years £’000 £’000 £’000 £’000 3,314 376 3,690 858 376 1,234 838 – 838 1,618 – 1,618 Contractual cash flows 1 year or less 1 to 2 years 2 to 5 years £’000 £’000 £’000 £’000 4,591 413 5,004 1,119 413 1,532 919 – 919 1,736 – 1,736 5 years and over £’000 – – – 5 years and over £’000 817 – 817 2011 Non-derivative financial instruments: Secured bank loans Trade and other payables 2010 Non-derivative financial instruments: Secured bank loans Trade and other payables (iv) Market risk Financial risk management Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. Market risk – Foreign currency risk The Group has exposure to foreign currency risk arising from trade and other payables which are denominated in foreign currencies. The Group is not, however, exposed to any significant transactional foreign currency risk. The Group’s exposure to foreign currency risk is as follows and is based on carrying amounts for monetary financial instruments. As at 31 March 2011 Cash and cash equivalents Trade and other payables Balance sheet exposure As at 31 March 2010 Cash and cash equivalents Trade and other payables Balance sheet exposure The Company has no exposure to foreign currency risk. EUR £’000 48 (347) (299) EUR £’000 179 (385) (206) Group Group USD £’000 90 (274) (184) USD £’000 204 (336) (132) Other £’000 1 (85) (84) Other £’000 1 (161) (160) Total £’000 139 (706) (567) Total £’000 384 (882) (498) 68 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 27 Financial instruments CONTINUED Sensitivity analysis Group A 10% weakening of the following currencies against pound sterling at 31 March would have increased / (decreased) equity and profit or loss by the amounts shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at that date. This analysis assumes that all other variables, in particular other exchange rates and interest rates, remain constant and is performed on the same basis for the year ended 31 March 2010. EUR USD Equity Profit or loss 2011 £’000 40 36 2010 £’000 56 54 2011 £’000 40 36 2010 £’000 56 54 A 10% strengthening of the above currencies against pound sterling at 31 March would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. Market risk – interest rate risk Profile At the balance sheet date the interest rate profile for the Group’s interest-bearing financial instruments was: Fixed rate financial instruments: Finance leases receivable Finance leases payable Variable rate financial instruments: Financial liabilities Group Company 2011 £’000 312 (191) 121 2010 £’000 258 (171) 87 2011 £’000 2010 £’000 – – – – – – (3,971) (3,971) (5,102) (5,102) (3,137) (3,137) (4,068) (4,068) The Group has a loan of £0.8 million (2010: £1.0 million) in respect of the ferry delivered in 2005. The loan is repayable over a 10 year period from June 2005 and bears interest at 1.4% above the Bank of England base rate. The loan was previously hedged with a base rate cap of 6.5% and a base rate floor of 4.25%. On 13 January 2010 the Group liquidated this base rate cap and floor at a cost of £68,000. The Group has a further loan of £3.2 million (2010: £4.1 million) in respect of the acquisition of Momart International Limited. The loan is repayable over five years from June 2010 and bears interest at 2.0% above the Bank of England base rate. The loan was previously hedged with a base rate cap of 6.25% and a base rate floor of 4.25%. On 13 January 2010 the Group liquidated this base rate cap and base rate floor at a cost of £284,000. FALKLAND ISLANDS HOLDINGS PLC 69 27 Financial instruments CONTINUED Sensitivity analysis An increase of 100 basis points in interest rates at the balance sheet date would have increased / (decreased) equity and profit or loss by the amounts shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at that date. This analysis assumes that all other variables, in particular foreign currency rates, remain constant and considers the effect of financial instruments with variable interest rates and financial instruments at fair value through profit or loss or available-for-sale with fixed interest rates. The analysis is performed on the same basis for 31 March 2010. Equity: Increase Decrease Profit or loss: Increase Decrease Market risk – equity price risk Group Company 2011 £’000 2010 £’000 2011 £’000 2010 £’000 – (40) – (40) – (51) – (51) – (31) – (31) – (41) – (41) The Group’s and Company’s exposure to equity price risk arises from its investments in equity securities which are classified in the balance sheet as available-for-sale equity securities (see note 15). Sensitivity analysis The Group’s available-for-sale financial assets comprise its investment in FOGL. During the year ended 31 March 2011 FOGL shares traded on the AIM market of the London Stock Exchange at an average price of 126.24p with a high of 244.00p and a low of 76.00p. Based upon this share price history the value of available-for-sale financial assets held at the balance sheet date could have varied between a low of £9,120,000 (2010: £7,602,000) and a high of £29,280,000 (2010: £21,270,000). (v) Capital Management The Group’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can continue to provide returns to shareholders and benefits to other stakeholders. 70 ANNUAL REPORT 2011 Notes to the Financial Statements CONTINUED 28 Operating leases Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years More than five years Group 2011 £’000 651 2,464 6,225 9,340 2010 £’000 664 2,512 4,038 7,214 The Group leases three office premises and a number of storage warehouses under operating leases. Office leases typically run for a period of 3 years, with an option to renew the lease after that date. Warehouse leases typically run for a period of 25 years, with an option to renew the lease after that date. Group During the year £651,000 was recognised as an expense in the income statement in respect of operating leases (2010: £649,000). The Company had no operating lease commitments. 29 Capital commitments At the end of the year the Group had no capital commitments not provided for in these financial statements. 30 Related parties The Group has a related party relationship with its subsidiaries (see note 14) and with its Directors and executive officers. Directors of the Company and their immediate relatives control 1.4% per cent of the voting shares of the Company. The compensation of key management personnel (including Directors) is as follows: Group Company 2011 £’000 2010 £’000 Key management emoluments including social security costs 1,266 1,282 Company contributions to defined contribution pension plans Share-related awards 229 95 209 79 Total key management personnel compensation 1,590 1,570 2011 £’000 531 26 50 607 2010 £’000 573 25 49 647 FALKLAND ISLANDS HOLDINGS PLC 71 31 Accounting estimates and judgements The preparation of financial statements in conformity with adopted IFRS requires management to make judgements, estimates and assumptions that effect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based upon historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgements as to asset and liability carrying values which are not readily apparent from other sources. Actual results may vary from these estimates, and taken into account in periodic reviews of the application of such estimates and assumptions. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods. Actuarial assumptions have been used to value the defined benefit pension liabilities. Management have selected these assumptions from a range of possible options following consultations with independent actuarial advisors. Impairment tests have been undertaken with respect to intangible assets (see note 11 for further details) using commercial judgement and a number of assumptions and estimates have been made to support their carrying amounts. In determining the fair value of intangible assets recognised on the acquisition of Momart International Limited management acted after consultation with independent intangible asset valuation advisors. 72 ANNUAL REPORT 2011 Directors and Corporate Information Directors David Hudd Chairman Registered Office Kenburgh Court, John Foster Managing Director 133-137 South Street, Bishop’s Stortford, Hertfordshire CM23 3HX Telephone: 01279 461630 Fax: 01279 461631 Email: admin@fihplc.com Registered number 03416346 Website: www.fihplc.com Auditor KPMG Audit Plc St. Nicholas House, Park Row, Nottingham NG1 6FQ Financial PR Financial Dynamics Holborn Gate, 26 Southampton Buildings, London WC2A 1PB Mike Killingley* Jeremy Brade* *Non-executive Directors Company Secretary Mike Beck Corporate Information Stockbroker and Nominated Adviser Altium 30 St. James’s Square, London SW1Y 4AL Solicitors Bircham Bell and Dyson LLP 50 Broadway, Westminster, London SW1H 0BL Banker HSBC Bank plc 18 North Street, Bishop’s Stortford, Hertfordshire CM23 2LP Registrar Capita Registrars The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU Senior Staff Senior Staff Senior Staff in the Falkland Islands at Portsmouth Harbour Ferry Company at Momart Limited Roger Spink Director and General Manager Keith Edwards Director and General Manager Kenneth Burgon Director Telephone: 00 500 27600 Email: fic@horizon.co.uk Telephone: 023 9252 4551 Anna Maris Director Email: admin@gosportferry.co.uk Telephone: 020 7426 3000 Website: www.the-falkland-islands-co.com Website: www.gosportferry.co.uk Email: enquiries@momart.co.uk Website: www.momart.co.uk www.fihplc.com 

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